Money laundering from crypto bridge hacks: how compliance team can identify the risks

Someone with Ether tokens may want what does bridge mean in crypto to use them to buy NFTs or play games on the blockchain with lower gas or transaction fees than Ethereum, such as Solana. Blockchain technology, which was created as the basis for cryptocurrencies, has evolved and is used in various sectors of the economy. One of the key elements that enable interoperability and collaboration between different blockchains are so-called bridges. Blockchain technology is a decentralized digital ledger system that records transactions across multiple computers. If you have Bitcoin and would like to move some of it to Ethereum, the blockchain bridge will retain your Bitcoin and convert it into similar amounts of ETH that you can use.

Beyond Cryptocurrency: Exploring the Diverse Applications of Blockchain Technology

This is a lot simpler to automate when both networks are compatible with the same virtual machine (e.g. EVM). First, a smart contract audit is important to ensure there are no weaknesses in the https://www.xcritical.com/ computer code that automates every state transition. Secondly, ensure your dApp security for safe interactions of off-chain components with blockchain networks.

Vulnerabilities in Cross-chain Bridge Protocols Emerge as Top Security Risk

However, interactions among different chains create cross-chain bridge security concerns. At this point of time, you must consider the growing complications in the world of web3 with the addition of multiple layers. How could standalone blockchains solve the problem of cross-chain interoperability? 🔓 Blockchain bridges are susceptible to attacks due to their reliance on third-party data handling in centralized bridges and the absence of regulatory oversight in decentralized bridges. The two main attack types are code attacks, exploiting security loopholes in smart contracts, and design attacks, targeting bridge designs through social engineering. 🌉 Blockchain bridges, act like physical bridges, connecting different blockchain networks or applications.

Smart Contract & Cybersecurity Attacks

Furthermore, it compares these categories and discusses their limitations and weaknesses. Authors in [12] propose a proof of concept framework using smart contracts to provide secure communication between heterogeneous blockchains. The proposed system focuses on how Ethereum blockchain can be used to securely share and transfer healthcare data. The system only supports heterogeneous (public and private) blockchains on the Ethereum platform, and not hybrid systems, such as Bitcoin. The ability of different blockchain networks to interact meaningfully with one another facilitates seamless integration across diverse systems makes evolution of new use cases possible. Further, blockchain interoperability has an impact on reaching a more decentralized ecosystem which presents an advanced manifestation of blockchain technology’s promise to decentralize systems and economies.

Understanding Blockchain Bridges

Blockchain bridges play an essential role in enabling cross-chain connectivity, allowing different blockchain networks to communicate and share resources, thereby facilitating a modular and interconnected blockchain architecture. In the absence of bridges, crypto assets remain tethered to their native networks, unable to participate in other ecosystems being ‘isolated’. This fragmentation stifles liquidity, impedes DeFi adoption, and ultimately limits the scope of crypto’s revolutionary potential.

Importance of Blockchain Bridges

Your Bitcoin is locked in a smart contract while you receive access to an equivalent amount of ETH. Again, blockchain analytics capabilities provide an important defence by enabling compliance teams to identify high risk transactions involving mixers. While mixing generally prevents a compliance team from identifying the ultimate source of funds, the transparency of the blockchain makes it possible to identify funds flowing from a mixer. After recognizing the tokens, they were intentionally burned, paving the way for the original ETH to be safely transferred. Despite the secure process, recent malicious attempts and scams have highlighted the need to bolster bridge security. These blockchains still have their own validators for on-chain operations, but to transfer data to other networks, they use the Polkadot validators.

Cross-chain Bridge Exploits: There Are More Risks Than You Know

Building an open, decentralized, and interoperable blockchain space requires using blockchain bridges, and thereon lies their relevance. Because both blockchains are different, there will be different smart contracts to manage tokens on each side. For example, the bridge on blockchain A might lock and unlock tokens when you deposit. The bridge on blockchain B could do the same or use another method, like generating or destroying tokens on deposits or withdrawals.

Smart Contract Security Audit for Rainbow Bridge by Aurora

Some externally verified bridges are secured by multisig wallets.Ronin is one example. Multisig wallets arealso referred to as m-of-n multisigs, with M being the required number of signatures or keys and N being the totalnumber of signatures or keys (m≤n). This means that an attacker only needs to exploit M keys to be able to hack thewhole system.

The increased number of unconnected and independent blockchain systems, causes a big fragmentation in the field of research as the majority of blockchain systems operates within silos [25]. From business perspectives, these Blockchain platforms should be able to interact with each other in order enhance buisness processes and introduce new add-on values for both users and organisations. However, integration with other systems/Blockchains is a non-trivial challenge primarily due to differences with respect to platforms, consensus mechanism, and governance. Blockchains that focuses on interoperability has, therefore, increased in popularity by researchers and industrial partners in recent years.

