How the Bitcoin network can solve the pitfalls of DeFi token bridges

cointelegraph.com:

Decentralized finance (DeFi) saw a record inflow from centralized exchanges as crypto users flocked to self-custody solutions following the FTX collapse. Over 100,000 Bitcoin (BTC) left crypto exchanges so investors could avoid third-party custody. True to the “not your keys, not your coins” mantra of Bitcoin, DeFi solves a wide array of problems associated with centralized entities.

However, several reports indicate DeFi is not a fail-safe environment, as high-profile protocol exploits like Wormhole, Nomad and Ronin made headlines in 2022 for the wrong reasons.

Source: Token Terminal

DeFi exploiters particularly target cross-chain bridges. In fact, cross-chain bridge exploits account for more than half of all DeFi exploits since September 2020, with approximately $2.5 billion lost to these attacks. A Chainalysis report shows that token bridge attacks accounted for over 69% of the total amount of crypto stolen in 2022, a clear indication that bridge exploits are on the rise.

Since the DeFi ecosystem comprises multiple blockchains, transferring digital assets from one network to another requires specially designed protocols that work across different blockchains. Known as cross-chain bridges or token bridges, these protocols lock users’ deposited tokens from one chain into a contract, then issue the equivalent amount of assets to the same user in the receiving network.

For example, since the Bitcoin blockchain is not directly compatible with the Ethereum (ETH) blockchain, the DeFi ecosystem relies on workarounds like wrapped Bitcoin and token bridges to tap into the liquidity available in the Bitcoin ecosystem.

Most bridge protocols use central storage to back assets on the receiving blockchain, creating a target spot for