Understanding the Risks of Bridged Stables on PulseChain (But We Need Them)

As a newly launched blockchain, PulseChain has to derive a large part of its liquidity from other blockchains through bridges. As a result, the network is mostly fueled by such Ethereum-based stablecoins as USDC, USDT, and DAI.

The popularity of these assets is hard to ignore. Yet, such an approach comes with some serious risks. The bridges may fail while centralized stable assets may blocklist USDL-related addresses at any time.

Why do these risks matter and what does Liquid Loans do to avoid them? Read on to find out.

What is a DeFi Bridge?

DeFi bridges represent software protocols serving to transfer digital assets across different blockchains.

Every separate blockchain, be it Ethereum, Solana, or any other popular solution, operates in a vacuum with no possibility to send assets to another network. 

Bridges fill this gap by locking assets on one chain and creating their wrapped versions on another one. Thus, they facilitate the transfer of value and solve the interoperability problem.

Why are Bridges Risky?

Despite their convenience, DeFi bridges are not ideal in terms of asset security. The associated risks vary according to the type of bridge you use.

Trusted bridges

Trusted bridges are controlled by centralized units. As the name implies, they require users’ trust and thus eliminate the whole meaning of implementing blockchain in the first place.

Such an approach always comes with a counterparty risk, and here’s the proof. As the year 2022 became the worst in terms of crypto hacks and stolen funds, centralized bridges make up the majority of hackers’ victims.

Trustless bridges

These bridges rely on smart contracts and algorithms to manage their operations. Users can connect to them through non-custodial wallets and thus remain in full control over their assets.

Such bridges may fail, too, but for different reasons. When discovered by hackers, bugs in the code of such bridges may also turn into severe fund losses.

Third-party audits and other security measures can help to improve the situation.

The Largest Bridge Failures

A crypto analytical platform DefiLlama states that at the time of writing, the total value hacked in bridges already exceeds USD 2.5 billion.

Let’s briefly review some of the largest cases along with the reasons behind these breaches.

Trusted bridges

• Ronin, USD 624 million. Hackers gained control over five of the nine validator nodes controlled by a single entity through social engineering.
• Binance bridge, USD 570 million. An attacker exploited the bug found in BSC’s centralized proof verification system.
• Harmony, USD 100 million. The attackers compromised two of the four private keys that the project used for validating transitions.

Trustless bridges

• Wormhole, USD 326 million. A newly released protocol version contained a bug that an attacker discovered and exploited just a couple of hours after the commit.
• Nomad, USD 190 million. An upgrade to the Nomads’ contracts contained a vulnerability that enabled hackers to bypass the message verification process and drain the funds from the bridge contract.

Is PulseChain at Risk?

As mentioned earlier, a significant part of PulseChain’s liquidity comes from fiat-backed stablecoins that are risky by definition.

At the same time, third-party bridges that help to convert these assets into PLS impose additional danger, regardless of whether they are trusted or not.

How to deal with such a situation?

To create a truly trustless and secure platform, a number of methods come forward to solve it.

How Does PulseChain Address The Risks of Bridged Stablecoins?

It’s hard to invent a tool that would bypass all the existing limitations in a single blow. Yet, the more layers you add, the higher the security. 

Thus, PulseChain relies on many different solutions and constantly looks out for more to add:

1. Decentralized stablecoins

Slowly but surely, PulseChain decreases its dependence on fiat-backed stable assets changing them for truly decentralized coins such as USDL.

As an algorithmic stablecoin, USDL represents PulseChain’s native stablecoin. This means that it is governance-free and redeemable for $1 worth of PLS at any time. As a result, it is censorship-resistant and secure.

2. Decentralized on- and offramps.

Converting fiat into crypto always comes with a counterparty risk. Yet, some solutions help to bring the danger to a minimum.

For example, Coast has developed a non-custodial on-ramp tool specifically for PulseChain. It helps users to buy crypto directly from their bank accounts. But unlike CEXes, it transfers crypto directly to end-users' wallets and thus minimizes the time when the funds stay at risk.

3. A variety of listings on exchanges

When a project lists its asset just on one of two CEXes, it puts its users in danger since these exchanges may ban the project at any time.

Increasing the number of listings can significantly reduce this risk. Even if a local government bans any of these platforms or the platforms themselves put a veto on the project, there will still be some workarounds available in other regions.

Closing Thoughts

There is no such thing as 100% security in crypto. Yet, the same applies to fiat money as well. After all, it’s the global crisis of the centralized financial system that prompted the creation of decentralizied Bitcoin in 2009.

Cryptocurrencies at least give their users the possibility to truly own their assets. Now that the industry offers a huge variety of DeFi tools for different purposes, it has finally become possible to say the same about stablecoins.

PulseChain keeps abreast of all the innovations that emerge on the market and constantly looks out for mew measures to reduce the risks of bridges stablecoins.