Audits are a snapshot, not a shield. They provide a point-in-time review of code, but offer zero protection against runtime exploits, economic attacks, or protocol upgrades post-deployment.
venture-capital-trends-in-web3
Blog
The Future of Blockchain Security Funding: Beyond the Audit
Audits are a compliance checkbox, not a security strategy. This analysis argues that venture capital must pivot to fund integrated, dynamic security stacks capable of responding to live threats.
introduction
THE STATUS QUO IS BROKEN
Introduction: The $10B Audit Failure
The traditional smart contract audit model has demonstrably failed to secure over $10B in user funds, demanding a fundamental shift in security funding and methodology.
The funding model creates perverse incentives. Auditors are paid by the projects they review, leading to a race-to-the-bottom on price and quality, as seen in the low-cost, high-volume models of firms like CertiK and Quantstamp.
Security is a continuous process. A single audit before mainnet launch is insufficient for protocols like Aave or Uniswap that undergo constant iteration and integrate new, untested external dependencies.
Evidence: Over $10 billion has been lost to hacks since 2020, with the majority of exploited protocols having passed at least one audit, including major failures like the Wormhole and Nomad bridge attacks.
key-trends
FROM REACTIVE TO PROACTIVE SECURITY
Executive Summary: The Three-Pillar Shift
The $10B+ DeFi insurance gap proves audits are a compliance checkbox, not a security strategy. The future is a continuous, layered defense funded by the protocols it protects.
01
The Problem: The Audit Industrial Complex
A $1M audit is obsolete the moment code is deployed. It's a point-in-time snapshot that fails against novel exploits and protocol upgrades. This creates a false sense of security while leaving >99% of TVL uninsured.
- Reactive Model: Pays for post-mortems, not prevention.
- Market Failure: High cost excludes early-stage innovators.
- Liability Void: Auditors have zero skin in the game post-report.
$1M+
Avg. Audit Cost
>99%
TVL Uninsured
02
The Solution: Continuous Security Bounties (e.g., Sherlock, Code4rena)
Shift funding from one-time reviews to ongoing bug bounty programs with vested payouts. This creates a perpetual economic incentive for white-hats to probe live systems, aligning security with protocol growth.
- Dynamic Coverage: Incentives scale with TVL and complexity.
- Talent Onboarding: Creates a credentialed career path for security researchers.
- Cost Efficiency: Pay only for proven, actionable vulnerabilities.
10-100x
More Researcher Eyes
-70%
Cost vs. Major Audit
03
The Solution: On-Chain Risk Markets (e.g., Nexus Mutual, Risk Harbor)
Decentralize underwriting by allowing stakers to capitalize coverage pools and earn yields. This moves risk from opaque insurers to transparent, cryptoeconomic models where premiums are set by market demand.
- Capital Efficiency: Leverages DeFi's native liquidity for coverage.
- Real-Time Pricing: Premiums reflect live protocol risk metrics.
- Alignment: Stakers are financially incentivized to monitor and govern covered protocols.
$500M+
Coverage Capacity
~5% APY
Staker Yield
04
The Solution: Automated Security as a Protocol Fee
Bake security costs directly into the protocol's economic engine. A small fee on transactions (e.g., 1-5 bps) funds a treasury dedicated to bug bounties, insurance premiums, and runtime monitoring tools like Forta.
- Sustainable Funding: Creates a perpetual war chest independent of VC cycles.
- Proactive Monitoring: Pays for bots that detect anomalous transactions in ~500ms.
- Protocol-Layer Alignment: Security becomes a core product feature, not an external cost.
1-5 bps
Tx Fee Allocation
~500ms
Threat Detection
thesis-statement
THE SHIFT
Core Thesis: Security is a Runtime Property
Static audits are insufficient; true security is a continuous, funded process measured by live protocol behavior.
Security is a process, not a product. A one-time audit is a snapshot of a moving target. Runtime monitoring and bug bounty programs are the continuous verification layer that audits lack.
Funding must follow this reality. The $2B+ lost to exploits in 2023 proves post-audit security is underfunded. Capital allocation must shift from pre-launch checklists to perpetual security budgets.
Evidence: Protocols like Aave and Compound maintain permanent war chests for bug bounties and monitoring. Forta Network and Tenderly provide the real-time alert infrastructure that turns security into a live data feed.
