How the Bitcoin Network Can Solve the Pitfalls of DeFi Token Bridges

Decentralized finance (DeFi) saw a record influx from centralized exchanges as crypto users flocked to self-storage solutions following the FTX collapse. Over 100,000 Bitcoin (BTC) left crypto exchanges to allow investors to avoid third-party custody. True to the “not your keys, not your coins” mantra of Bitcoin, DeFi solves a wide range of problems associated with centralized entities.

However, several reports indicate that DeFi is not a fail-safe environment, as high-profile protocol exploits such as Wormhole, Nomad, and Ronin made headlines in 2022 for the wrong reasons.

Source: Token Terminal

DeFi exploiters are particularly targeting bridging chains. In fact, cross-chain bridge exploits account for more than half of all DeFi exploits since September 2020, with approximately $2.5 billion lost to these attacks. A chain analysis report shows that token bridge attacks accounted for over 69% of the total amount of crypto stolen in 2022, a clear indication that bridge exploits are on the rise.

Why do cross-linked bridges fail?

Since the DeFi ecosystem consists of multiple blockchains, transferring digital assets from one network to another requires specially designed protocols that work across different blockchains. These protocols, known as cross-chain bridges or token bridges, lock users’ staked tokens from one chain into a contract, then issue an equivalent amount of assets to the same user on the receiving network.

For example, since the Bitcoin blockchain is not directly compatible with the Ethereum (ETH) blockchain, the DeFi ecosystem relies on solutions such as wrapped Bitcoin and token bridges to leverage the liquidity available in the Bitcoin ecosystem.

Most bridging protocols use central storage to back up assets on the receiving blockchain, creating a target site for hackers. The lack of developer expertise compared to the complex nature of creating a bridge that works across multiple networks causes security vulnerabilities, making cross-chain bridges the biggest attack surface in the DeFi space.

How to make DeFi more robust

To make DeFi more resilient to exploits, a new approach removes this weak link between blockchains. Mintlayer is a layer-2 blockchain on the Bitcoin network that aims to connect the sidechain to the Bitcoin community with as little friction as possible. Users can build any type of existing DeFi application on Mintlayer without compromising the core foundation of security and decentralization on which the Bitcoin community is built.

Mintlayer aims to eliminate token bridges, the biggest attack surface of DeFi, which costs users billions of dollars every year. Instead of wrapped tokens, users can exchange their BTC for tokens on the Mintlayer blockchain via atomic exchange. By not requiring any kind of cross-chain bridges, wrapped tokens, or coupling mechanism to use Bitcoin on its blockchain, Mintlayer eliminates the risks associated with bridges and third-party custody.

Speaking about the launch of the Mintlayer blockchain, Mintlayer co-founder Enrico Rubboli said that it took over 18 months of hard work. He added:

“Mintlayer is the home for projects willing to build on top of Bitcoin. We are excited by the quality and quantity of responses regarding potential projects. People want the functionality of DeFi, but don’t want to compromise the security and principles of Bitcoin.

To allow users to access their BTC on the go, Mintlayer launched a mobile Bitcoin wallet, available on both Google Play and the App Store.

DeFi ecosystem with a focus on Bitcoin

Technical development aside, the team launched the Mintlayer Ecosystem Fund with the goal of building a Bitcoin-centric DeFi ecosystem. Projects can join incubator programmes, accelerator programs and apply for grants, or apply for direct investment through the fund.

The collapse of large centralized organizations such as Celsius, Terraform Labs, and FTX triggered an exodus from centralized exchanges to decentralized finance and self-custody solutions in 2022.

If the DeFi ecosystem wants to retain this new user base, it needs to solve ongoing problems related to the direct interaction between users and blockchains, starting with security – the most critical aspect. Coming back full circle, the answer may lie in making the path from Bitcoin to use in financial applications as short and straight as possible, with Mintlayer.