Though the media has paid more attention to the collapse of centrally-managed organizations, the “bridge-exploiting” events of 2022 serve as a reminder that the decentralized finance ecosystem (defi) still has not provided adequate security. Hugo Philion, co-founder and CEO of Flare Networks, believes that the limited growth of defi products is due to the lack of secure solutions.
Communication between Chains is Limited
In responses provided to Bitcoin.com News, Philion stated that more than $2 billion was lost over the last 12 years because of bridge exploits. Nevertheless, he argued that it may be feasible to make bridges “substantially safer.” He also talked about the need to protect digital assets and move between chains, as well as the possibility to use non-smart digital assets in Web3.
These are Philion’s answers to the questions.
Bitcoin.com News (BCN): What has prevented the unification of this ecosystem?
Hugo Philion (HP): Historically, blockchains process native transactions. For example, Bitcoin moves the native bitcoin asset from A to B. They are not designed to exchange information. The Bitcoin chain cannot tell what happened at the Ethereum Block #1083483. This communication problem is compounded when trying to collect reliable and validated information about different chains using decentralization. What is the best way to do this while considering the possibility of chain kickback? There is no decentralized and secure method to acquire and verify state across multiple blockchains, and it is unlikely that there is only one solution that will fit all use cases.
BCN: How does the lack of communication between chains affect dapp developers?
HP: The largest use case for blockchain is decentralized finance (Defi). The deficiency of cross-chain communication has hampered the growth, reach, and efficiency of the Defi market. These decisions have caused billions of dollars in capital losses and are very difficult to use. This has restricted participation to those with more technical knowledge. As a result, market liquidity, size, and returns are limited.
However, many of the communication use cases that could result in adoption are still unknown. An example of this is the purchase or sale of assets on a smart contract chain with Bitcoin direct payments. Blockchain engineers can develop protocols that could revolutionize digital ticketing, gaming, and payment gateway technology markets. This is just one example of cross-chain communication with high integrity.
BCN: What systemic risks are posed by cross-chain activities, and how can users protect their assets?
HP: An example of this is the recent bridge exploits, which illustrate how interchain communication problems can have a devastating impact on the entire downstream blockchain environment. Currently, there are not enough secure and decentralized ways to transfer data between siloed systems. You can report false information to help the movement, and if the transactions are verified, the assets can be reallocated to the established chain. This introduces risk to the entire system.
BCN: What made chain bridges so popular in 2022? Is there any innovation that could restore faith in bridges?
HP: Large-scale cross-chain experimentation has been conducted in 2021 and 2022. The first stress test for cross-chain bridges was successful, but many were ultimately unsuccessful with only $2 billion in funds tapped over the twelve months. The inability to transfer assets between chains safely has created space problems.
Bridges can be made more secure by integrating decentralized cross-chain communication into the same consensus mechanism as the underlying blockchain. Assets can also be secured at the protocol level while they move across the chain to reduce risk. Risk must be managed at the protocol level, and users must be aware of the risks associated with complex financial systems.
BCN: Are there non-smart contract chains that can be connected? Can crypto assets such as Bitcoin be upgraded to make them compatible with the defi universe?
HP: Public databases, such as blockchains, cannot natively report on transactions from outside sources. To improve non-smart contract chains, two general models are being created: payment triggers and a new type of blockchain, the UTXO-based Defi chain. The UTXO-based Defi chain is a blockchain that can integrate with Ethereum and other smart contract-based networks. This model allows users to move assets quickly and securely between chains. As for Bitcoin, it is possible to upgrade it to make it compatible with the Defi universe. Flare Network has created a bridge that allows users to move Bitcoin between the Bitcoin and Ethereum networks.
The integration of decentralized cross-chain communication has been touted as a game-changer for the blockchain ecosystem. It can offer substantial security benefits, as well as providing access to a range of new opportunities. Hugo Philion, the CEO of Flare Networks, recently discussed the implications of this technology in an interview with Bitcoin News.
When asked what the potential uses and new opportunities of non-smart contract assets were, Philion said that approximately 70% of the market capitalization for digital assets is made up of bitcoin, dogecoin and XRP. He added that larger-scale use of non-smart asset in contracts would increase liquidity on the market and decrease reliance on central services by users.
Philion explained that Flare Networks has integrated two distinct protocols into its network: State Connector and Flare Time Series Oracle. These tokens are native as they are embedded directly into the blockchain, and use the network to ensure data is provided accurately. He likened it to the way our senses help us to interact with the world around us.
When asked to explain what the native interop protocol is in simple terms, Philion said that it should work reliably to “keep an eye” on what is happening in other blockchains, and make notes that will help to base decisions on. This would allow tokens such as bitcoin to be used with Web3 applications.
The CEO concluded that the integration of decentralized cross-chain communication makes bridges “substantially more secure” and opens up a range of new opportunities.