Why Blockchain Bridges Are Essential for DeFi
With the TVL (Total Value Locked) in DeFi (decentralized finance) exceeding $83.4 billion at the time of writing, the space is becoming a popular alternative to our legacy financial system — promising more user empowerment through faster and cheaper payments.
DeFi applications are built on decentralized blockchain networks like Ethereum, Cardano, and Avalanche. But in order to exchange value from one chain to another, dApps (decentralized applications) rely on third-party software known as blockchain bridges.
The fundamental value of bridges is that they connect two independent blockchain networks to enable users to send digital assets from one ecosystem to another. When it comes to dApps, the role of cross-chain bridges becomes more intricate and their security even more important.
In this article, we’ll explore the importance and benefits of bridges in DeFi, as well as how cross-chain bridge security can single-handedly make or break a DeFi ecosystem.
Why Cross-Chain Bridges Are Essential for DeFi
While decentralized blockchain networks provide open and permissionless environments, they operate in a siloed fashion and therefore lack the ability to communicate and exchange value. As Ethereum is the hotbed of most DeFi applications, this lack of interconnectivity significantly narrows the scope of DeFi.
This is where cross-chain bridges come into play and serve an important role in facilitating DeFi transactions and activity. Leveraging their infrastructure, users are able to swap assets across two different blockchains, aggregating liquidity and enabling greater activity across their respective ecosystems.
The problem, however, arises when insecure bridges are exploited through malicious hackers. Bridges that lack security or have exploits leave major vulnerabilities that can not only ruin specific protocols but also the multitude of external networks they connect to.
We differentiate between two main types of bridges: centralized (also known as custodial) or decentralized (also known as non-custodial). The main difference between the two is who controls the received tokens that create bridged assets. For WBTC, BitGo is the sole custodian of all its Bitcoin collateral, making it a centralized bridge, whereas our partner, Wormhole, holds these assets directly on the protocol in a decentralized fashion.
Centralized bridges are particularly vulnerable to hacks given that one custodian holds all the respective digital assets. As DeFi users have to trust their assets in the custody of a central party’s storage, it defeats the ethos of DeFi, beyond creating additional vulnerabilities like multi-sig wallet hacks or social engineering schemes.
Rising from the ashes of previously-failed bridging solutions, Magpie is different — truly multichain — no limitations. For one, our protocol isn’t limited to specific ecosystems but instead offers support for the most well-known blockchains and dApps.
As a truly decentralized, cross-chain protocol, your assets are never in our custody or at the risk of being stolen from a multi-sig wallet. Not only that, we utilize bridges only as cross-chain messaging layers instead of for initiating swaps, meaning your assets will be securely stored on the original chain while we send you the requested assets from our secure stablecoin pool on the destination chain.
And with great bridges, comes great potential — especially for dApps and DeFi applications.
The Benefits of Cross-Chain Bridges for DeFi
- Increased Capital Efficiency
Thanks to cross-chain bridges, users can deploy their holdings to interact with DeFi protocols on other blockchains and earn passive crypto yield, instead of being limited to one network.
Chain-agnostic bridges enable crypto holders who believe in a particular cryptocurrency to hold the wrapped version of that asset and interact with other blockchain networks — increasing the multi-chain capital efficiency for the entire blockchain space.
2. Chain-Agnostic Interoperability
Cross-chain bridges are the solution to the interoperability problem that’s been plaguing the DeFi space, bringing much-needed interconnectivity between siloed blockchain networks.
Interoperability is what allows cross-chain collateral to move freely into the most promising DeFi apps — without having to pay high gas fees or wait for long confirmation times — all thanks to blockchain bridges.
3. DeFi Scalability
When CryptoKitties clogged the Ethereum network back in 2018, it became clear that DeFi needs more scalability — which goes hand in hand with interoperability, as one single network won’t be able to handle the influx of mainstream users.
Platforms like Magpie were designed to handle large amounts of transactions, with near-instant finality and sub-penny fees — taking some of the strain off the most popular DeFi networks while allowing users to seamlessly interact with virtually any major DeFi protocol.
The Future of DeFi is Chain-Agnostic
With DeFi’s enormous potential, the cross-chain space needs to shift in a direction that’s more secure and efficient for users and protocols alike. Magpie is here to leave a spash by making digital asset swaps multi-chain, secure, and more efficient — for a truly chain-agnostic DeFi future.
Our solution will help drive further adoption and utility for the DeFi space, finally allowing siloed blockchain networks to truly flourish and create the ideal multi-chain environment of the future.
This is only the beginning of more to come.
