Flare Networks CEO: Integrating decentralized cross-Chain communication makes bridges’substantially safer’
Although they received less media attention than the collapses of central organizations, the so-called “bridge exploit” incidents in 2022 once again demonstrated that the decentralized finance (defi), ecosystem still lacks sufficient secure solutions, Hugo Philion who is the co-founder and CEO at Flare Networks, said. Philion claims that defi products have been constrained by the absence of secure solutions.
Lack of communication between chains
Philion wrote to Bitcoin.com News claiming that the large-scale cross-chain experimentation seen in 2020-2021 could be the reason why more than $2Billion has been lost through the so-called bridge exploits over the past 12 months. Flare Network CEO Philion stated that while it is impossible to eliminate all risks for users, bridges can be “made substantially safer.”
Philion addressed security-related issues and also shared his thoughts on other issues. These include the possible use non-smart contractual digital assets in Web3 and defi, as well as how to insure digital assets when they are transferred across chains.
Below are Philion’s responses to the questions.
Bitcoin.com News (BCN). Can you explain why nobody has been able secure unify the ecosystem yet.
Hugo Philion, (HP): Blockchains were originally designed as distributed ledgers that process native transactions. For bitcoin, the movement or the native asset bitcoin from one address to another. They are not designed to exchange information between themselves. For example, the Bitcoin chain can’t tell you what happened on block #1083483 of the Ethereum chain. This creates a communication problem. How can information about different chains be reliably collected and validated using decentralization analogs to the chains? How can this be done while allowing for chain rollback risk?
Besides rollups, there have not been any sufficiently secure and decentralized mechanisms that can acquire and confirm state among disparate blockchains. It is unlikely that there is a single solution. Instead, there are likely to be multiple solutions that will work for different uses.
BCN: How does the inefficiency of communication between chains affect decentralized app developers?
HP: The largest use case for blockchain technology today is decentralized finance (Defi). The Defi market has been limited in size, participation, efficiency, and effectiveness due to a lack of cross-chain communication. Existing designs have not only resulted in billions of dollars in capital loss, but they are also difficult to use, which limits participation to more skilled users. Market size, liquidity, returns, and returns have all been limited as a result.
Additionally, adoption-driven use cases that leverage communication have not been discovered. One example is assets that can be purchased or traded on a smartcontract chain and paid in bitcoin. This could allow blockchain engineers to create a variety of protocols that could revolutionize the digital ticketing, gaming, and payment gateway technologies. This simple example shows the potential for high-integrity communication between chains.
BCN: Do cross chain activities pose systemic risk to the industry’s future? If so, how do you know?
HP: Yes. One example is how a crosschain communication failure can cause havoc in a downstream blockchain ecosystem. This has been demonstrated recently by multiple bridge exploits. False information can be reported to the authorities and used to determine asset movement. After transactions have been verified and assets have been re-allocated to more established chains it is possible for information to be found to be incorrect. This can pose a risk to the entire system.
BCN: What made cross-chain bridges so famous in 2022? Are there any innovations that could restore bridge users’ faith in them? Can bridging solutions offer users some protection from the possibility of losing their assets?
HP: The years 2021 and 2022 saw large-scale cross-chain experimentation. Cross-chain bridges were subject to their first stress tests. Many failed to perform with more than $2Billion of funds being exploited over the past 12 months. The inability to safely transfer assets across chains has likely hindered development in this space.
Bridges could be made safer by integrating cross-chain communication that is decentralized and similar to the underlying Blockchain consensus mechanisms. Additional risk can be reduced if assets are insured at protocol level as they move between chains.
Protection is therefore a two-step process. First, the protocol level must be kept low to minimize risk. Second, it is important to insure usage where possible. Risk in any complex financial system is likely to never be zero. However, users should be protected wherever possible.
BCN: How can non-smart contracts chains be connected? Is it possible to upgrade or make crypto assets such as bitcoin compatible with defiworld?
HP: Blockchains are siloed, public databases that can’t natively read or report on external transactions. Flare is currently working on two models to upgrade nonsmart contract chains. These are payment triggers, and bridging.
A payment trigger is a smart contract function that is triggered by a transaction on another blockchain. This allows for simple and useful functionality such as the payment of a collectable using a smart-contract platform using bitcoin or any other token. This requires a sufficiently decentralized data acquisition protocol that requires a number validators to verify a transaction on a particular chain. Data can then be accessed, secured acquired, and reported to another chain. This allows for the triggering of other blockchain events. This mechanism can be used to connect multiple non-smart contracts chains.
Bridging, on the other hand, adds full smart-contract capabilities to tokens like bitcoin. It is possible to create synthetic versions on smart-contract chains of these assets through secure data acquisition and natively available on-chain decentralized pricing. Flare’s model is unique in that the user does not need to provide the token itself, like bitcoin. This removes the over-collateralization requirements and eliminates the direct market risk from the user, meaning that they do not need to actively manage the position. These 1:1 representations can then be used in Defi and other distributed applications.
BCN: What new opportunities and use cases can you see if non-smart contracts assets are used for defi or Web3 activities?
HP: About 70% of the total market capitalization for digital assets is made up of bitcoin, XRP and dogecoin. Wide-spread use of non-smart contracts assets in Defi would increase liquidity and reduce reliance on centralized services.
Creators would have a greater market, and token holders would have decentralized access. On-ramping nonsmart contract tokens onto an scalable chain also allows for an alternative payment rail to Lightning. Web3 also needs to be more useful, user-friendly, and appealing through decentralized and reliable communication protocols that allow for both blockchains and nonblockchain networks to communicate. We want these applications to accept tokens such as bitcoin.
BCN: Can you explain in simple terms what native interoperability protocol are?
HP: Flare is home to two unique protocols: the State Connector (or Flare Time Series Oracle) and the State Connector (or both). They are native because they are embedded directly into the blockchain using FLR token to encourage data provision. Additionally, they use the network to ensure accurate data provision.
These protocols, which are five years old, are Flare’s sensors. They allow Flare to “see” what is happening across other blockchains and make a note of it so it can base future decisions on it. This is similar to the way our senses enable us to see the world around us and interact with it.
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