How to Use DeFi Audits to Protect Your Investments

In the world of decentralized finance (DeFi), trades are executed via smart contracts without intermediaries. Despite the great opportunities, software errors or vulnerabilities may lead to huge losses. That's where DeFi audits come in, a smart contract security follow-up that aims to detect problems before hackers exploit them. Understanding the importance of these audits is an essential step to protecting your investments in this accelerating field.

1. Understanding decentralized finance and its security risks

• What is decentralized finance (DeFi)?

Decentralized finance (DeFi) is a financial system built on blockchain technology that allows users to carry out financial transactions such as lending, borrowing, and trading, without the need for intermediaries such as banks or financial institutions. These operations are carried out through smart contracts that operate automatically according to pre-programmed conditions. DeFi seeks to provide users with transparency, open access, and complete control over their funds.

• DeFi protocols risk months (hacks, vulnerabilities, exploits)

Despite the great advantages that decentralized finance offers, it carries many risks, the most important of which are:

Software vulnerabilities: Any simple error in the smart contract code could result in the loss of millions.

Hacks: Hackers target unsecured protocols to hack them and steal money.

Technical exploits: Even without a direct hack, attackers can exploit the workings of contracts to make illicit profits (such as Flash Loan Attacks).

Therefore, it is essential that DeFi protocols are audited before being used by investors.

2. What is DeFi Audit?

DeFi audit (decentralized finance) refers to the process of reviewing and analyzing smart contracts used in DeFi protocols with the aim of ensuring their security and safety from security vulnerabilities and software errors that may lead to financial losses or exploitation by hackers.

 Definition of smart contract auditing and its objectives

A smart contract audit is a systematic and careful examination of the smart contract code used in DeFi protocols. This is usually done before the project is launched (or sometimes after).

Main objectives:

Detect security vulnerabilities that may lead to hacking or theft of funds.

Improve code quality and increase its efficiency.

Ensure compliance with best security practices and standards.

Enhancing user and investor confidence in the Protocol.

 Audit types: manual vs automated

Manual Audit:

It is conducted by engineers or security experts who review the code line by line.

It is characterized by accuracy and the ability to better understand the programming context.

It can detect complex attacks such as: Reentrancy, Price Manipulation, etc.

Automated Audit:

 

It is done using static analysis tools.

Fast and can scan large amounts of code in a short time.

Some of the most popular tools include: MythX, Slither, Oyente, Certora, and Manticore.

Effective in detecting typical errors but may not detect complex vulnerabilities.

A combination of manual and automated auditing is typically used for maximum security.

Who does these audits?

Specialized auditing companies:

It has teams of experts in blockchain security.

Provides formal reports with a comprehensive assessment and suggested weaknesses.

Among the most prominent:

Certik

Trail of Bits

OpenZeppelin

Quantstamp

Consensys Diligence

Freelance Auditors:

They work individually or within communities like Gitcoin or Code4rena.

They are often used for community audits or rewards (Bug Bounties).

DeFi (decentralized finance) audits protect your investments through a range of mechanisms aimed at reducing risk and improving the security of smart protocols. Here's how it's done:

3. How do DeFi audits protect your investments?

DeFi (decentralized finance) audits protect your investments through a range of mechanisms aimed at reducing risk and improving the security of smart protocols. Here's how it's done:

1. Detect vulnerabilities before exploiting them

Through careful review of the Smart Contracts code by cybersecurity experts:

Software errors or vulnerabilities are discovered that may be exploited later.

 

The code is tested to simulate attack scenarios such as: Reentrancy, Integer Overflow/Underflow, or unauthorized access.

Correcting these vulnerabilities early protects the protocol and users from potential losses.

2. Enhancing transparency and confidence in the Protocol

Publicly publishing audit reports enhances user and investor confidence in the security of the protocol.

Demonstrates the project's commitment to protecting funds and not ignoring security risks.

Motivating the community to participate in discovering vulnerabilities through patch rewards (Bug Bounty Programs).

3. Examples of hacking cases that could have been avoided with scrutiny

🔴 DAO Hack (2016)

Reason: "Re-entry" vulnerability in the smart contract.

Losses: $60 million.

 

If he had undergone a security audit, the vulnerability would have been easily discovered.

🔴 Poly Network Hack (2021)

Reason: Weakness in authorization logic and key management.

Losses: More than $600 million (later recovered).

An audit would have revealed weak access control logic.

 

4. How do you select projects that have been audited?

To select a well audited DeFi project:

Check published reports:

The project must publish a formal audit report on its site or via GitHub.

The report should preferably be public and not just an announcement that "the audit has been conducted.".

Name of the auditing company:

 

Make sure the audit firm is well-known and has a reputation in the field (see below for a list of the most popular firms).

Audit date:

Serious projects audit before launch, not after.

The audit should preferably be up to date with recent changes in the code.

Number of audits:

Some projects are audited by more than one company to obtain multiple results.

The existence of bug bounty programs:

This is a sign that the team is serious about maintaining safety.

 

How do you ensure that the project has been audited?

See project documentation:

Go to the official website, find the section “Security” or “Audit”.

Check audit report links:

Links must point to official PDF documents or GitHub pages from the auditing company.

Check for the company's signature or seal.

Search GitHub:

The audit report may be present as an attachment in the code repository of the project.

Search on the Internet:

 

5. Limitations of DeFi audits

• Why aren't audits a complete guarantee?

Although Smart Contract Audits are an important step in securing DeFi protocols, they are not a complete guarantee for the following reasons:

Code complexity: Smart contracts are often very complex, making it difficult to detect all possible vulnerabilities or scenarios that could lead to exploits.

Constantly changing the environment: DeFi protocols interact with other protocols, and any change in one of them may affect unexpectedly, even if the code has been previously audited.

Human errors: Auditing is carried out by individuals or companies, which makes the possibility of error possible. Not all auditors have the same level of experience or tools.

 

Inability to simulate all scenarios: It is difficult (sometimes impossible) to test every possible interaction or attack scenario in a limited audit environment.

Post-audit code updates: Some projects make post-audit modifications or updates, making the audit results invalid or incomplete.

• The need for ongoing testing and bounty programs to detect vulnerabilities

Given the inadequacy of audits alone, a multi-layered security approach must be adopted that includes:

Continuous Testing:

Implementing automated testing, including unit tests and interactive tests.

Use simulation environments (testnets) periodically to experiment with new features and analyze system behavior.

Bug Bounty Programs:

Invite security researchers and independent developers to test the protocol in exchange for financial rewards.

These programs encourage ethical disclosure of vulnerabilities before they are exploited by malicious actors.

 

Community Reviews:

Opening the source code to the public and developer community may contribute to discovering problems that were not detected by audit teams.

Automated detection tools:

Using automated behavior analysis tools (such as MythX or Slither) can reveal dangerous patterns that are difficult to monitor manually.