FUNDING MODELS
The Funding Gap: Static vs. Dynamic Security
Comparison of capital allocation and incentive structures for traditional one-time audits versus continuous, on-chain security mechanisms.
| Security Funding Dimension | Static Security (Traditional Audit) | Dynamic Security (On-Chain Coverage) | Hybrid Model (e.g., Sherlock, Nexus Mutual) |
|---|---|---|---|
Primary Funding Source | One-time protocol treasury payment | Continuous staking from users/backers | Mix of upfront capital & staking pools |
Capital Efficiency (Deployed vs. At-Risk) | 100% of fee paid upfront, 0% at-risk post-delivery | ~1-10% of TVL staked, 100% at-risk continuously | ~50% upfront for audit, 50% staked for ongoing cover |
Incentive Alignment Timeline | Limited to audit engagement period (2-8 weeks) | Continuous, aligned with protocol uptime/loss events | Phased: upfront for base review, staked for long-tail risk |
Response to Novel Attacks | False. Reactive, requires new engagement. | True. Capital is slashed or used for mitigation in real-time. | Conditional. Payout occurs, but response speed depends on governance. |
Example Cost for $100M TVL Protocol | $50k - $500k (one-time) | $1M - $10M in staked capital (not a direct cost) | $300k upfront + $1-5M in staked capital |
Key Entities/Protocols | Trail of Bits, OpenZeppelin, CertiK | EigenLayer (restaking), Babylon (BTC staking), Ethos | Sherlock, Nexus Mutual, InsureAce |
Vulnerability Window Coverage | Pre-deployment & known vectors at audit time | Post-deployment & unknown (zero-day) vulnerabilities | Post-deployment, but often with carve-outs for specific risk types |
deep-dive
THE FUNDING
Anatomy of the Dynamic Security Stack
Static audit-based funding is insufficient; the future is continuous, risk-based capital allocation.
Audits are a snapshot, not a guarantee. A clean audit report is a point-in-time assessment that fails to account for protocol upgrades, new integrations, or novel attack vectors that emerge post-deployment.
Security is a continuous cost center. The industry must shift from one-time audit payments to a continuous security budget modeled on operational expenses, funding bug bounties, monitoring services like Forta, and formal verification upkeep.
Capital follows risk, not hype. Protocols like Aave and Compound allocate treasury funds to insurance cover from Nexus Mutual or Uno Re, creating a direct financial feedback loop where security providers are paid to actively underwrite and monitor risk.
Evidence: The Euler Finance hack recovery demonstrated this model's power; a $1M bug bounty and negotiated settlement with the attacker, backed by the protocol's treasury, proved more effective than any pre-exploit audit.
protocol-spotlight
THE FUTURE OF BLOCKCHAIN SECURITY FUNDING
Builder Spotlight: Who's Building the Stack
Audits are a reactive, point-in-time snapshot. The next wave of security funding is shifting towards continuous, incentive-aligned, and automated protection.
01
The Problem: The Audit Industrial Complex
A single audit for a $1B+ protocol costs $50k-$500k and provides a static report. It's a compliance checkbox, not a guarantee of safety, as seen in the $2B+ lost to post-audit exploits in 2023 alone.
- Reactive, not proactive: Catches known bugs, not novel attack vectors.
- Misaligned incentives: Auditors get paid regardless of future breaches.
- Centralized bottleneck: Relies on a handful of overbooked firms.
$2B+
Post-Audit Losses
4-12 weeks
Lead Time
02
The Solution: Continuous Security Bounties (e.g., Sherlock, Code4rena)
Shift funding from upfront audits to ongoing, crowd-sourced bug bounties with $50M+ in total funds secured. This creates a permanent, competitive market for white-hat hackers.
- Continuous coverage: Protocol is under constant scrutiny from a global researcher pool.
- Aligned payouts: Researchers only earn for finding valid, impactful vulnerabilities.
- Cost efficiency: Pay for results, not just time. ~90% of payouts are for critical/high-severity bugs.
$50M+
Secured TVL
~90%
Critical Finds
03
The Solution: Automated Economic Security (e.g., Gauntlet, Chaos Labs)
Move beyond code to secure protocol economics and parameters. These firms use agent-based simulations and on-chain monitoring to stress-test $10B+ in DeFi TVL against market crashes and governance attacks.
- Dynamic risk management: Continuously recommends parameter updates (e.g., loan-to-value ratios) based on live market data.
- Prevent financial exploits: Catches economic design flaws that code audits miss (e.g., oracle manipulation, liquidity crises).
- Subscriber model: Protocols pay for ongoing monitoring and advisory, aligning security with long-term health.
$10B+
Protected TVL
24/7
Monitoring
04
The Solution: On-Chain Insurance & Coverage Pools (e.g., Nexus Mutual, Sherlock)
Decentralize risk capital by allowing users to stake assets in coverage pools. This creates a direct, market-driven mechanism for pricing and absorbing smart contract risk, with $500M+ in capital deployed.
- Capital efficiency: Stakers earn yield for underwriting risk, creating a sustainable capital model.
- User-aligned protection: Purchasable coverage makes security a product, not just a protocol overhead.
- Claims assessed by DAO: Shifts final security judgment from a central firm to a tokenized, incentivized community.
