A Comprehensive Guide For Defi Security Audits

by ImmuneBytes
DeFi security audits: The Ultimate step by step guide

Defi has been on an upward trajectory of success in recent years, making meteoric progress. Decentralized finance (DeFi), a growing field at the intersection of Blockchain, digital assets, and finance, looks set to change the way we interact with financial services.

Although still in the early stages of development, security issues are projecting danger over the Defi space, with nearly $12 billion of Defi assets lost in 2021 alone. The Rekt leaderboard report says that the Top ⅘ crypto-heists happen in the Defi cross-chain bridge sector. 

Looking at the security needs of the space, it is imperative to take up a Defi safety audit, providing a security net to the underline smart contract. 

This article will cover all the requirements of a DeFi smart contract audit.  

What are DeFi Security Audits?

Smart contracts are the underlying working mechanism for a decentralized finance ecosystem. Hence, any bugs found in the code can make the Defi protocol prone to hacking. 

Here, the Defi audit encompasses verification of Defi smart contracts for vulnerabilities. 

A thorough analysis of the smart contracts that control the operation of these financial systems is part of the Defi security audit. It usually entails a defi audit firm and auditors scrutinizing the code for flaws.

How do DeFi Audits work? 

Defi audit checks if the code performs as per its intended behavior. 

Reentrancy, broken access control, front running, floating pragma, integer underflow/overflow, etc. are some of the common vulnerabilities frequently surfacing in smart contracts.   

Defi security audit is usually performed by third-party auditors, providing a fresh perspective on the smart code functioning. Typically, DeFi Smart Contract Audit can be split into four steps. 

  1. Pre-Requisites

Pre-requisite amounts to gathering auditing requirements including business requirement documents, whitepapers, technical specification documents, smart contract code via GitHub commits, and more.

It aids auditors in analyzing the intended functioning of the smart contract under review. 

  1. Unit Testing

Auditors perform test runs on unit test cases written by the developers, verifying if the code is functioning as planned.  Also, audit tools are deployed, ensuring unit testing takes maximum risk under coverage. 

  1. Manual Auditing

Probably, the most important part of the auditing process. Here, the auditor scans the code line-by-line looking for vulnerabilities. Later, auditing tools like Mythril, slither, mythx, scribble, and more. 

Auditors recommend changes to smart contracts citing vulnerabilities, and code optimization. 

  1. Reporting

One can bifurcate this into initial and final reporting. Here, initial reporting mentions the recommendations, including bugs detected in the code after the detailed auditing. Vulnerabilities are usually classified based on their severity. At the same time, final audit reporting takes place after developers refactor the code based on the recommendations given earlier. 

Additional Resource: Smart Contract Vulnerabilites

Why is the DeFi Safety Audit important? 

Chainalysis report highlights that 97% of all Crypto hacks are associated with decentralized finance. For some time now, DeFi has been the most attractive destination for hackers making it vital to consider its security domain. 

Image Source: https://blog.chainalysis.com/reports/2022-defi-hacks/ 

Here are a few benefits of auditing DeFi smart contracts. 

  1. Security audits act as a security stamp for your DeFi project, promoting investors’ trust in it. 
  2. A third-party audit provides a fresh perspective to your smart project, increasing the chances of finding bugs. 
  3. Along with vulnerability scan, auditing also helps in smart contract performance optimization. 

Pros of DeFi Audits

Audit services in the Defi industry are in high demand due to the recent surge in Defi popularity, accompanied by an equivalent increase in Defi hacks. Smart contract auditing serves as the third line of security coverage after technical infrastructure and governance framework. 

As a result, cybersecurity is critical for smart contracts, and failure to do so will result in significant financial losses and the contract’s assets being permanently locked down. The immutable nature of the blockchain makes it essential to deploy the correct code on the blockchain. 

Alongside this, auditing verifies the consistency of the smart contract with the project’s intended behavior and protects financial assets stored while ensuring the project’s integrity. 

Cons of DeFi audits

Auditing is not a new phenomenon, and though it reduces the chances of hacking, it does not guarantee a hack-proof smart contract. Signifying, it is vital to complement audit with other layers of security like bug bounty, smart contract insurance, etc. 

Also, to ensure a smooth auditing process, one must provide the auditors with all relevant information, including whitepapers, business requirements, technical specifications, and others. This necessitates developing a trusting relationship with your auditors, which can have its own set of consequences.

Wrapping Up

Smart contracts undoubtedly power nearly every aspect of the decentralized financial system. Also, many Defi hacks could have been prevented if the underlying smart contracts were audited, for example, the Ronin network, the polynetwork attack, and more. 

 As a result, keeping the security implications associated with a smart contract in mind is crucial to adopting a smart contract audit as an integral step for its security.

Additional Resources

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