DeFi Security Audit: Importance & Risks

Defi Security Audit: Importance & Risks

Conducting a DeFi audit has become an extremely important tool today. It is especially true for companies that want to guarantee users the security of their blockchain-based projects. Financial services companies must be able to ensure safety and have excellent ways to protect against hacker attacks. The code behind these services must comply with all security requirements. Otherwise, users will lose trust in the company. 

Companies order audit services to ensure that the deployed code works perfectly and does not fail. Investors are very interested in the results of smart contract audit because this allows them to assess the potential of a cryptocurrency before investing.

What is a DeFi audit?

Decentralized finance works on automated smart contracts, so any errors found in their code can disrupt the system, which is highly undesirable. A DeFi audit is a smart contract code review and due diligence performed by auditors to prevent hacker attacks and various security issues.

DeFi protocols have many software risks:

  • Coding errors.
  • Vulnerabilities that can cause the software to malfunction.
  • Security vulnerabilities that allow attackers to hack and steal funds from the protocol.

So, DeFi audits are key elements for securing security. The service must have impeccable security features and comply with safety requirements. Furthermore, companies should request an audit for the deployment code to work well. This way, investors can assess the blockchain’s underlying value before making important investment decisions.

How does the DeFi audit process?

A Defi Audit checks if the code is working correctly and everything is happening according to the requirements. 

Floating pragma, broken access control, lookahead, reentry, integer under/overflow, etc., are some of the most notorious vulnerabilities in smart contracts.

Defi audits are typically performed by third-party auditors, providing a new and unbiased view of how the smart code works. Auditing DeFi smart contracts can be divided into four main steps.

  1. Pre-Requisites

It is the collection of audit requirements, including technical documents, business requirements documents, documents with technical specifications, smart contract codes, and much more. 

It helps the security audit firms properly analyze the smart contract’s intended functioning.

  1. Unit Testing

At this stage, the security audit team is doing test runs for the different unit tests written by the developers, checking if the code works.

  1. Manual Auditing

It is a key part of the process. The specialist scans the code line by line at this stage in search of vulnerabilities.

The auditors make recommendations about making various changes to smart contracts, pointing out code optimizations and vulnerabilities.

  1. Reporting

It can be noted the initial reporting that mentions the recommendations, including errors found in the smart contract’s code, and the final reporting after the developers refactor the code based on the advice.

What are DeFi audits?

Smart contracts are the backbone of the decentralized financial ecosystem. Any errors can lead to the unauthorized use of the Defi protocols, which will lead to big trouble. Defi security audit is a detailed analysis of the smart contracts that control financial transactions.

Almost all cryptocurrency hacks are associated with decentralized funds. Defi remains the main target for attackers, so it’s important to evaluate its security domains now. Therefore, an audit carried out on time is essential.

Why is the DeFi smart contract auditing so important? 

It is important to secure a project before it is ready to go. And regularly conduct security checks. The audit of smart contracts by experts is essential in today’s world, when hackers are becoming increasingly active. There are several pluses to auditing DeFi smart contracts.

So why DeFi audit has gained a great popularity:

  • A competent audit helps to optimize the performance of smart contracts.
  • Security audit allows you to take a fresh look at your project, increasing the likelihood of detecting errors and vulnerabilities.
  • Security audits increase investor confidence in a project by acting as a security seal for a DeFi project.

Benefits of DeFi Auditing

Cybersecurity is significant to smart contracts. Auditing services in this industry are in huge demand due to the surge in Defi’s popularity, accompanied by an increase in hacker attacks. Furthermore, the immutable nature of the blockchain makes it necessary to deploy the correct code. 

So a security audit protects the financial assets held while ensuring the project’s integrity and verifies that the smart contract complies with the intended behavior of the project.

Cons of DeFi security audit

Despite all the advantages of smart contract audits, it is extremely important to complement them with other layers of security, such as insurance for smart contracts, rewards for detecting errors, etc.

Among the minuses are the following:

  1. You need to know a lot to participate in DeFi projects. So it would help if you studied this area to understand what you are doing.
  2. High level of volatility to consider.
  3. You should take care of various security methods at a high risk of fraud.
  4. All information, including technical specifications, business requirements, white papers, and so on, should be provided to audit professionals to ensure a smooth audit process. It requires developing a great trusting relationship with the auditors, which can have consequences. Therefore, you should select auditors whom you trust completely.

Smart contract code review

Programs on public blockchains often operate invaluable assets, which makes them frequent targets for attacks. Therefore, checking code for potential vulnerabilities is a great way to increase user and investor confidence. There are different types of smart contract code review:

  • Automatic code verification. It is usually launched with tools that automatically look for known vulnerabilities in the code (fuzzers, static analysis, symbolic execution).
  • Checking the code manually. Audit firms carry it out to examine in detail the various scenarios of attacks on the code that can lead to serious trouble.

The Future of DeFi

Decentralized finance is constantly evolving, providing customers with innovative solutions. However, the DeFi ecosystem today is full of infrastructure failures, hacks, and scams. The possibility of limitless DeFi transactions raises important questions for society regarding the specifics of process regulation.

  • Who will enforce the rules in this area?
  • Who is responsible for investigating a financial crime outside DeFi apps, borders, and protocols?

Particular attention should be paid to system stability, energy requirements, system maintenance, and equipment failures.

Conclusion 

Decentralized finance eliminates various intermediaries, allowing merchants and businesses to conduct financial transactions using cutting-edge technology. It is made possible through peer-to-peer financial networks that use connectivity, security protocols, hardware, and software.

DeFi applications aim to recreate traditional financial systems using cryptocurrencies, such as exchanges and banks. DeFi has become popular lately, and hacker activity is rising. Safety audits are necessary to secure user data and avoid reputational risks for the company. It is the best way to prevent DeFi hacks.

FAQ

What is audit in DeFi?

A DeFi safety audit is a thorough review and code analysis performed by audit professionals to prevent hacker attacks, data leakage, loss of funds, and risks to the company’s reputation.

Is DeFi risk-free?

Investing in DeFi is very risky but very promising. However, each protocol and DeFi project has a different level of reward and, accordingly, a different level of risk.

What are the risks of investing in DeFi? 

The following risks can be distinguished: environmental risk, oracle risk, storage risk, smart contract risk, and regulatory risk.

What are the components of DeFi?

Decentralized finance uses different new technologies to exclude centralized institutions and third parties from financial transactions. The components of DeFi are software and hardware, stablecoins that allow the development of various applications.

Do you need a smart contract audit?

Yes, sure. A security audit of a smart contract helps prevent various troubles. So, it is necessary to conduct a detailed audit of smart contracts in blockchain systems. Security vulnerabilities, design flaws, and coding issues focus on these audits.