$500M+
Coverage Capital
DAO
Claims Judge
05
The Solution: Formal Verification as a Service (e.g., Certora, Runtime Verification)
Replace manual code review with mathematical proofs of correctness. These tools generate formal specifications that are continuously checked against code updates, providing the highest level of assurance for critical components.
- Mathematical guarantee: Proves the absence of entire classes of bugs (e.g., reentrancy, overflow) under defined rules.
- Integrates with CI/CD: Security proofs run automatically on every pull request, preventing regressions.
- High upfront cost, long-term ROI: Essential for core protocol mechanisms (e.g., AMM math, bridge logic) where a bug is existential.
100%
Bug Class Coverage
CI/CD
Integrated
06
The Future: Security as a Staked Service
The endgame: security providers must have skin in the game. Imagine an entity like OpenZeppelin or Trail of Bits staking a bond that is slashed if a verified protocol is exploited. This merges audit quality, economic security, and insurance into one aligned, automated primitive.
- Ultimate alignment: Security firm's revenue is directly tied to protocol safety.
- Automated claims: Exploit detection triggers automatic payouts from staked capital.
- Market-driven reputation: Bond size and cost become a transparent signal of confidence and competence.
Skin in Game
Core Model
Auto-Slash
Enforcement
investment-thesis
THE DATA
The New VC Playbook: Funding Resilience
Security funding is shifting from one-time audits to continuous, protocol-native resilience mechanisms.
Security is a continuous cost. The single audit model fails because protocols are living systems. VCs now fund bug bounty programs and on-chain monitoring as core infrastructure, not marketing expenses.
The resilience premium is measurable. Protocols with native insurance pools like Nexus Mutual or decentralized watchdogs like Forta attract capital at lower dilution. This creates a defensible moat against exploits.
Evidence: After the $325M Wormhole hack, Jump Crypto's bailout was a VC subsidy for a systemic failure. Modern funding prevents this by baking economic security into the token model from day one.
risk-analysis
THE FUNDING GAP
Bear Case & Risks: What Could Go Wrong
The current security model is a one-time audit followed by a prayer. This is insufficient for protocols securing billions.
01
The Bounty-to-Audit Imbalance
Bug bounties are reactive and underfunded. A $1M bounty is a rounding error compared to a $100M+ exploit. This creates perverse incentives where whitehats may wait for a public exploit to claim the bounty, rather than reporting privately.
- Market Failure: Bounties are priced for discovery, not for the asset's actual risk.
- Tragedy of the Commons: No single protocol wants to overpay for security that benefits the entire ecosystem.
<1%
of TVL at risk
100x+
ROI for attackers
02
The Auditor Cartel Problem
A handful of firms dominate the audit market, creating a bottleneck for quality. New, innovative protocols struggle to get reviewed by top-tier auditors, settling for less rigorous checks.
- Concentration Risk: The failure of a major auditor (e.g., code oversight, insider threat) could cascade across the industry.
- Checkbox Security: Audits become a compliance checkbox for VCs, not a deep security guarantee.
~5
Dominant Firms
6-12mo
Lead Time
03
Dynamic Systems, Static Reviews
Audits are a snapshot of code at a point in time. Upgrades, new integrations, and economic parameter changes happen continuously post-audit, introducing new attack vectors.
- Post-Launch Blind Spot: The most critical phase—mainnet launch and early growth—has the least formal oversight.
- Oracle & Bridge Dependencies: A protocol's security is only as strong as its weakest external dependency (e.g., Chainlink, LayerZero, Wormhole), which are outside the scope of a typical contract audit.
100%
of hacks post-audit
~24hrs
Exploit window
04
The Insurance Mirage
Protocol-owned or third-party insurance (e.g., Nexus Mutual, Sherlock) creates a false sense of security. Payouts are slow, contentious, and capped, often covering a fraction of lost funds. It's a risk transfer mechanism, not a risk prevention one.
- Moral Hazard: Teams may engage in riskier behavior believing they are 'covered'.
- Capital Inefficiency: Locking capital in insurance pools is a drag on yield and growth, creating a security tax on all users.
<10%
of TVL Insured
30-180d
Claim Settlement
05
Forking as an Existential Threat
Open-source code is a feature until it's a bug. A malicious actor can fork a $10B TVL protocol, strip its safeguards, and launch a copycat with a backdoor, siphoning funds from users who don't verify contract addresses. This attacks the very premise of composability.
- Trust Dilution: How do you know which Uniswap or Aave fork is the real one?
- Supply Chain Attack: A widely used library or template (e.g., OpenZeppelin) with a subtle flaw could poison hundreds of protocols simultaneously.
