How DeFi Audits Help Institutional Investors Avoid Risky Projects

• Blockchain Council
• March 12, 2025

Anyone who has been in the investment world long enough knows that excitement often comes with a hidden cost. The more promising a financial opportunity seems, the more cautious one should be. DeFi has been no exception.

Many investors were drawn in by its promise: no banks, no middlemen, just direct financial transactions powered by Blockchain. But then the hacks started. Billions vanished overnight. Regulations tightened. Suddenly, what seemed like an open frontier started looking like a minefield.

For institutional investors managing massive portfolios, the risk is even greater. Unlike retail traders, they can’t afford to throw money at every new project and hope for the best. They need security, compliance and transparency. This is why DeFi audits are no longer optional, they are a necessity.

But what exactly do these audits cover? And how do they prevent investors from falling into the same traps that have already cost the DeFi sector billions? Let’s break it down.

What Is a DeFi Audit?

A DeFi audit is a deep review of a project’s smart contracts and overall security. It helps detect weaknesses that hackers could use to steal funds or disrupt operations. These audits also ensure the project follows industry security standards and works as intended.

In simple terms, a DeFi audit is like a quality check before launching a project. It gives investors confidence that they’re putting their money into something secure. Not all audits are created equal. A poorly conducted review can leave critical vulnerabilities unnoticed, putting investors at risk. This is why institutional investors should prioritize audits conducted by professionals with relevant certifications, such as the Certified Cryptocurrency Auditor™ (CCA). 

What Do DeFi Audits Cover?

A well-done audit looks at multiple aspects of a project’s security and functionality. Here are the key areas examined:

1. Smart Contract Review

Developers write smart contracts to automate transactions in DeFi projects. If these contracts have bugs, attackers can exploit them. Auditors carefully inspect the code to spot errors, security flaws and potential loopholes.

2. Security Testing

Hackers are always looking for weak spots in Blockchain-based platforms. Audits simulate attacks to see if the project can withstand threats. This includes checking how well the system protects against unauthorized access and cyberattacks.

3. Regulatory Compliance Check

Regulations surrounding cryptocurrencies and DeFi are constantly changing. Institutional investors need to know if a project follows the latest legal requirements. Auditors verify whether the project aligns with necessary financial and security regulations.

4. Performance and Reliability Testing

A good DeFi project isn’t just secure, it should also work efficiently under different conditions. Audits examine transaction speed, scalability and system reliability to ensure smooth performance, even during high demand.

Why Are DeFi Audits So Important for Institutional Investors?

Institutional investors handle large amounts of money and operate under strict rules. A single security breach can lead to massive financial and reputational damage. Here’s how DeFi audits help them reduce risks:

They Prevent Costly Security Failures

Cyberattacks on DeFi platforms have resulted in billions of dollars in stolen assets. In early 2025, the Bybit exchange suffered a hack that drained around $1.4 billion. Hackers used a fake Safe UI to trick the system and execute unauthorized transactions.

This type of attack could have been prevented with a more thorough security audit. By investing in projects that undergo strong security checks, institutional investors reduce the chances of falling victim to similar attacks.

They Help Meet Regulatory Standards

Governments worldwide are paying more attention to DeFi, introducing laws to protect investors. For example, the European Union introduced new cryptocurrency regulations in 2025 to improve security and oversight.

If a project doesn’t follow legal guidelines, investors could face legal trouble or financial penalties. Audits help confirm whether a project meets these regulations, making it safer for institutional investors to participate.

They Increase Transparency and Trust

Unlike traditional financial institutions, many DeFi projects operate without clear accountability. Audits force developers to be transparent about their security measures.

When a project undergoes an audit, it shows investors that the team is serious about security and compliance. This builds trust and confidence, which is essential for large-scale investments.

Real-Life Cases That Show the Impact of DeFi Audits

The Bybit Hack

In February 2025, Bybit experienced a major security breach that resulted in the theft of approximately $1.4 billion. The attackers deployed a malicious version of the Safe UI, allowing them to exploit a weakness in the exchange’s multisig smart contract. By manipulating the system, they were able to execute an unauthorized upgrade, draining the platform’s funds.

A thorough audit could have detected and fixed these vulnerabilities before they were exploited. This incident serves as a reminder of how overlooked security flaws can lead to catastrophic financial losses.

zkLend’s Exploit

The zkLend protocol suffered a loss of around $9.5 million due to a simple rounding error in its smart contract. This flaw, though seemingly minor, created an opportunity for an attacker to siphon funds from the system.

Had the protocol undergone a detailed audit, this issue could have been identified and resolved before deployment. This case highlights how even the smallest coding errors can have severe financial consequences.

The Collapse of TerraUSD

In 2022, the TerraUSD stablecoin collapsed, triggering a chain reaction that wiped out billions from the DeFi sector. The total value locked (TVL) across decentralized platforms dropped by nearly 65%. Investors who had placed their trust in the stability of TerraUSD saw their holdings disappear almost overnight.

However, DeFi protocols that had undergone rigorous audits and had strong risk management measures in place were able to withstand the impact far better. This crisis reinforced the importance of security assessments and stress testing in DeFi projects.

FTX’s Downfall

FTX’s collapse in 2022 exposed major gaps in financial oversight. The U.S. Securities and Exchange Commission (SEC) later charged Prager Metis, the exchange’s auditing firm, with misconduct. Authorities argued that the auditors lacked the necessary expertise to evaluate a cryptocurrency exchange properly.

How Can Institutional Investors Protect Themselves in DeFi?

DeFi is full of potential, but it’s also unpredictable. To lower risks, institutional investors should follow these best practices:

1. Only Invest in Audited Projects

A project that has been properly audited is far less likely to suffer from security breaches. Before committing funds, investors should check whether a project has passed a security review from a reputable auditing firm.

2. Work with Trusted Auditing Firms

Not all audits are equal. Some firms have a better track record than others. Investors should rely on well-known auditing companies with a history of identifying vulnerabilities in DeFi projects.

3. Demand Continuous Monitoring

Blockchain security isn’t a one-time process. New threats emerge regularly. Investors should push for ongoing security checks and regular updates to keep DeFi projects safe over time.

4. Do Independent Research

While audit reports are useful, investors should conduct their own research. Checking the project’s development team, governance model and community involvement provides a clearer picture of its reliability.

Final Thoughts: Why DeFi Audits Should Never Be Ignored

Ignoring DeFi audits is like walking into a high-stakes poker game blindfolded, sooner or later, you’re bound to lose. Too many projects have promised groundbreaking innovations, only to collapse due to preventable security flaws.

For institutional investors, the risks aren’t just about money. A single misstep can bring legal troubles, reputational damage and massive financial setbacks. Audits provide the safety net needed to make informed, secure investments.