The problem of wrapped tokens & DEX

[Mitch]

The problem with modern DEX is that a large part of the coins being traded are wrapped tokens.
All wrapped tokens are issued by bridges, that's their essence, if someone issued a wrapped token, it is automatically a bridge. And this bridge can suddenly close because it is centralized.
The bridge's scam will lead to the scam of all the tokens that the bridge has issued.

The risk of scamming bridges and wrapped tokens is highly underestimated.
To estimate the size of the problem, I asked an AI chatbot trained on fresh data "list of cryptocurrency bridges that have lost users' money in the last 3 years with the amounts of losses".
In response I got a list of 9 bridges that have lost money.
In total, over $2 billion has been lost in cryptocurrency bridge hacks in the last 3 years.

The list is not complete, at least the DEX Waves scam last year, which I watched in real time as a user, was not included.
Waves bridge stopped converting wrapped tokens into original tokens and the price went to hell, estimated users lost about $100M.
Half a year later Waves launched a new bridge, changed the names of all the old tokens that had fallen to almost zero. The new bridge issued new wrapped tokens and DEX continued to work.

Trading on DEX is a great idea, we only trust the smart contract, fully trustless. However, there is a nuance in what exactly you buy on DEX.
If you have ETH and you want to buy BTC, on DEX you can only buy wrapped bitcoin, for example WBTC.
WBTC is an ERC20 standard token issued by the BitGo bridge that is backed by native BTC 1:1.
BitGo publishes a list of bitcoin wallets on their website so that everyone can verify that they have exactly as many bitcoins as they have issued WBTC, and so far they are doing fine. However, at any moment these bitcoins can be stolen from their accounts, for example by dishonest employees or under criminal pressure.
As long as you hold the wrapped token you are carrying this additional risk that has occurred due to the centralized issuer of the token.

Vitalik Buterin recommends using atomic swap from time to time, most recently in the post "Don't overload Ethereum's consensus".
Here is a small quote from it:
Cross-chain bridges: similar logic as oracles, but also, try to minimize how much you rely on bridges at all: hold assets on the chain where they originate and use atomic swap protocols to move value between different chains.

First of all, of course, we need to understand what atomic swap is and why it is better than bridge.
Atomic swap allows you to exchange coins issued in different blockchains without trusting the counterparty. You can exchange native coins, for example, native BTC for native ETH.
You can also exchange tokens of any standard, including ERC20, e.g. USDT.ETH to BTC.
You don't need to use a wrapped token, you just buy the asset on the right network. You don't need to trust the seller, it can be an anonymous person on the internet with no reputation.
The deal will either be finalized on both sides or canceled and everyone will be left with their coins.
The deal does not require a guarantor in the form of a person or organization.
In personal conversations, the first objection I've encountered when describing these fantastic features of atomic swap is usually "but that's impossible!".

However, it is possible, implemented even in a couple of working services, but it was done so obscurely or inconveniently that it has not yet become popular.
How the atomic swap works will be discussed in detail in the next article.

[Sophokles]

Atomic swaps are being used by many DEX's and dapps to trade bitcoin and ETH like coins with each other --it's not impossible. The use of the smart contract makes them trustless and vulnerable as well. Smart contracts have been the primary target of hackers for dapps, and they mostly use loopholes in smart contracts to exploit them. Though I like the way it works...either both parties will receive their desired assets or nothing at all.

Atomic swaps are better than centralized bridges in many ways for cross-chain asset transfers, and I believe this board is dedicated to bitcoin-related topics when your post is mostly related to the DeFi application.

[Mitch]

Atomic swaps are being used by many DEX's and dapps to trade bitcoin and ETH like coins with each other --it's not impossible.

Sure it's possible, but I don't know of a usable enough service for atomic swap.
I found only AtomicDEX, but they don't good enougth, they allow use for trade only their own wallet.
U say many, so give me links where i can swap BTC to ETH by atomic swap.

[franky1]

wrapped tokens are "pegged" not bridged

bridges are sub networks/systems(not tokens themselves) that allow value of multiple mainnet pegged tokens to transfer together on that one bridge network that transfers between different mainnets

pegged token = value vehicle
bridge = transport network

[Sophokles]

Atomic swaps are being used by many DEX's and dapps to trade bitcoin and ETH like coins with each other --it's not impossible.

