LetsExchange / LetsExchange Blog / “Good” and “Bad” Services for Cross-Chain Exchanges. Why It’s Important to Carefully Examine the Reputation of a Cross-Chain Exchange Service to Avoid Receiving “Dirty” Funds

“Good” and “Bad” Services for Cross-Chain Exchanges. Why It’s Important to Carefully Examine the Reputation of a Cross-Chain Exchange Service to Avoid Receiving “Dirty” Funds

Nov 22, 2023 3 min read

The proliferation of blockchains has increased the demand for cross-chain infrastructure that facilitates interoperability across many blockchain networks. One of the most essential interoperability functionalities in the crypto world is cross-chain swaps, a service allowing seamless exchange of one cryptocurrency for another on a different blockchain. Cross-chain swaps remove the need for intermediaries (e.g., centralized exchanges), offering a more secure, transparent, and seamless way to trade cryptocurrencies across various blockchains.

How Cross-Chain Swaps Work

An early proposal for cross-chain swaps was the process commonly known as atomic swaps. An atomic swap utilizes a time-locked smart contract in which both parties lock up the correct amount of crypto for the transaction. When both parties put in the right amount of coins or tokens, the smart contracts can be unlocked, and each party gets their corresponding funds. But even though atomic swaps are entirely decentralized, they cannot work with all blockchains and need more scalability. For instance, both blockchains must use the same hashing function for an atomic swap. Moreover, both parties must agree on the amount and exchange price and wait some time for the swap to be completed.

Because of the above inconveniences, most current cross-chain swaps take place through crypto bridges. A bridge wraps and locks up tokens on a source blockchain, creating a 1-to-1 representation on the destination blockchain. More technically, a bridge mints wrapped tokens on the destination blockchain and then buys the desired cryptocurrency through a native decentralized exchange (DEX). Several cross-chain protocols automate this process, so users only need to specify the cryptocurrency they want to swap for and the asset they wish to receive. However, the security of these cross-chain swaps depends on the underlying bridge implementation. Hence, it is critical to carefully examine the reputation of any cross-chain exchange service you plan on using.

Attacks on Crypto Bridges

The growing popularity of decentralized finance (DeFi) has increased the demand for crypto bridges that allow investors to “jump” from one blockchain to another. Unfortunately, hackers and scammers are targeting bridges to conduct their criminal activity. Malicious actors usually steal crypto funds by getting tokens on one blockchain without a corresponding deposit on the other. They can generate false deposit events or make fake deposits to defeat the validation process of the crypto bridge. In other cases, hackers take over the control of the majority of validators to have a fraudulent cross-chain transaction approved.

Money laundering is another problem on crypto bridges. It allows hackers to profit and fund illegal activities such as narcotics trafficking, arms sales, bribery, embezzlement, fraud, etc. Cybercriminals use cryptocurrencies to launder “dirty” money since compliance with Anti-Money Laundering (AML) requirements varies on online crypto trading platforms and exchanges. Cross-chain swaps can make it challenging to trace dirty funds back to criminal activity because of the decentralized nature of these transactions.

How to Protect Your Crypto against Criminal Activity through Bridges

To avoid being the victim of malicious activity through bridges, you must be vigilant and follow best security practices. These tips can come in handy:

  • Use secure and crypto bridges with a good reputation. Research the track of their cross-chain services and do not disregard any red flags.
  • Keep your crypto in a hardware wallet.
  • Use strong passwords and multi-factor authentication.
  • Monitor your transactions and immediately protect your funds if you notice unusual activity.
  • Stay informed about the latest security threats, specifically the most common attacks on crypto bridges. This way, you can quickly identify and respond to online threats.
  • Keep your bridge software updated and your device's antivirus and other security programs.
  • Use a reputable exchange with solid security measures to swap cryptocurrencies through a bridge.
  • Please do not click on suspicious links or enter your login credentials on dubious sites, as they could be phishing schemes.

Most importantly, assess carefully whether cross-chain swaps through bridges are worth the risk. While crypto bridges allow for decentralized transactions, they might expose your crypto funds to malicious activity if you do not choose a reputable cross-chain exchange service. In this regard, LetsExchange.io is a secure platform to swap cryptocurrencies using its various functionalities, including DEX, cross-chain swaps for the same coin on different blockchains, and more.

Conclusion

As blockchain technologies evolve, new security threats plague crypto platforms. That is the case with crypto bridges providing easy and quick cross-chain swaps. These protocols can be vital in boosting DeFi liquidity and guaranteeing blockchain interoperability. However, it would help if you exercise caution before entrusting your funds to one of these protocols. Likewise, exchanges and crypto bride providers must implement robust security measures compliant with AML regulations.

Disclaimer

Please keep in mind that the above information is based exclusively on our observations and is provided for informational purposes only. It doesn’t constitute any kind of financial advice nor represents an official forecast. Cryptocurrency is a highly volatile asset, and you are investing in it at your own risk.