DeFi Audit: Why Is DeFi Important?
The new digital era of economic reforms and revolutions is already at our door. With the need and demand for more direct and independent financial transactions, the DeFi industry confidently paved its way to the crypto world, giving the most troublesome traditional banking processes a simplified approach. With a computer and an Internet connection, you can easily lend, borrow, trade, or access other financial products without dragging on complications and disrupting financial Intermediaries like banks or brokers.
And though the DeFi infrastructure and its regulations are still under debate and development, DeFi projects and platforms have already changed the core concepts of the banking industry.
So, let’s go on and take a closer look at DeFi, its importance, benefits, and auditing process in this article.
What is Decentralized Finance (DeFi), and How It Works?
Decentralized Finance (DeFi) is an umbrella term referring to emerging financial technology deployed on secure distributed ledgers. The primary purpose behind this technology is to remove the traditional financial institutions and banks that have control over money transfers, financial services, and products. Instead, the consumers can easily access any service from anywhere globally and make transactions with the fling of fingers through peer-to-peer networks using connectivity, security protocols, and hardware and software advancements.
But how exactly does this financial ecosystem work? As we already know, DeFi uses blockchain technology similar to other cryptocurrencies, which helps carry out financial transactions without centralized financial institutions. All the financial processes are recorded in blocks and validated by other users. If the verifiers agree on the transaction conditions, the block will be closed and encrypted, and no one can make any alterations after that.
To sum up, let’s see the outline of core concepts of Decentralized Finance below.
- Users hold their money in a secure crypto wallet instead of opening savings accounts or storing it in a bank.
- The Decentralized Finance platforms eliminate the transaction fees bank charges for using their services.
- Anyone around the globe with an Internet connection can use it without control nodes.
- Transferring money, crypto assets, and taking a loan will take several minutes.
Smart Contract Audit Services for DeFi Projects
With the alarming number of security breaches, data leakage, and the rise of DeFi hacks in 2022, the overall protection and security measures in the DeFi space require a more solid and severe approach. And what is the best way to avoid or minimize the risks of such harmful scenarios if not constantly performing comprehensive security auditing? There are multiple audit companies and firms like Immunbyte specializing primarily in DeFi products, including Decentralized applications and projects, that help check the security systems and fix the problems carefully.
Audit services generally cover the solutions designed for strengthening the security of vital decentralized apps developed on peer-to-peer public blockchains like BSC, Ethereum, Polkadot, EOS, Tron, etc. And as decentralized finance typically is used as an umbrella term for almost all financial applications in cryptocurrency and blockchain geared using smart contracts and decentralized technology, the core and essential part of security assessments becomes smart contract auditing. In addition, DeFi audits can include run-time and static analysis of the smart contract code and reviews on gas optimization.
DeFi Audit Importance
Before jumping into the primary auditing process, let’s see why it is so essential to perform a smart contract audit from time to time and what problems it solves.
- Safeguarding your or your investors’ and partners’ funds, digital assets, and data
- Increasing the longevity level of the audited project in the market;
- Eliminate the risks of non-functionality and turning off the application;
- Fixing the existing bugs, flaws, vulnerabilities, and weak spots of the app before its release;
- Ensuring the integrity of the project through comprehensive solutions and upgraded tools:
Stages of the DeFi Audit Process
Before conducting an audit, it’s essential to fully understand the DeFi project’s architecture, goals, characteristics, and security policies. Only after that can the security expert make a strategic audit plan according to the company’s needs, objectives, and requirements and choose appropriate testing methods and tools.
Generally, all audits differ depending on the scope, specifics, and company’s budget; however, there are multiple methodologies and phases common to all audits that we will review below.
#1 Assessment and Evaluation
The first and most crucial step covers the project’s general assessment and evaluation. It helps to make initial reports and figure out the business logic. Additionally, the auditor estimates risk coverage and determines the core security properties for testing.
#2 Review and Analysis
After understanding the core aspects and components of the project’s smart contracts, the auditing team can move on to the second phase – reviewing and analyzing. They conduct multiple code analyses and reviews parallel with the project’s code in this stage. Finally, the security professionals perform manual analysis to identify all possible anomalies and vulnerable elements existing in the system, along with the essential reviews.
#3 Reporting and Delivery
The final stage of any DeFi audit is reporting. When all the procedures, tests, analysis, and assessments are done, the security team provides a final technical report on the audit results. Generally, the report includes a detailed list of discovered issues, bugs, vulnerabilities, remediation solutions, and approaches for fixing the detected problems. Some audit companies also provide post-auditing services such as revision, retesting, and monitoring.
The demand for direct purchases and the need to remove controlling authorities from most financial transactions and products, including loans, crowdfunding, insurance, betting, derivatives, etc., lead to the development of a new financial system. As a result, various Decentralized Applications have come to light, promising to support this idea and cut out intermediaries from all kinds of financial transactions through their integrated blockchain technology.
There are already multiple DApps of various types serving to simplify the users’ digital experience. Here we gathered some of the most popular ones.
These online exchanges are one of the successful pioneers among DeFi platforms. Their main goal is to help investors exchange digital currencies for other fiat currencies. For example, you can swap a USD coin with Bitcoin, Ether, or vice versa. Moreover, the exchange platforms enable users to trade or exchange currencies directly among each other without involving third parties like a bank or broker.
Lending markets are another popular form of the DeFi concept, connecting lenders to borrowers of cryptocurrencies. The core idea behind Lending Platforms is to replace intermediaries like banks and brokers with smart contracts. One such well-known platform example is Compound, which allows customers to borrow cryptos or offer a loan. Here users can make a profit or earn interest by lending out their money: the interest rates are set according to the current demand for the cryptocurrency.
Stablecoins are from the group of Decentralized Finance platforms concentrating on price stability. It means a stablecoin tied to a real-world asset such as a euro or dollar outside of the cryptocurrency is used to stabilize the market fees and interest rates.
Prediction Markets are a form of decentralized finance platform mainly used for future predictions. Crypto enthusiasts can use prediction markets for betting on a possible outcome of certain future events like elections or games. The critical difference between these markets from traditional betting platforms is the absence of intermediaries.
It is a method of sending bitcoins to the Ethereum platform so that consumers can use coins directly in Ethereum’s DeFi system. Additionally, WBTCs allow customers to earn interest on their lending bitcoin via other decentralized platforms and applications.
In addition to the above-listed decentralized applications and platforms, other new and innovative DeFi concepts also have come to light. Let’s review them together.
- Yield Farming: It’s mainly suitable for experienced crypto lovers who like to take risks. The main idea of yield farming is that users can scan through various tokens at a low cost in search of opportunities that bring good money returns.
- Liquidity Mining: This concept is one of the forms of yield farming that DeFi apps use to entice customers to their platforms by giving them free assets.
- Composability: As DeFi applications are open-source and the code behind them is publicly available, people can use them to compose new apps like building blocks based on the code.
The Decentralized Finance concept development has recently brought many projects, platforms, and apps to the crypto market. In addition, it opened new doors of innovative solutions and financial services for crypto community members to support investing, betting or staking, giving them limitless options and opportunities for digital activity and peer-to-peer transactions.
However, not everything is as bright and simple as it seems. The crypto space itself is a challenging and tricky sector that entails various risks and security issues. And DeFi is not an exception. So, before making any investment decisions or starting any other digital activity, it’s more than essential to pay attention to existing risks to avoid losing funds.