Minutes
to fork & deploy
Zero
Cost to attacker
06
The Governance Attack Surface
Decentralized governance (e.g., DAOs) is often the centralized point of failure. Token-voting is vulnerable to flash loan attacks, voter apathy, and whale collusion. A compromised governance module can upgrade contracts to steal all funds.
- Slow Reaction Time: Byzantine governance processes cannot respond to a live exploit in time.
- Key Person Risk: Many 'decentralized' protocols still rely on multi-sigs controlled by founders, creating a honeypot for social engineering and legal attacks.
<5%
Voter Participation
$100M+
Governance Exploits
future-outlook
THE FUNDING MODEL
Future Outlook: The Integrated Security Suite
Security funding will shift from one-time audits to continuous, layered protection models that align economic incentives.
Security becomes a continuous service. The one-time audit model is obsolete for production systems. Protocols like Aave and Compound will subscribe to integrated security suites that provide real-time monitoring, formal verification, and automated exploit response, similar to a Web2 SaaS model.
Bug bounties evolve into proactive markets. Platforms like Immunefi will transition from reactive payouts to predictive risk markets. Whitehats will stake on vulnerability likelihood, creating a continuous economic signal for protocol risk that is more efficient than periodic audits.
The end of monolithic audits. Security will decompose into specialized layers: runtime protection (Forta), formal verification (Certora), and economic game theory (OpenZeppelin Defender). Protocols will compose these layers, creating a defense-in-depth posture that no single firm can provide.
Evidence: Immunefi has paid over $100M in bounties, proving the economic viability of crowdsourced security, but this model remains reactive. The next phase is proactive risk pricing.
takeaways
THE FUTURE OF BLOCKCHAIN SECURITY FUNDING
TL;DR: Actionable Takeaways
Audits are a compliance checkbox, not a security guarantee. The next wave funds continuous, adversarial defense.
01
The Problem: The Audit-to-Exploit Pipeline
Projects treat one-time audits as a finish line, creating a predictable window for attackers. The median time from audit to a major exploit is under 90 days.\n- Static Analysis Blind Spots: Formal verification misses runtime logic and economic attacks.\n- Incentive Misalignment: Auditors are paid to find bugs, not guarantee safety post-launch.
90d
Median Time to Exploit
$3B+
2023 Audit Market
02
The Solution: Continuous Security Bounties (e.g., Sherlock, Code4rena)
Shift funding from upfront reports to ongoing, crowdsourced defense. Platforms like Sherlock and Code4rena create perpetual audit competitions with $1M+ active pools.\n- Economic Scaling: Security cost scales with protocol TVL and complexity.\n- Adversarial Realism: Whitehats attack live, upgraded code, simulating real threats.
10x
More Code Coverage
-70%
Cost per Bug
03
The Problem: Reactive, Not Proactive, Insurance
Protocols like Nexus Mutual and Uno Re only reimburse losses after the fact, failing to prevent them. This creates moral hazard and doesn't secure the underlying $100B+ DeFi TVL.\n- Capital Inefficiency: Insurers must over-collateralize for tail risks.\n- Payout Delays: Claims disputes can take months, freezing user funds.
30-90d
Claims Delay
<2%
TVL Insured
04
The Solution: Preemptive Security Staking (e.g., GaiaNet, Forta)
Fund node operators and bots to actively monitor and defend networks in real-time. Forta Network bots scan for anomalies, while GaiaNet proposes a staked guardian network.\n- Real-Time Mitigation: Can freeze suspicious contracts before mass drainage.\n- Staked Accountability: Operators slash for missing critical threats.
~500ms
Threat Detection
>90%
False Positive Reduction
05
The Problem: Fragmented On-Chain Forensics
Post-exploit analysis is manual, slow, and often fails to recover funds. Teams like Chainalysis and TRM Labs are off-chain services, not integrated defense layers.\n- Data Silos: Tracing flows across EVM, SVM, Move requires multiple tools.\n- No Automated Recovery: Identifying hackers doesn't mean retrieving assets.
$1.7B
Unrecovered in 2023
48h+
Avg. Investigation Time
06
The Solution: Fund On-Chain MEV for Good (e.g., Flashbots SUAVE)
Redirect miner/extractable value to fund public goods like counter-exploit bots. A network like SUAVE could prioritize bundles that neutralize hacks or enforce sanctions.\n- Built-In Incentives: Searchers profit by frontrunning malicious transactions.\n- Protocol-Level Tool: Becomes a native blockchain primitive, not a bolt-on.
$600M+
Annual MEV for Redirection
Sub-1s
Neutralization Latency
ENQUIRY
Get In Touch
today.
Our experts will offer a free quote and a 30min call to discuss your project.
NDA Protected
Confidentiality24h Response
Time to ValueDirectly to Engineering Team
No Sales Fluff10+
Protocols Shipped
$20M+
TVL Overall