Interoperability: Safeguarding crypto investments

This article first appeared in Digital Edge, The Edge Malaysia Weekly on September 11, 2023 – September 17, 2023

Generally, cryptocurrency assets stored on blockchain are more secure and owners have full control of their property. However, digital assets remain vulnerable to cyberattacks as these are online.

A study done by Chainanalysis in 2019 found that approximately 20% of all bitcoins have been lost and cannot be recovered. This means that billions of dollars’ worth of assets have been permanently lost due to errors in the addresses used.

“The solution to this? Implementing interoperability in the blockchain networks. It can help recover assets gone due to incorrect addresses by providing error prevention and recovery mechanisms, enabling asset tracking and fostering collaboration among blockchain networks,” suggests Luke Liu, chief core ecosystem contributor at Poly Network Inc.

Poly Network is a decentralised finance (DeFi) platform that enables interoperability between different blockchains and facilitates the development of Web 3.0 infrastructure. It connects blockchains, including well-known ones like Ethereum, Polygon, Arbitrum and BNB Chain. Since Poly Network’s inception in 2020, the protocol has successfully facilitated the transfer of assets across blockchains surpassing US$16 billion (RM74 billion) in value.

“In the context of multiple blockchain networks, it is important to allow users to interact with different applications on different blockchains in a flexible and trusted way.

“Without blockchain protocols, what we can do is rely on centralised exchanges to get our assets and data exchanged between different underlying networks. In many cases, there will be too much risk for the user and [it is] not really in line with the general blockchain culture and ecosystem,” Liu says.

Interoperability in the context of blockchain refers to the ability of different blockchain networks or platforms to communicate, interact and share information seamlessly. It addresses the challenge of enabling compatibility and collaboration between various blockchain systems.

Blockchain technology is often implemented in different forms, such as Bitcoin, Ethereum and Ripple. Each blockchain network has its own set of rules, protocols and features that define how transactions are verified, consensus is reached and data is stored.

Although blockchains always operate in silos, Liu says they can intersect and know how other blockchains work in tandem.

Interoperability aims to overcome these limitations by establishing standards and protocols that facilitate the exchange of data and assets across different blockchain networks. It allows users to transfer value, information or digital assets from one blockchain to another without the need for intermediaries or centralised exchanges.

“First of all, this is a multiple-phase workflow. A specific application on the source blockchain network will be able to set up this interoperation request. Then, this request will be captured by our network with a smart contract, and this network that captures messages will lead to a relay of the message,” he says.

These messages will then be delivered from the source blockchain to the Poly Network relay blockchain. The verifiers on the relay blockchain will be triggered to verify the validity of the message from the source network.

“Once the verification and validation are done, cross-chain communication takes place. This involves the use of cryptographic techniques and protocols to maintain data privacy and integrity. Finally, thorough testing of the interoperability framework is carried out to ensure functionality and security,” adds Liu.

He also highlights that the prevalence of software bugs and vulnerabilities enable attackers to easily exploit the security of blockchain. Referring to the major crypto heist amounting to a whopping US$613 million in crypto tokens the company suffered in August 2021, Liu said the hackers were able to tamper with the system using “bugs”.

“In many blockchains these days, there will be no direct connection between your blockchain addresses and blockchain accounts, back to your real physical accounts. That’s the fundamental enormity of anonymity with blockchains.

“To further complicate the process, if the hacker would like to transfer the funds and assets across the blockchains, he or she might be using specific technologies on blockchain,” says Liu.

One of the typical traditional technologies is token or coin mixing. According to Decrypt, a coin mixer is a service that enables users to obscure the source and destination of their transactions. Users send cryptocurrency to the service to have that crypto mixed with other coins or tokens, and then send the equivalent amount of “mixed” coins to a recipient address, hiding the connection between the sender and recipient.

The coin-mixing process will make it harder for the observer on the blockchain to understand where these funds come from and how they are processed, he says.

“In such cases, it’s hard to relate those funds to a specific address on the blockchain and this address is not directly related to someone’s physical identity or physical bank account. And these are some of the common forms of attacks some cybercriminals use when they manage to perform a tag on the blockchain and obtain a specific amount of cryptocurrencies.”

After the mega heist in 2021, Poly Network made sure to thoroughly review its risk management to accelerate the process of identifying the root cause of the attack and prevent future mishaps.

Liu stresses the significance of security specifications in guaranteeing the safety of Web 3.0 interoperability protocols. The absence of clearly defined security specifications often poses challenges for security solutions that rely on code analysis and formal verification to be applicable within the context of interoperability protocols.

Web 3.0 symbolises the next iteration of the internet, which has the potential to be as groundbreaking and transformative as the shift from Web 1.0 to Web 2.0. Web 3.0 is founded on the fundamental principles of decentralisation, openness and enhanced user benefits.

“On Web 3.0, users utilise infrastructure like blockchain, which helps them have control over their data,” says Liu.

For instance, the creator economy is one of the prime examples that allow creators to come up with and safeguard their creations on blockchain.

“Creators will be able to earn, and the benefits will be fairly and reliably allocated based on the creation and ownership of data. The creator economy will be one of the most straightforward instances of how data ownership change can transform the perception towards Web 3.0.”

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