Sure it's possible, but I don't know of a usable enough service for atomic swap.
I found only AtomicDEX, but they don't good enougth, they allow use for trade only their own wallet.
U say many, so give me links where i can swap BTC to ETH by atomic swap.

Here are few other:

• bisq
• atomicdex
• defiswap
• hodlhodl

Use these platforms at your own risk. They can be dangerous and are always potential targets of hacker groups. All these platforms use atomic swap features.

Edit: bisq, defiswap, hodlhodl non of these platform uses atomic swap features. Only atomicdex uses that feature.

[nelson4lov]

Your concerns for bridges and Wrapped tokens are valid. Wrapped tokens in particular has been put up for debates on multiple occasions and the concept is flawed because there is essentially a trust in a centralized party to honour agreements every time BTC or Ethereum tokens are wrapped. But unlike bridges, I'm not sure there have been a direct attack on  Wrapped tokens that resulted in loss of funds since the value these wrapped tokens have are backed by the actual collateral asset held by BitGo Trust.

[Mitch]

..But unlike bridges, I'm not sure there have been a direct attack on  Wrapped tokens that resulted in loss of funds since the value these wrapped tokens have are backed by the actual collateral asset held by BitGo Trust.

As long as BitGo's collateral is in place, all is well.
However, imagine a situation where serious people came to the owners of BitGo and made them an offer they couldn't refuse.
For example, "give us the private keys to your wallets and you and your families will stay alive".

They probably use multi-signature, or different wallets are managed by different employees. In any case, this is a small number of specific people, finding them all at once is not a very difficult task for the intelligence services of any country. Organized criminals can handle it too.
The $4.4 billion BitGo has on custody is a decent slice of the pie.

What will happen to the WBTC rate if there is about 0 BTC left on BitGo bitcoin accounts ?
I don't think they will be bailed out by the government like a bank that is collapsing.
They will simply cease to exist.
All those who had WBTC on their hands can only record losses.

[Mitch]

wrapped tokens are "pegged" not bridged

bridges are sub networks/systems(not tokens themselves) that allow value of multiple mainnet pegged tokens to transfer together on that one bridge network that transfers between different mainnets

pegged token = value vehicle
bridge = transport network

Wrapped tokens are "pegged", I totally agree.
But pegged by who?
My answer is "pegged by the bridge".

For example USDT.BSC is USDT pegged by Binance.
Binance act as the main bridge, you give them real USDT issued by Tether in some other network, they give you wrapped USDT.BSC.
And what is realy important, they do it in both directions, for now.

And right now many other bridges can help you transfer USDT from other networks to BSC and back.
Now all these bridges work like a transport system.

Now imagine that Binance goes to bakrutsy, CS goes to jail, as it happens with FTX.
In the blink of an eye all bridges stop accepting USDT.BSC.
Because bridges are not transport system, they are specialized exchanges.

[zasad@]

Cryptocurrency bridges have many risks, but these risks are mainly for those users who add liquidity to these bridges and, accordingly, receive a reward for this in the form of a share of commissions. If the exchange directions are popular, then the profit reaches 30-40% per year, which is not bad for large capital.
If I use a bridge, then I have little risk unless there is a break-in at that moment.

[Apocollapse]

Wrapped token is definitely 100% scam because it offer no use case and all they do is copy pasta other coin/token and use their centralized network.

Now imagine that Binance goes to bakrutsy, CS goes to jail, as it happens with FTX.
In the blink of an eye all bridges stop accepting USDT.BSC.
Because bridges are not transport system, they are specialized exchanges.

That's why you need to trust the network when you use a token that run off chain, so if you're trust Tether and you not trust Binance, you must not use USDT BSC and consider to either use USDT ERC-20 or other off chain network.

The best DEX is Bisq, not Atomic DEX or Atomic Swap.

[Blitzboy]

People keep saying, "Its on the blockchain, so it must be safe," but they forget that the issue bridge could be the process's Achilles' heel. Hacks, scams, and even internal corruption can happen on centralized bridges, and when they go down, they take a lot of money with them.

