DeFi audit – what is it and why is it necessary?

Tokenguard Team
January 25, 2022
defi audit

Conducting a DeFi audit has become a necessary tool at the disposal of companies that want to ensure the integrity and security for the users of their blockchain-based projects. This is especially relevant for financial services as companies providing them should treat their online security as a number one priority. The code underlying these services should be impeccable and meet safety requirements to make users trust it.

To ensure that the deployed code works properly and won’t fail, companies order audit services. Investors are interested in the results of smart contract verification as well as it helps them assess the potential of cryptocurrencies before investing.

What is a DeFi audit?

As decentralized finance is running on the automated smart contracts, any bugs found in their code can undermine the smooth work of the system.

Simply put, a DeFi safety audit is a thorough check and analysis of the code performed by auditors to prevent this situation. This process is performed by third-party auditors which ensures an unbiased overview of the code.

How does DeFi audit work?

Auditors review documentation, website, and software repository, to detect vulnerabilities in code and problems of deployed contracts. As a result of conducted work, the auditing company comes up with the summary and a report that includes the comprehensive analysis of the security of the project and its consistency with the whitepaper.

There are three key stages of the DeFi audit:

  1. Assessment of the project. It is fulfilled by studying the DeFi software’s white / yellowpaper to determine the business logic and to estimate the risk coverage and security properties.
  2. Automated code verification. Usually run with tools that automatically look for well-known vulnerabilities in the code (fuzzers, symbolic execution, static analysis)
  3. Manual code review. It is conducted by specialists to test different attack scenarios on the code that may result in any significant breaches.
  4. The delivery of a comprehensive audit report. This final stage presents a detailed analysis of all vulnerabilities discovered in the smart contract. It comes with recommendations that help companies to mitigate the risks.

These steps are required for the comprehensive audit that will reveal all potential security bugs and help your project ensure its integrity before the launch.

Benefits of using smart contract audits for DeFi projects

It is required to conduct the token audit to safeguard investors’ funds and to increase the project’s longevity in the market. Caring about the safety of your project before launching can help companies to protect millions of dollars in assets.

Smart contract audits performed by highly qualified experts with additional help of automated tools give your blockchain projects the following advantages:

  • Verify the consistency of code and white / yellowpaper
  • Protect the assets from hackers
  • Ensure the integrity of the project

Flaws and problems with DeFi auditing

Numerous security concerns in the DeFi sphere have not appeared out of the thin air as some blockchain projects have proved to be incapable of creating a holistic ecosystem and building a decentralized economy. DeFi auditing alone may be insufficient if you strive to achieve 100% security.

Although the open-source approach caused the industry to boom in the early years, now it seems to work against the sector where projects are cloned and deployed so easily. Newly-created projects often try to adapt the existing code by introducing new ideas. To do that, they modify the system’s mechanics which is not intended for such tasks. As a result, the pieces of code become incompatible and cause failure.

Platforms should be cautious when enriching the old ecosystem with new features. Sometimes inexperienced developers may kill their own project by launching it without dApp audit. Hackers can exploit DeFi protocols for malicious purposes as happened with Binance yield farms Garuda, GoCerberus, Lokum, and KetchupSwap on 16th June 2021. Another vivid example is IronFinance’s Titan Token that lost its value as the tokenomy was designed incorrectly.

Issues may emerge when team members don’t understand the deployed code. Take Pancakeswap as an example. The project deployed its fork Polycat offering IFO on Polygon deriving this feature from Initial DEX Offering (IDO). Poor understanding of the process resulted in incorrect calculations of sent tokens at the end of the presale while the whole economy had to be redesigned due to insufficient checks of deployed contracts. The platform issued 10 times more native tokens and increased their overall supply.

Demand for DeFi audits

With every new bullrun, there is an overwhelming demand for audit services in the DeFi industry. The recent surge of DeFi popularity at the end of 2020 resulted in the increased demand for smart contract security audits as the total value locked in the decentralized sector grew exponentially.

Audit firms are swamped with orders from projects that want to remove bugs and flaws before their platforms go live. Large security firms even have to reject the projects due to a high volume of applicants. Eventually, the market gets exhausted as the next stage of its cycle takes place.

With the ever-growing number of auditing solutions, companies should carefully select those that have good experience and the needed level of qualification. DeFi audit is the key point where the entire process of smart contracts’ security begins. Also, one may expect that audited solutions will find it easier to get insurance of their funds, therefore, such services may become the next trend in the nearest future.