Skin-in-the-Game Audits
Overview
Traditional Web3 audits often suffer from several common issues that can hinder their effectiveness. Lengthy response times, lack of QA, and high costs for potentially subpar reports are some of the challenges faced by projects seeking audits. These limitations have prompted the need for alternative approaches that address these shortcomings.
Hats Finance understands the importance of creating incentive alignments through all parties having skin in the game. That's why we have developed a skin-in-the-game audit mechanism in which audit firms can share some of the long-term risks that projects face. This approach enhances QA and ultimately fosters increased trust and accountability between projects and auditing firms, thereby enhancing users' confidence in the security of smart contracts.
Framing the problem
Through our own experience and through countless conversations with representatives of other protocols, we have experienced the shortcomings of traditional audits. We also discovered that Hats.finance security primitive could be used to solve various problems in the following way:
Protocols’ security is dependent on the quality of their smart contracts.
Even the best solidity experts can make mistakes and find it difficult to review their own code.
To increase protocol and user security smart contracts need to be reviewed and audited by external smart contract security experts.
While audits conducted by audit firms come at a significant cost, they tend to lack mechanisms that encourage QA.
Audit firms can stake part of their fee using Hats.finance vault mechanism, thus demonstrating their commitment to sharing the risks associated with the projects they audit.
Further, skin-in-the-game audits incentivize auditors to provide ongoing support and guidance beyond the initial assessment.
Thus, skin-in-the-game audits support protocols to get higher quality reports, gain greater trust from their users, and enlist ongoing engagement and support from their auditors.
Key Benefits of Skin-in-the-Game audits:
Here's how these innovative audits improve on the traditional approach:
Enhanced Trust and Accountability: Traditional audit firms examine a contract, identify vulnerabilities, provide a report, and then often disengage. 'Skin-in-the-game' audits, like those championed by Hats Finance, flip this model on its head. By using an on-chain bug bounty protocol, auditors, projects, and community members contribute liquidity to incentivize responsible vulnerability disclosure and reward ethical hackers. This means that audit firms have a vested interest in the ongoing security of the contract, thereby increasing accountability and trust.
Shared Risk: Rather than leaving a project to bear the risks of potential vulnerabilities alone, 'skin-in-the-game' audits introduce the concept of shared risk. Audit firms not only evaluate the contract but also share some of the long-term risk exposure. This results in a collaborative relationship where both parties are motivated to ensure robust security.
Community Involvement: These audits also increase community engagement. Community members and stakeholders can add liquidity to the bounty pool, actively participating in and influencing the security process.
User Trust: Given the improved trust between projects and audit firms, users can feel more secure about the smart contract's safety. This heightened trust can foster a stronger, more vibrant community around a project, enhancing its potential for success.
Current Audit Firm Partners
Hats Finance has a growing partnership network of high quality audit firms who are willing to partner with protocols through skin-in-the-game audits. Our current network of skin-in-the-game audit partners includes:
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