Overcoming Blockchain Fragmentation in DeFi:
In the rapidly evolving landscape of blockchain and decentralized finance (DeFi), interoperability is a challenge that demands attention. Blockchains are fragmented, unable to communicate effectively. This challenges the principles of the crypto economy and keeps us from fostering collaboration or expanding use cases. The growth of blockchain and the future of innovation is dependent on interoperability.
The Alt-L1 Explosion and Its Challenges:
Centralized custodial bridges have not seen significant adoption since WBTC, and DeFi bridges have been the most common solution for cross-chain functionality, creating massive growth for alternative Layer-1 (Alt-L1) solutions in 2021 and expanding our ecosystem in the process. But this growth came at a cost. Bad-actors began targeting the vulnerabilities in cross-chain bridges, with exploits costing $2 billion in 2022. But how have bridge hacks affected L1 networks?
Figure 1 shows a significant decrease in the USD value of assets locked on various L1 networks after being affected by a bridge hack. Moreover, this decline worsens as the number of days increase. On average, observed L1s experienced an 11.13% decline in total value locked (TVL) one day after being affected by a bridge hack. That figure rises to 14.85% after seven days, reaching 29.20% after 30 days.
Source: 21Shares, data by DeFi Llama
That’s why security concerns have taken center stage in the discourse around interoperability. Prominent teams like Hyperlane, Circle, and Connext are actively innovating in this domain.
Centralized Custodial Wrapped Assets as a Solution:
At 21.co, we believe that one of the most secure options continues to be the centralized custodial model for cross-chain assets that has enabled WBTC, the largest wrapped asset by a mile. While embracing the ideals of a decentralized future, the journey towards that goal necessitates safeguarding the DeFi ecosystem. The interim requires a safer cross-chain connection, so we've decided to apply a few TradFi best practices. Taking these incremental steps allows us to create safer cross-chain conditions to further expand the user base through familiar and accessible standards
The Focus on Security and Ongoing Innovation:
21.co can achieve all of this through Onyx, our proprietary operating system, which has been used to create and redeem over $3.3 billion in assets. Here’s how we’re approaching wrapped assets and security:
- Custodied Underlyings: In the first phase of 21.co Wrapped Tokens, industry-leading custodians will hold the underlyings of the wrapped assets to minimize exploit risks.
- In House Management System: Onyx, our proprietary operating system, manages fund flows, accounting, and custodied crypto asset administration. Onyx applies a novel approach to managing these functions, and we’re excited to expand its capabilities to wrapped assets.
- Role Based Access Control: Wrapped tokens employ role-based access control and secure multi-party computation (MPC) to ensure administration, minting, and burning is available to our experienced operations team.
- Fast Minting and Burning: minting and burning will be restricted to onboarded parties. Our experienced operations team is agile to enable quick and easy mint and burn, which is essential for maintaining onchain liquidity pegged to the asset.
- Basic Tokens: The simplicity of the wrapped tokens is their strength. Their value stems from the underlying assets. Basic ERC-20 tokens ensure ease of use and avoid unnecessary complexity.
Balancing the Future of DeFi:
At 21.co, we believe in the future of DeFi, while also envisioning a world where the majority of users aren't necessarily aware of the specific chains they're using. Interoperability will get to the point where cross-chain interaction is as seamless in onchain interactions, and 21.co Wrapped Tokens have an important role to play in the interim. Seven of the top 10 tokens on CoinGecko are L1 tokens, and crypto users deserve the ability to utilize these tokens across protocols. In scaling DeFi as a community, we need to overcome its challenges. Pragmatic solutions, like centralized wrapped assets, can provide the stability needed to maintain DeFi's momentum.
