Education

What Is DeFi Security?

Introduction to DeFi

It’s impossible to discuss security matters without figuring out what exactly is DeFi. DeFi stands for decentralized finances – an umbrella term that includes most smart contract-based financial operations.

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Is DeFi safe?

As a system, DeFi is built to allow maximum security with minimizing the human element, which is proven to be the least reliable. It’s less often that the system malfunctions, but the users of DeFi choose to seek and exploit the existing issues.

Safety of the DeFi market is entirely defined by the measures that project owners and creators are prepared to take for the sake of protection for themselves and the users. Because not every project takes the necessary measures, users of dApps end up in danger.

Security risks in DeFi include issues within the code of smart contracts that determine the functionality of dApps and tokens. These issues might vary in severity. For instance, there are certain issues that highlight excessive freedom for the contract owner, which can result in abuse of power and, subsequently, loss of users’ funds.

Other issues make a contract susceptible to external attacks by hackers and malicious users. These are avoidable things, that can be easily predicted by an experienced auditor. So the question here is not whether DeFi is safe as a system, but whether every user and project representative within the ecosystem is acting in your best interests. The answer to that isn’t necessarily yes.

Is DeFi safe?

DeFi security is a number of measures that project owners and users must both take if they want to evade potentially dangerous situations. These measures include but not limited to security audits, locking liquidity, and excessive research before engaging in any processes.

Security audits allow to discover errors and possibilities for contract abuse within the contract’s code. Knowing these potential risks ahead of time makes room for fixing the errors.

Most auditors don’t just show the issues, they offer ways to fix them. And this gives project owners an opportunity to deploy the most functional version of the code. If the errors are not fixed, however, the users of the dApp or potential buyers of the token will have to rely on the owner’s actions.

There is one more thing to consider, as after deploying the contract and giving a proper start to the project its owners have to make sure that the funds invested in it are safe. This is where locking liquidity comes into play as a safe practice for ensuring protection from rug pulls.

That’s not all, because there is so much more

What do you do as a user?

Users of DeFi projects and dApps don’t always need to rely on project owners to deliver on their promises. For that, the best practice is doing your own research or DYOR. Before investing in a project, one has to make sure it’s worth it and the necessary security measures are taken. There’s also a matter of finding out as much as possible about the team behind the token or the project. Usually, that means that either the team is public and non-anonymous or that it has been through the KYC process, with a legitimate representative ready to take responsibility for the team’s credentials.

For a user, this is an act of protecting themselves and their finances, a responsibility that lies solely on the user’s shoulders.

As it is obvious, DeFi itself is neither safe nor unsafe to use. Its security is merely a matter of participants’ preparedness to face potentially dangerous situations and knowing how to prepare themselves to avoid them. Fortunately, there is enough information to enter the DeFi market with plenty of knowledge.

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