In just three years, bridge hacking has cost more than $2 billion. Thats not just a small problem; its a big red flag. People should stop being fooled by the shiny surface of "trustless smart contracts" on DEX platforms and start looking deeper. Even if you cant trust the deal itself, can you trust the thing you're buying? WBTC is only as reliable as BitGo, and if BitGo goes down, your investment goes down with it. People, pay attention to Vitalik Buterin: The way to go is with atomic swaps. Trusting anyone in the crypto world is like walking on thin ice, so cut out the middleman and do business straight.

[franky1]

wrapped tokens are "pegged" not bridged

bridges are sub networks/systems(not tokens themselves) that allow value of multiple mainnet pegged tokens to transfer together on that one bridge network that transfers between different mainnets

pegged token = value vehicle
bridge = transport network

Wrapped tokens are "pegged", I totally agree.
But pegged by who?
My answer is "pegged by the bridge".

For example USDT.BSC is USDT pegged by Binance.
Binance act as the main bridge, you give them real USDT issued by Tether in some other network, they give you wrapped USDT.BSC.
And what is realy important, they do it in both directions, for now.

And right now many other bridges can help you transfer USDT from other networks to BSC and back.
Now all these bridges work like a transport system.

Now imagine that Binance goes to bakrutsy, CS goes to jail, as it happens with FTX.
In the blink of an eye all bridges stop accepting USDT.BSC.
Because bridges are not transport system, they are specialized exchanges.

nope.. exchanges are the gateway

i really hope you learn what bridges are. especially if you drive a car.. because if you dont think that a bridge is part of the transport network, you wont get far

[makishart]

wrapped tokens are "pegged" not bridged

bridges are sub networks/systems(not tokens themselves) that allow value of multiple mainnet pegged tokens to transfer together on that one bridge network that transfers between different mainnets

pegged token = value vehicle
bridge = transport network

Wrapped tokens are "pegged", I totally agree.
But pegged by who?
My answer is "pegged by the bridge".

For example USDT.BSC is USDT pegged by Binance.
Binance act as the main bridge, you give them real USDT issued by Tether in some other network, they give you wrapped USDT.BSC.
And what is realy important, they do it in both directions, for now.

And right now many other bridges can help you transfer USDT from other networks to BSC and back.
Now all these bridges work like a transport system.

Now imagine that Binance goes to bakrutsy, CS goes to jail, as it happens with FTX.
In the blink of an eye all bridges stop accepting USDT.BSC.
Because bridges are not transport system, they are specialized exchanges.

So, what is happening if the collateral address used to store the native BTC is still fine? Im concerned about the collateral address rather than bridge. It's caused by the bitcoin stored in the collateral address is the main reason that gives wrapped tokens 1:1 value.
Even if the bridge was collapse and the value of wrapped token will not be affected caused by that.

[RussianEnglishTranslation]

The internet computer has ckBTC, which doesn't use a bridge. CCIP by chainlink will obsolete bridges.

[Mitch]

Atomic swaps are being used by many DEX's and dapps to trade bitcoin and ETH like coins with each other --it's not impossible.

Sure it's possible, but I don't know of a usable enough service for atomic swap.
I found only AtomicDEX, but they don't good enougth, they allow use for trade only their own wallet.
U say many, so give me links where i can swap BTC to ETH by atomic swap.

Here are few other:

• bisq
• atomicdex
• defiswap
• hodlhodl

Use these platforms at your own risk. They can be dangerous and are always potential targets of hacker groups. All these platforms use atomic swap features.

I take a quick look at these platforms, and only AtomicDex of them uses Atomic Swap as technology.
Bisq and hodlhodl is p2p trading platform, but they rely on human who will solve disputes if someone is unhappy by the results of the deal.
So you have to trust these people who run the platform. They can make mistakes and also they can collude with your counterparty.
So they are not actually trustless. They just have no KYC, which is great of course.

Defiswap is just a normal DEX, you can't swap cross chain there.

