Decentralized lending protocol Aave will implement a “proof of reserve” system to protect bridged assets on Avalanche, a decentralized finance (DeFi) twist on the centralized exchanges racing to shore up customer confidence in the wake of FTX.
The decentralized autonomous organization (DAO) behind Aave, the popular DeFi protocol on Ethereum, approved blockchain oracle Chainlink’s Proof of Reserve smart contract by a vote of over 99% in favor. It will specifically cover Aave versions (v)2 and v3 on the Avalanche blockchain.
Bridged assets are DeFi’s way of moving value between blockchains that don’t normally communicate with each other. The asset gets locked in a smart contract on its home chain; then, a clone is issued on the target network. Aave v3 on Avalanche has bridged versions of DAI, USDT and USDC, among other tokens.
But this setup creates many security vulnerabilities, and hackers have repeatedly exploited token bridges. This year, Web3 game Axie Infinity’s Ronin network and cross-chain protocol Nomad faced exploits totaling over $800 million due to breaches on their token-bridges.
Bored Ghost Developing, the Web3 studio behind the proposal, says its PoR smart contracts will give an extra layer of security to Aave’s Avalanche implementation, but can also help mitigate attacks on bridged assets on the network.
“The focus is more on automatically detecting and acting whenever any symptom of security issues on a bridge appears,” said Ernesto Boado, the former chief technology officer at Aave and co-founder at Bored Ghost Developing, which wrote the proposal. “We think that obviously, transparency goes first, in this case, our development goes a step further.”
Under the proposal Aave will use ChainLink PoR’s aggregator smart contract to protect tokens on the original network (Ethereum) as well as their bridged versions on the target network (Avalanche).
Max Melcher, go-to-market lead of proof of reserve at Chainlink Labs, told CoinDesk that proof of reserves allow decentralized technologies to accurately report on reserve values, rather than trusting a single party to do so.
“Leveraging Chainlink Proof of Reserve, Aave can verify that bridged assets accepted on the platform are fully collateralized before allowing users to borrow against them,” said Melcher.
Proof of reserves have recently been in the news post-collapse of FTX because the industry is demanding more transparency from centralized exchanges (CEX). Earlier this month, popular exchange Crypto.com’s reserve ratios show that investors’ assets are safely backed. Last week, Binance’s auditor Mazars cut ties with the exchange, raising questions about the exchange’s reserves, or lack thereof.