The crypto borrowing and lending platform Nexo recently provided transparency into exactly how its business makes money. Its lengthy breakdown follows the collapse of numerous high-profile crypto lending firms that were overexposed to defunct projects and businesses. Nexo’s Business Model As Nexo explained in a Twitter thread on Monday, Nexo’s primary business strategy is to facilitate collateralized credit. Its core services include crypto collateralized loans, interest-bearing crypto accounts, and spot, futures, and options trading. Through its Earn product (crypto interest…
The decentralized finance (DeFi) space has developed substantially in the past three years. However, the threat of hacks and scams still looms large on the horizon, leading to FUD (fear, uncertainty, and doubt) in users and projects. Fortunately, smart contract audit and KYC services can tilt the balance towards a secure, more lucrative future for this sector.
Auditing companies ensure that investors get behind real and feasible projects. Moreover, KYC standards guarantee the reliability of development teams and reduce malicious participants. These are only the two main benefits of audit and KYC services. Below, we look at their inner workings and how they secure the DeFi environment for everyone.
How Smart Auditing Works
The crypto market was similar to the wild-wild-west in its first years. Hundreds of projects would appear overnight. Some would turn into long-lasting success stories. Meanwhile, others pulled the rug from under their users, disappearing with millions of stolen dollars into the thin blue air.
In recent years, auditing companies have set a strong foothold in the market. They took the guard dog role of scanning the integrity of projects and investors alike. Some of these auditors became industry-leading brands, certifying thousands of projects, developers, and users. For example, audit & KYC companies like SolidProof, Certik, PeckShield or OpenZeppelin help secure most of the DeFi space today through their services.
But how do they work?
These auditors use professional teams of experts to evaluate each new project’s most basic components. If and when they encounter issues, they work closely with the projects’ development teams to solve them. Often, they use manual and automated auditing methods to “proofread” the underlying mechanisms of a DeFi protocol.
Generally, new projects looking to gain credibility in the market approach auditing companies in their early development stages. This way, they get a certified third-party examining their source code for issues and vulnerabilities. Next, they work together until the entire protocol is bug-free. The resulting certificate testifying the project’s reliability can help teams attract angel investors and other financial backers. Furthermore, it convinces early adopters to support the project in the long term.
KYC Standards and Procedures
A KYC (Know Your Customer) verification is an industry standard for preventing money laundering and other fraudulent activities. The DeFi space is still largely unregulated, allowing many malicious participants to create fake projects. In fact, the industry has a long history of hacks, pump & dump scams, and rug-pulling hoaxes.
Again, the auditing companies provide top-quality KYC services to minimize the risk of fraud for both projects and their users.
Auditors can perform KYC verifications to confirm the identities of developers, investors, and users. Generally, they employ in-depth searches seeking any potential risk of these participants committing fraud or other financial illegalities. Also, they aim to discover whether users pose a risk of financing terrorism through their activities.
Most teams developing new DeFi initiatives apply for KYC verification to prove their good intentions even before the launch of their projects. Then, once they’re up and running, they can ask their users and investors to pass the same procedures. If every verification successfully confirms the participants’ legitimacies and capital sources, their collaborations can proceed virtually risk-free.
Benefits of Audits and KYC Screening for DeFi
The emergence of auditing companies in decentralized finance has made this environment safer. Furthermore, it contributed to creating a well-regulated crypto space, more accessible to new projects and investors.
Smart contract auditing is a reliable tool for developers to test and improve source codes before launching projects. Even the most expert teams in the field opt for this third-party assessment to ensure the viability of their work.
KYC screening prevents illegal activities and fraudulent actors from entering an increasingly safer DeFi space. Also, it reduces the risk of money laundering, terrorist activities, and other cyber crimes. Lastly, it prevents malicious participants from introducing money from illicit sources into the crypto market.
Nowadays, the DeFi space is departing from its wild-west image as developers and users can rely on better verification tools. A project without a smart contract audit will find it almost impossible to attract wealthy investors or many users. On the other hand, financial backers and regular users can only access a limited number of projects without passing KYC verification.
The extensive tests taken during audits ensure no vulnerability risks the project and its investors. Analysis and code validation helps the project maintain genuine proceedings and acquire the help required in case of a bad actor.
All in all, smart contract audit and KYC services help DeFi develop into a safer, more trustworthy space for everyone.