Sunday, December 04, 2022

Interoperability: How Essential Bridges Exposes Crypto Projects to New Risks

When the Terra project crashed last month, we learned a lot about the crypto market.

While certainly some – potentially because of the large volume of sales – that people were turned off to the market and its Wild West way, we also learned about the dangers that can come from the bridges needed between blockchains.

Interoperability can be defined as “the basic ability of different computerized products or systems, without restriction, in implementation or access, to easily connect and exchange information with each other.”

Why? interoperability essential?

Empowering blockchains with interoperability is essential, because without them, each blockchain would only have access to the information it puts on the chain itself.

A hypothetical Google blockchain would only have access to Google’s information. So if you want to see the latest Elon Musk tweets, you have to visit the Twitter chain.

Interoperability between blockchains allows you to access information on another blockchain via the existing blockchain.

Back to the Google example; Instead of just returning results from Google News when you ask “Why is Celsius freezing my assets?” If you do a search, you will be able to find results from all the parties that Google is concerned with.

The good thing about this – which is specific to Web 3.0 – is that the information can be more transparent and trustworthy.

Consider this concocted Hillary Clinton quote: “Look, the average Democrat voter is just plain stupid. They’re easy to manipulate. That’s the easy part.”

In an immutable blockchain where you can’t easily delete posts and things are transparent, it would be easy to trace the original posting of this quote. While it will likely just be a dummy account, Google Blockchain can flag that quote as potentially misleading and – if necessary – even everything related to that account.

Perhaps the source blockchain habitually floods the Google blockchain with false information, the bridge could be removed entirely and Google’s blockchain search would become more reliable. At least in theory it would be so, but we’ll come back to that after this next section.

Financial Dangers of Interoperability

While there will still be societal hazards, investors need to be aware of how interoperability adds risk to each bridge.

Interoperability does not mean that you can access information on another blockchain. Think of it as the end-user/user experience outcome of this next section.

Bridge is one of the many ways that interoperability works on a blockchain, and is certainly one of the most important.

The bridges are set up by two blockchains creating a pool that allows users, for example, to spend Ethereum on the Solana chain and vice versa. A “tokenized” version of Ethereum is created to represent the native Ethereum making it usable on the Solana chain.

Bridges are typically 1) centralized, 2) run on smart contracts, and 3) operated by liquidity providers. LPs generally have to put an equal amount of each token in the pool. This is risky for LPs as they may incur temporary losses due to changes in prices.

But – by locking a large amount of each token (in a proportionate way) with a centralized entity that we would consider trustworthy – the entire pool could be lost if his swap suddenly disappeared.

A piece of bad code can pull many chains down with it as collateral damage.

While interoperability is extremely important, it creates a kind of systemic technical risk that can jeopardize blockchain projects to varying degrees.

The bigger the failure – and the more interconnected it is – the more it will pull on the market as a whole. Whereas smaller cryptos with fewer bridges are less of a threat.

When investing in crypto, it is important to know everything about not only the underlying crypto you wish to invest in, but also its exposure to other crypto projects. Understanding bridges can help protect you from collateral damage.

It is less essential to the likes of Ethereum at the moment, as Vitalik Buterin’s brainchild dwarfs many of its bridges. But the closer other cryptos come to Ethereum’s market cap, the higher the risk they carry. So for the big guys, maybe stick with the few bridges that are the biggest – at least to start with.

For smaller projects, it’s best to get to know each crypto to accomplish this on a more personal level. Obviously, for some, this is an enormous task—especially if you’re considering this risk right now. For the initial scan, crypto investors can take advantage investorsobserver Risk gauge to quickly assess the liquidity of the project. After your initial scan, prioritize the biggest (and probably the sketchiest) bridges and move on from there.

metaverse bubble

Back to the Google Blockchain example. Blockchains only have access to information on the chains to which they are connected, which seems to be very dangerous. Currently, people become isolated when they are trapped in an algorithm-driven hell loop where posts recommend similar posts – exposing people to a reality only where everyone agrees with them.

This phenomenon is called the “filter bubble”, a term coined by Eli Pariser.

A filter bubble is a “state of intellectual separation that can result in personalized searches when a website algorithms selectively infers which users are based on information about the user, such as location, past click-behavior, and search history.” Wants to see information.”

While sites like Facebook, Instagram and TikTok trap people in a bubble – other information actually exists on those sites. If you change your clicking habits, you will get new results.

A blockchain version offering a solution that could increase polarization – instead of needing to change your liking/interaction habits to see new ideas – you now essentially have to go through a process to get another view. Will have to start on the new blockchain.

The digital scarcity that blockchain brings to us can create a “metaverse bubble” whereby my search feeds reflect only one perspective, rather than the one my search channel has only one perspective.

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