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Working Papers
Abstract
Decentralized Finance (DeFi) is an innovation with the potential to address fundamental issues in modern finance. However, in practice, its technology has also demonstrated susceptibility to various problems, including security vulnerabilities and coding errors, which have led to an increasing number of exploits and hacks. In response, protocols have adopted security audits as a means to mitigate these issues.
In this study, we collected original data on security audits and explored their potential signaling effects. Our findings indicate that protocols are audited more frequently than previously documented, including audits when contracts are already managing funds. Generally, the release of security audits results in modest increases in the returns of the protocols’ own currencies. Contrary to findings in other studies, we did not observe significant increases in the amount of liquidity attracted by protocols or in their operating volume as the number of audits increased. Therefore, our preliminary results do not support the notion that audit releases generally serve as a signaling mechanism.