Top 10 Best DeFi Security Best Practices

Top 10 Best DeFi Security Best Practices

DeFi News
December 26, 2022 by Diana Ambolis
The growth of DeFi protocols has been a vital part of the blockchain and cryptocurrency ecosystem. But security is still a significant concern for DeFi protocols, especially before a consumer protocol is released. As the protocols will handle users’ money, it is essential to emphasize the best security measures. The effect of security on DeFi
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The growth of DeFi protocols has been a vital part of the blockchain and cryptocurrency ecosystem. But security is still a significant concern for DeFi protocols, especially before a consumer protocol is released. As the protocols will handle users’ money, it is essential to emphasize the best security measures. The effect of security on DeFi protocol adoption and trust is likely predictable. What are the potential reasons for the emphasis on DeFi security? This section discusses the DeFi security issues developers must look into in 2022. This will help you find the answer. You may learn the best ways to keep your DeFi network safe and the problems they solve.

Justification to Focus on DeFi Security

Due to the inherent dangers in the area, it is essential to focus on DeFi security. Most DeFi teams would try to fix the problems in their code to fix security holes in DeFi, but they needed more luck. Developers need to know much about common DeFi security risks, like brute force and oracle attacks. Here is a list of the essential DeFi security issues developers need to know about in 2022.

  • Exploiting Sources of Randomness

Consumers and miners get an unfair advantage because DeFi systems exclusively use inputs associated with blockchain creation. Re-rolling the results of DeFi applications and reordering transactions are two ways to show blockchain security.

  • Oracles Influenced by Outside Forces

Oracles are a crucial source of information for protocols. Due to their dependence on a single exchange for data, time-weighted average price oracles may pose substantial security problems for DeFi networks. Consequently, TWAP oracles are not credible price predictors, as the quoted price cannot correctly represent the current price on the larger market.

  • Unprecedented Token Migrations

When a project moves tokens from one liquidity provider to another, this is called a token or liquidity migration. These instances may lower the pool’s liquidity, making it more susceptible to market manipulation. When a project wants to switch to a new version of the native token, this is a clear sign of a token migration. For accurate reporting of asset prices, a new native token would need a new price feed. This means token migration could introduce risks that have yet to be discovered.

Threats from a DeFi security breach could be as unique as the DeFi apps themselves. To ensure that dApps are safe, it is essential to be careful and follow best practices.

Also, read: 9 NFT Projects Redefining Web3 in Anime PFPs.

Security Best Practices for DeFi

The systematic risks connected with DeFi protocols revealed that blockchain-based dApps might be vulnerable to various flaws. In addition, the intricacy of security flaws and the fast development of the web3 ecosystem pose new threats to DeFi. Alternatively, you may resolve DeFi security vulnerabilities using the following best practices.

  1. Reentry Attacks

Protections against reentrancy attacks would be the first item on the list of the finest DeFi security best practices. In this type of DAO attack, an internal contract calls for an external contract to change the state of the external contract. Arrangements are integral to DeFi and perform distinct functions like receive and fallback. Contract manipulation might enable the withdrawal of money without the sender’s knowledge. In this case, the best thing to do is to change the internal status of the contract. Ensure that the internal state has changed before calling an external agreement you don’t trust or sending ETH and tokens.

  1. Reason for Uncertainty

Randomness can be helpful in smart contracts for several reasons, especially when the fair distribution is needed. The source of randomness or anything used with blocks to make a random number can show where an application’s DeFi security is weak. On the other hand, blockchain systems are predictable by nature and don’t have a source of random numbers that can’t change. In addition to making sure that cryptography is secure, the method used to create randomness must be hard to change and easy to check. Therefore, finding a random number without leaving the blockchain is difficult. In such circumstances, developers want a solution that works as a dependable randomization oracle.

