The economic impact of bridges: is cross-chain liquidity best fragmented?

Most people are aware that smart contract exploits — of which bridge contracts account for a significant sum — have resulted in a lot of stolen crypto assets over the years.

The reports have been shared so many times that it's pointless to even plug them in here. A single Google search will pull up numerous articles on this and so one has to ask:

What's the true cost of being interoperable with multiple ecosystems?

What economic value does this interoperability bring to the native network participants of said chain?

Can interoperability result in governance attacks?

How's the wealth of network participants protected?

Evidently, all questions generally lean on what the risks and rewards look like, which is very reasonable because we are dealing with an emerging economic environment where value generation and protection is directly influenced by defined risks and rewards that each network participant is exposed to.

You look at the core designs of our ecosystem and you find that everything rests on incentives for proper participation and penalties for cases of attempted exploits that directly threatens protocol’s security.

That said, when we move on to bridges, we move out of territories protected by protocol rules. In fact, exploits in these environments generally cannot be understood as “attacks” by the underlying chain because they really don't break any rules, they just capitalize on human errors that allow “very valid — by protocol's definition” transactions to occur on-chain.

For instance, if a smart contract can be upgraded to autonomously move new deposits to a new address, the chain cannot see it as anything but valid even if the wrong parties got around to leverage the upgradability of said contract.

The economic impact

When we talk about economic impacts, most will generally fixate on the “monetary” side of things, but although all roads lead to money or value flow, there are some things in-between that are quite essential to the economy.

The biggest of it is governance and in the earlier paragraphs of this article, a question in this direction was thrown:

“Can interoperability result in governance attacks?”

This is quite literally the easiest question in the list to answer and that answer is yes. However, there's a but.

A sovereign chain can have its governance system attacked only if its consensus mechanism is based on stake.

This conclusion echoes that unless your consensus algorithm is proof of work(PoW), then if interoperability leads to bad actors being able to exploit bridges and attain access to significant amounts of your network's native assets, then they can effectively attack your chain's governance.

As one should imagine, this poses direct monetary threats. If a governance system of any blockchain (effectively the decentralized nature of it) afforded a secure and steadily growing economy to which individual participants are well compensated as much as they're actively contributing, an attack on said governance system would by direct influence, negatively impact the network's economic value flow.

A scenario most common would be that benefits of said blockchain’s operations would be channeled to a centralized group, as evident with traditional systems of governance with corrupt small cycles.

All of this presents a significant barrier to fully embracing interoperability. You look at networks like Hive and realize that we don't really suffer much(if any) hacks, exploits, etc, and the major reason is that we don't have native smart contracts and don't have decentralized bridges with significant exposure to other blockchains.

There's not many channels for cross-chain operations and that has generally kept this ecosystem out of the news when exploits are being discussed.

Is cross-chain liquidity best fragmented?

Having fragmented liquidity would generally mean that more smart contracts have to run between chains which one can expect to be more expensive than having one.

That said, when we look at the economic impacts of the former system, would it be a reasonable cost to take on to allow blockchains to remain interoperable with each other?

At all times, what we build has to prioritize security above every other thing because without it, we really don't have anything unique to work with.

The larger liquidity gets on bridges, the more they become targets for attackers. Leveraging solutions that would reduce concentration of assets seems like the most logical approach, plus this generally can be more efficiently secured than single contracts with keys managed by corporations or by a small group of people within a single corporation.

Posted Using INLEO