A cross-chain bridge is a decentralized tool that links two blockchains and enables users to make seamless transfers. The prime purpose of this bridge is to exchange information and assets from one network to another. The last mechanism only works when tokens already exist on both chains and are locked in liquidity pools. As you’ve guessed, this model locks tokens on the source chain and unlocks an equivalent number of tokens on the destination chain. Several popular blockchain bridges have gained prominence in the crypto community, each offering unique features and capabilities.

These relayers must stake some tokens before getting approval, and this stake can be slashed if they are guilty of malicious activity. Although a fairly new addition to the blockchain ecosystem, cross-chain bridges have exploded in popularity, with their total locked value (TVL) running into billions. Popular blockchain bridges like Arbitrum and Avalanche have also seen token values record significant increases. One of the most notable examples of a cross-chain bridge vulnerability points to fake deposits.

In this scenario, when a user deposits funds into a chain, the smart contract generates a signed message and returns the signature in the transaction. This signature serves as proof of the deposit and is used to verify the user’s withdrawal request on the other chain. This process should be able to prevent various security attacks, including replay attacks and forged deposit records.

For example, In 2022, almost 69% of the funds were stolen between January and August. Again, even the Polygon cross-chain bridge suffered a loss of $4 billion after hackers exploited the smart contract function. Along with the transfers, the cross-chain bridge development also focuses on security. No errors or malicious actors can hamper the transfer process with this bridge.

• Additionally, some bridge projects have created open-source code to demonstrate transparency and build credibility.
• This flow is basically how all conventional cross-chain bridges, including Axelar’s Satellite bridge, enable users to transfer their tokens across blockchains.
• These relayers must stake some tokens before getting approval, and this stake can be slashed if they are guilty of malicious activity.
• Additionally, some bridge projects make their codes open source to promote transparency.
• Details about mitigation approaches to security and privacy issues is presented in Table 5.
• After you read these sections, you will have a better understanding of bridge risks and which aspects you should evaluate when using a bridge.
• Bridge attacks led to losses of over 1.3 billion USD in 2022, accounting for 36% of the year’s total losses, according to CertiK’s estimates.

A trusted bridge is a cross-chain protocol controlled by a centralized entity. During bridging, the asset control moves from the users to the centralized authority. Users have to “trust” the integrity and efficiency of the centralized entity to perform the transaction. Most bridges using this method often have staking and farming programs where users can lock their assets into the pool for periodic rewards. At its core, a blockchain bridge serves as a link, transferring data and value between two blockchains. This could be between two public blockchains, between a public and a private blockchain, or even between two private blockchains.

As a result, users may find swapping assets difficult, negating the usefulness of a bridge. A cross-chain transfer protocol is the programming that allows users to move value across non-interoperable blockchains. In some cases, these protocols lock up the original token in a smart contract or burn it and mint a native token on the target blockchain.

Encouraging collaboration and communication between bridge developers, security researchers, and blockchain communities fosters knowledge sharing and the development of robust cross-chain security solutions. Moreover, supporting and funding innovative research initiatives focused on novel trustless protocols and cryptographic mechanisms can pave the way for a more secure future of interoperability. Keep yourself updated on the latest protocols, security developments, and emerging best practices. By following these recommendations and maintaining a keen eye on the evolving bridge ecosystem, you can confidently navigate the interoperable future, reaping the full potential of your blockchain assets. Remember, while bridges offer distinct advantages, they may involve slightly higher fees compared to centralized exchanges.

Instead, you’d have to visit a centralized crypto exchange (CEX), buy Solana’s SOL tokens, and send them to a Solana-compatible wallet. While sending funds within a blockchain’s ecosystem is easy, developers have struggled to find secure ways to get different networks to interact with each other. Many in the crypto industry have labeled this issue the « interoperability problem. » Although users can easily transmit data across blockchains, some might conduct illegal activities like fake transfers, defrauding, and others.

By enabling concurrent activity across diverse chains, bridges effectively expand the bandwidth of the entire blockchain landscape, fostering a more scalable and inclusive future for decentralized technology. Protocols once limited to fundraising on Ethereum, like Hyperliquid and dYdX, can now migrate development to their own chains, fostering greater autonomy and tailored functionality. Bridges seamlessly transfer liquidity between chains, allowing these protocols to integrate new blockchains and expand their user base while retaining essential liquidity pools. The blockchain bridges’ transformative power and plenty of opportunities for businesses lies in a multitude of benefits, each paving the way for a more efficient, inclusive, and innovative crypto ecosystem.