  1. Rely on the Instrument for Testing and Static Analysis

Next on the list of important DeFi security best practices are testing and static analysis tools. A device or platform for automated testing might give more testing control. Trying your application is a proven way to minimize DeFi security risks. Some of the most popular protocols, such as Synthetix and Aave, include sample testing suites to understand testing best practices better. In addition, static analysis tools may accelerate the identification of issues by automatically executing contracts and securing detected vulnerabilities.

  1. Transparency and Limitations on Function

Solidity, the language used to make DeFi protocols, explains the different parts of function visibility or transparency. The amount of access a specific group of users is given depends on whether a function is public, private, external, or internal. Visibility and restriction may offer the required access authorization for several jobs. Contract management may benefit more if the best visibility and restriction management practices are used. Still, these suggestions for reducing security holes in DeFi may make you worry about how centralized DeFi protocols are.

  1. Preventative Measures for Frontrunning

The possible way to stop this DeFi security attack would involve fair sequencing services. In a blockchain network, all transactions are saved in the mempool. This makes sure that everyone can see all transactions. Users can also use the mempool to make sure that a transaction will make money by completing it before it is finished. Fair sequencing services could offer an off-chain way for dApps to sort transactions based on how appropriate they think they are in terms of time. Honest sequencing services can reliably solve the problem of frontrunning while lowering the cost of transactions for blockchain users.

  1. Recognize Common Errors

Discussing ideal DeFi security practices would highlight weaknesses in smart contracts. You will likely make new code vulnerabilities if you don’t follow the proper security standards. Overflows and underflows, as well as the looping gas limit, are common problems that must address in a DeFi protocol. In addition to avoiding “tx. origin,” you must put proxy storage collection, data cleaning, and accurate token transfer computation at the top of your list of priorities.

  1. Avoid Amm And Dex Reserves As Price Oracle Warns

One of the best ways to deal with the security holes that oracle attacks create in DeFi is to look for alternatives to centralized oracles. One of the most common ways to break into DeFi systems is to use AMM and DEX reserves as a pricing oracle. Users may misuse a centralized pricing oracle by modifying the spit price for an order book or AMM-based DEX. In such conditions, a decentralized oracle would be the ideal solution. Decentralized oracles may help establish the true worth of currency exchange rates, enabling more intelligent security decisions.

  1. Affirmation is a Journey

A typical misperception about a security breach is that a specific and definitive solution might help to resolve the issue. However, as DeFi technologies expand, so do their accompanying security weaknesses. So, to master DeFi security, you must be one step ahead of security risks and events. This is accomplished via the use of current monitoring and alerts. DeFi security activities also include setting up the smart contract for the future by giving it access to sources of dynamic security information.

  1. Employ an External Audit Before Deployment

Before deploying to the leading network, best practices for DeFi security call for an outside evaluation. It is more equivalent to peer review for evaluating the security of code. When the protocol is used without a security audit, security problems are likely to happen. So, the audit must be thorough and emphasize good documentation, clear communication channels, and coded feedback to help people understand. On the other hand, you must remember that security audits cannot resolve all DeFi security vulnerabilities.

  1. Develop a Disaster Recovery Plan

The most important and valuable part of reducing DeFi security threats is a plan for what to do in case of a disaster. Common suggestions for a disaster recovery strategy include insurance and plan upgrades. Installing the emergency “pause” feature is another tried-and-true way to prepare for disaster recovery. Because there are many different ways to recover from a disaster, insurance protocols have made it safer for people’s money. On the other hand, an emergency “stop” function could stop all brilliant contract activities and turn off the protocol. Nevertheless, each technique has its pros and downsides. You may choose the one that best matches your requirements.

Final Words

Numerous entries in the list of top DeFi security best practices illustrated the relevance of several significant variables in developing protocols. Attacks on DeFi protocols can cost money and have made it even more critical to put security first. On the other hand, because security holes change over time, we must follow safety best practices. The DeFi community must work together to eliminate ecosystem-wide threats. Concentrate on a bottom-up approach to security and creating safe DeFi protocols. You may become an expert in decentralized finance by using credible study resources.