[Mitch]

wrapped tokens are "pegged" not bridged

bridges are sub networks/systems(not tokens themselves) that allow value of multiple mainnet pegged tokens to transfer together on that one bridge network that transfers between different mainnets

pegged token = value vehicle
bridge = transport network

Wrapped tokens are "pegged", I totally agree.
But pegged by who?
My answer is "pegged by the bridge".

For example USDT.BSC is USDT pegged by Binance.
Binance act as the main bridge, you give them real USDT issued by Tether in some other network, they give you wrapped USDT.BSC.
And what is realy important, they do it in both directions, for now.

And right now many other bridges can help you transfer USDT from other networks to BSC and back.
Now all these bridges work like a transport system.

Now imagine that Binance goes to bakrutsy, CS goes to jail, as it happens with FTX.
In the blink of an eye all bridges stop accepting USDT.BSC.
Because bridges are not transport system, they are specialized exchanges.

So, what is happening if the collateral address used to store the native BTC is still fine? Im concerned about the collateral address rather than bridge. It's caused by the bitcoin stored in the collateral address is the main reason that gives wrapped tokens 1:1 value.
Even if the bridge was collapse and the value of wrapped token will not be affected caused by that.

Imagine that the collateral BTC is still at the same addresses, and BitGo says that everything is fine.
They still accept BTC and give WBTC, but only in that direction.
The reverse direction does not work, no one can convert WBTC back to normal BTC.
Maybe they just lost the keys.
From time to time BitGo tweets that everything is fine, we'll fix it soon.
In this very imaginary situation, what happens to the price of WBTC if they don't fix the bridge in 1 month, 10 months, 10 years?
WBTC price soon goes down, and after several years will be 100 times less than actual BTC.

All I'm just saying is that native BTC is better than wrapped BTC, the risk is lower.
So it makes sense to look for how to trade native BTC instead of wrapped BTC.

[honglu69]

Avoid wrapped token. Consider native coins DEX

Thorchain can trade BTC DOGE LTC ETH native coins in large liqudity.

For smaller coins,  atomicDEX is great on small trades on cheap fees,  It support BNB and USDT too, all on atomic swap style in DEX.

The down side on atomicdex is poor liquidity.  Trading $10 USD swap in atomicDEX between BNB/DOGE pair is perfect, low fees.   but large volume is poor experience.

Thorchain is Uniswap style with native BTC LTC DOGE support.  Recently snap in metamask support BTC LTC DOGE native coins, thorchain can swap BTC <-> ETH  natively in metamask or in thorswap etc other more popular interfaces.  Thorchain has a chance to be number 1 defi dex in the future surpassing uniswap.  Uniswap can not swap BTC,  thorchain can.

[Mitch]

Yes, you can buy native BTC on ThorChain, that's fine.
They use decentralized validators with collateral to transfer data between blockchains. This model is better than a simple centralized bridge, but still worse than a true atomic swap.
Decentralized validators need to be paid, when I tested ThorChain, the final commission of the system was around 2%, that's quite a lot.
Also a system with decentralized validators has an additional attack vector, especially when swapping amounts larger than the validators' collateral.

[honglu69]

Yes, you can buy native BTC on ThorChain, that's fine.
They use decentralized validators with collateral to transfer data between blockchains. This model is better than a simple centralized bridge, but still worse than a true atomic swap.
Decentralized validators need to be paid, when I tested ThorChain, the final commission of the system was around 2%, that's quite a lot.
Also a system with decentralized validators has an additional attack vector, especially when swapping amounts larger than the validators' collateral.

I do not want to argue between atomic swap dex vs thorchain style dex, I like both and use both.

Yes indeed,  thorchain has security concern, it is relatively new. It has newly launched streaming feature that cut down trading cost, I think thorchain trading cost is 0.1% to 0.3%, quite competitive to CEX.  But for smaller trades, atomic swap based dex  atomicDEX is better.

AtomicDEX or any atomic swap based DEX has liquidity issue. This is big road block.  No liquidity,  no big traders coming.  atomic swap DEX is only for micro trades, or small retail traders unfortunately, this is not likely to change soon.

[Mitch]

AtomicDEX or any atomic swap based DEX has liquidity issue. This is big road block.  No liquidity,  no big traders coming.

I think, it is typical cold start problem, same as at any platform.
Money and advertisment solve it.