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What Are Cross-chain Bridges and Why Are They So Risky? (#122 - 17 October 2022)

The Future of Money with Henri Arslanian
What Are Cross-chain Bridges and Why Are They So Risky? (#122 - 17 October 2022)
By Henri Arslanian • Issue #111 • View online

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The topic of cross-chain bridges has been all over the news following last week’s attack on the BSC Token Hub, the native cross-chain bridge between Binance’s BNB Beacon Chain and BNB Smart Chain. 
Hackers drained nearly $600 million worth of BNB tokens from the Binance ecosystem, immediately making this the second most valuable crypto heist of all time. 
Source: Elliptic
Source: Elliptic
But first, it’s important to understand what cross-chain bridges are and why they’ve become so common across the global crypto ecosystem. 
Essentially, cross-chain bridges are meant to solve some of the interoperability issues between different blockchains, allowing users to transfer digital assets and data from one chain to another.  
For example, the Wormhole chain that was exploited earlier this year provides a link between two of the most popular smart contract blockchain ecosystems in the space: Ethereum and Solana. 
Whilst bridge designs tend to vary, their basic role and function are largely the same, with users sending funds in the form of one crypto-asset to the bridge protocol, which then locks those funds into a smart contract. The user then receives an equivalent amount of funds of a parallel asset on the chain that the bridge links to.
Some of the most common cross-chain bridges in the global crypto ecosystem and the blockchains they connect; Source: Dmitriy Berenzon
Some of the most common cross-chain bridges in the global crypto ecosystem and the blockchains they connect; Source: Dmitriy Berenzon
So in the Wormhole example we just mentioned, users would send Ether (ETH) to the bridge protocol, where it is held as collateral, before receiving Wormhole-wrapped ETH on the Solana network, which is backed by the original ETH held in the Wormhole smart contract.  
However, these bridges have also become attractive targets for hackers. 
That’s because cross-chain bridges can be seen as a central storage point of funds that back the bridged assets on the receiving blockchain. And regardless of how those funds are stored, that storage point becomes an appealing target for bad actors. 
And this vulnerability was quite evident in last week’s attack. 
The attack began on October 6 and took place on the BSC Token Hub, which bridges assets between the BNB Beacon Chain and the BNB Smart Chain.
According to users on Twitter as well as blockchain forensics outlets like Elliptic, the hacker was able to forge a proof for a block of transactions that had already been confirmed two years earlier, thus allowing the bad actors to begin minting new BNB tokens. 
The newly-minted tokens were then exchanged for other assets both on and off the BNB Smart Chain, including Ethereum, Polygon, Fantom, Avalanche, Optimism, and Arbitrum.
Source: Elliptic
Source: Elliptic
In an effort to stop even more funds from being siphoned out of the BNB Chain ecosystem, operations were suspended across the entire chain. 
And a large part of the stolen funds was soon either frozen or made inaccessible.
Shortly after the attacks, for instance, stablecoin issuers Circle and Tether froze over $33 million worth of USDC and USDT assets held by the hacker.
Combined with Binance’s actions, over $350 million worth of crypto-assets was quickly made off-limits to the criminals.
As blockchain security company SlowMist pointed out, a majority of the stolen tokens, roughly $430 million worth, were quickly rendered inaccessible, leaving the hacker with “only” $110 million of usable crypto assets. 
And in a thread on Reddit, Binance CEO ‘CZ’ provided more technical details on the attack whilst lowering estimated losses to around $100 million. 
Cross-chain bridge attacks have become more and more frequent over the past year.
In June, a hacker exploited a vulnerability to steal $100 million from Harmony’s Horizon Bridge. Two months later, attackers drained almost $200 million from the Nomad bridge. And as we wrote about in this newsletter earlier this year, hackers stole about $625 million of crypto assets from the Ronin Bridge, which connected the Ethereum mainnet to the popular play-to-earn game Axie Infinity. 
Excluding last week’s attack, about $2 billion in cryptocurrency has been stolen in cross-chain bridge hacks over the course of 2022, according to blockchain data firm Chainalysis.
Source: Chainalysis
Source: Chainalysis
Meanwhile, Elliptic (along with the Crypto Twitter community) was able to trace the stolen funds and the actions of the BNB Token hub hacker following the attack, with the hacker moving the stolen BNB tokens to two DeFi lending protocols on both the Binance Smart Chain and the Avalanche network. 
The hacker used 900,000 of the newly-minted BNB and $8 million worth of USDT as collateral to borrow new crypto assets. And at one point, it even looked like one of these positions was at risk of liquidation had the price of BNB dropped below $220.
But as Elliptic explains, the movement of these stolen funds following the Binance breach largely fits into a pattern that investigators in the digital assets space have observed over the past few years. 
For example, crypto criminals tend to rely heavily on DEXs (decentralized exchanges) and bridges during their heists. That’s because swapping in and out of different assets is one way to circumvent any potential asset freezes. 
Let’s also not forget that stablecoin issuers have the ability to freeze assets.
That has led bad actors over time to move out of centralized stablecoins like USDC and Tether and into decentralized stablecoins like DAI or cryptocurrencies like ETH, especially when mixers like Tornado Cash were still available (a topic that we recently covered in this newsletter).
In this case, the Binance hacker exchanged their BNB tokens for centralized stablecoins like UDSC and USDT, which were quickly frozen by the issuers, a signal, according to Elliptic, that the hacker may not have been as prepared as they thought. 
In addition, all the addresses and wallets used by the hacker in this case will now be flagged by all the major crypto traceability solutions in the market, making it very difficult for the hackers to launder the remainder of these funds. 
As Chainalysis explains, only a few years ago, centralized exchanges were the leading targets for crypto hacks. But today, successful hacks of major centralized exchanges have become increasingly rare, a sign not only of the centralized exchange ecosystem’s commitment to security but the presence of new, more vulnerable targets like bridges and DEXs.
Cross-chain bridges have an important role in the crypto ecosystem. But users will now need to weigh that against some of these hacking risks. Where that balance will be remains to be seen.
Definitely a story to follow.  
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Henri Arslanian
*Please note that this newsletter reflects Henri’s personal views and not those of any organisation he is involved with. This newsletter is for educational purposes only and none of its content should be construed as investment or financial advice of any kind. 
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Henri Arslanian

Future of Finance and Money - PwC Global Crypto Leader, Best Selling Author, Keynote Speaker, University Professor, Host of Crypto Capsule™ - Views are my own

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