• Aave, a popular DeFi protocol, will implement a “proof of reserve” system to protect bridged assets on Avalanche, a decentralized finance twist on centralized exchanges.
• The DAO behind Aave approved Chainlink’s Proof of Reserve smart contract by a vote of over 99% in favor.
• The “proof of reserve” system will provide an extra layer of security to Aave’s Avalanche implementation, and can also help mitigate attacks on bridged assets on the network.
Decentralized lending protocol Aave is taking a big step towards shoring up customer confidence in the wake of FTX by implementing a “proof of reserve” system to protect bridged assets on Avalanche, a decentralized finance (DeFi) twist on the centralized exchanges.
The decentralized autonomous organization (DAO) behind Aave, the popular DeFi protocol on Ethereum, recently approved blockchain oracle Chainlink’s Proof of Reserve smart contract by a vote of over 99% in favor. The system 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.
In order to address these security issues, Aave is turning to Bored Ghost Developing, the Web3 studio behind the proposal, to implement their “proof of reserve” system. The “proof of reserve” system will provide an extra layer of security to Aave’s Avalanche implementation, and can also help mitigate attacks on bridged assets on the network.
According to Ernesto Boado, the former chief technology officer at Aave and co-founder at Bored Ghost Developing, the focus of the system is more on “automatically detecting and acting whenever any symptom of security issues on a bridge appears.”
The system 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, says that proof of reserves allow decentralized technologies to accurately report on reserve values, rather than trusting a single party to do so.
Proof of reserves have 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.
By implementing Aave’s “proof of reserve” system, the popular DeFi protocol is taking a major step towards providing customers with the assurance that their assets are safe and secure on the Avalanche network. This system will not only provide an extra layer of security to Aave’s Avalanche implementation, but it can also help mitigate attacks on bridged assets on the network. With this new system in place, Aave is now better equipped to protect their customers and their assets from hackers and malicious actors.