The advent of bridges and wrapped tokens have enabled massive amounts of capital to flow between blockchain networks and expanded on-chain activity beyond the Ethereum ecosystem.
Much of the early success of alternative L1s like Binance Smart Chain, Avalanche, Luna, and Solana came from the ability for users to wrap their ETH or other ERC20 tokens into a smart contract that would give them access to WETH on their destination chain, which could be traded for native tokens on that network. The same action could be taken in reverse, allowing native tokens to be wrapped and sent over to Ethereum where they could interact with other more liquid tokens on the Ethereum network.
Underneath the surface of a bridge token transfer are a set of validators who sit between both chains (e.g chain A and B) and are responsible for verifying that a certain number of tokens have been locked in a smart contract on A chain (for example), which means that B chain can mint a wrapped version of the sent token since the token has been taken out of circulation from A chain.
As long as the validators confirm that the initial token is locked in the smart contract, the wrapped version will be recognized by protocols and counterparties on chain B as a real token with a value equal to its native version.
When the user who deposited their native token from Chain A to receive a wrapped version on Chain B wants to reverse the process and get their native token back, the wrapped version is sent to a burn address on Chain B, validators confirm the token burn transaction, which then triggers the native token to be released to the owner on Chain A.
While this process has been successful in moving billions of dollars worth of tokens between chains, it has not been without its flaws. Specifically the challenge of managing the validation of native tokens as they convert into wrapped tokens and revert back. This can be especially challenging if the set of validators is constantly changing.
Blockchains are essentially like islands that communicate data using their own special language. Even though a set of blockchains can have many similarities due to them being EVM compatible, there may still be significant differences in the protocols they use for confirming things like wrapped token ownership.
This makes cross-chain KYC especially challenging. For example, validators on Chain B may need to verify the identity of someone trying to exchange a wrapped token in order to confirm that they actually own the token, yet the process for conducting this verification may be based on protocols set up by validators on Chain A. In the event that the Chain A validators are no longer participating in validation, the wrapped tokens may be considered invalid by default, with no way to verify that they were obtained legitimately.
Without a robust identity system that enables multi-chain authentication of asset ownership and is adopted by current and new validators, bridges cannot be considered a truly secure and efficient method for transferring assets cross-chain.
For one, in certain scenarios where KYC/AML compliance is necessary, owners of wrapped tokens may be unable to prove ownership and therefore lose their ability to spend the wrapped tokens or even claim access to their native tokens due to the validators changing. It is also possible that the opposite situation may occur, where hackers may be emboldened to steal wrapped tokens and may be given access to spend them unencumbered because of the non-native chains ability to adapt the security protocols created by the native chain.
An Identity Layer for Blockchain Bridges
Accumulate solves this problem by creating a universal identity layer where validators can be represented as ADI’s.
Validators can coordinate security protocols between chains using Accumulate as the communication layer, enabling blockchains to keep up to date with any changes made to the protocols of the validators operating them and adjust accordingly.
Accumulate’s key management and authorization schemes would be particularly useful for validators to manage the flow of wrapped tokens between chains.
The Accumulate key management system would enable validators to generate multiple wallet keys that are linked to a decentralized digital identifier or ADI. These keys could be arranged based on a set priority. For example, you can create high-priority keys that are placed in cold storage for use in case your other keys are lost or compromised. Certain keys could be used for authorizing very important transactions such as sending or receiving a large amount of wrapped tokens to an important address, or changing a bridge’s security protocols, while other keys could be used for transactions of lower importance, such as testing newly deployed Defi smart contracts.
Validators represented as ADIs could update their key settings to include multisig transactions (transactions that require 2 or more digital signatures), delegated transactions (transactions that can be initiated by an external authority based on 3rd party verification), managed transactions (transactions that include self-imposed limits on spending or frequency) or other conditions without having to touch high-priority keys, thereby maintaining the highest possible security standards and minimizing vulnerabilities.
Authorization schemes can play a critical role in helping to secure blockchain bridges. One of the biggest challenges with keeping bridges secure today is navigating the risks that come with the growing honeypot of capital that is locked in a multi-sig wallet to enable wrapped tokens to be minted and deployed on other chains.
Incidents like the Ronin bridge attack, where $625m in USDC and ETH was stolen, was primarily caused by a lack of adequate security protocols for managing multisig wallets, which enabled the attacker to access the locked funds by phishing their way into just a few wallets.
Time-based authorization schemes on Accumulate can be designed to enable a new set of keys to be given authority to manage a multi-sig wallet every week, every day, or even during random intervals to ensure maximum unpredictability.
This would make it extremely difficult for an attacker to gain access to the majority of keys in a multi-sig wallet because the authorized wallets would always be changing.
In addition, protocols could be put in place between validators on different chains to ensure that there are fail safes put in place to secure bridged funds during or post upgrades, which is something that could have prevented the $300m Wormhole bridge hack on Solana from occurring.
Ultimately, the Accumulate digital identity layer can provide a safe and secure solution for validators and counterparties across different chains to authenticate wrapped tokens, keep track of security protocol updates and leverage authorization schemes to instill failsafes that prevent multi-sig bridge wallets from getting exploited.