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The Math Behind Deposit Insurance, And Why It's The Beginning Of The End
March 23, 2023
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As Simon White writes today, "a full guarantee of all bank deposits would spell the end of moral hazard disciplining banks and mark the final chapter of the dollar’s multi-decade debasement." And yet that's where we are headed, even if with a few hiccups along the way, because as White also notes, with the latest banking crisis in the US, it’s the clean-up that could end up doing far more lasting damage. That's because with the failure of SVB et al prompted the FDIC to guarantee that all depositors will be made whole, whether insured or not

And so, the precedent is being set, with Treasury Secretary Janet Yellen commenting on Tuesday that the US could repeat its actions if other banks became imperiled. She was referring to smaller lenders, and denied the next day that insurance would be “blanket”, but given the regulatory direction of travel over the last forty years, this will inevitability apply to any lender when push comes to shove.

Realizing it's just a matter of time before the next systemic crisis tips the banking sector over, over the weekend, a coalition of midsize US banks asked federal regulators to extend FDIC deposit insurance for the next two years, so as to alleviate any fears which could result in a wider deposit run on regional and community banks.

But what would deposit insurance of all $18 trillion US deposits - not just the $11 or so trillion in deposits that are currently "insured" by the FDIC - look like? As BofA's rates strategist Mark Cabana writes, deposit insurance has been a very effective solution to stabilize deposit outflows historically. Deposit insurance can be done in a variety of ways: (1) all domestic bank deposits; (2) increase coverage to a higher amount vs. the $250k currently.

If policymakers consider extending deposit insurance coverage it would impact reserves held in the Deposit Insurance Fund (DIF).

What is DIF? One way the FDIC maintains stability and public confidence in the U.S. financial system is by providing deposit insurance. The primary purposes of the Deposit Insurance Fund (DIF) are:

  1. to insure the deposits and protect the depositors of insured banks and
  2. to resolve failed banks.

While the DIF is backed by the full faith and credit of the United States government, it has two sources of funds: i) assessments (insurance premiums) on FDIC-insured institutions and ii) interest earned on funds invested in U.S. government obligations. The government guarantee of insured deposits is not limited by the amount in the DIF. One can think of DIF as a "first loss" tranche absorbed by assessed bank funds in DIF.

Where does the DIF stand today? The DIF's reserve ratio (the fund balance as a percent of insured deposits) was 1.27% (or $128.2bn) on Dec 31, 2022. The FDIC was aiming to increase the reserve ratio to 1.35% by Sep 30, 2028 or ~$8bn increase.

What % of deposits are insured? Estimated insured deposits stood at $10.1 trillion or 56.8% of total deposits held at FDIC insured institutions of $17.8trn as of Dec 31, 2022. Recent proposals would increase insurance coverage; the extent of insurance increase differs by proposal.

DIF increase needed to provide more insurance? Assuming the 1.35% target reserve ratio is applied to the uninsured deposits, this would imply a reserve build of $104bn.

Cost to insure all deposits? $104bn in reserve build to cover uninsured deposits compares to net income across all FDIC insured banks of $263bn reported for 2022. Obviously, this reserve build would need to happen over several years to limit the impact on industry profitability in any given year. Assuming that this additional assessment is spread over ten years, implies an approximately 50bp drag on annual ROE for the industry.

Of course, all this assumes the DIF is never really used, but the statutory amount is meant to serve as a confidence booster. After all, the total expanded DIF amount of $230 billion would be insufficient to bail out the uninsured depositors of even one TBTF bank like JPM. In fact, if all deposit insurance had to be used, it would mean the US government somehow has to fund a total of $18 trillion in deposits, an amount equal to 75% of US GDP. It's ain't happening.

Is any of this a viable option? While we are skeptical confidence can be restored with some accounting sleight of hand, Mark Cabana is optimistic and sees deposit insurance as one way for policymakers and the banking industry to address sensitivity among deposit customers. Absent such broader insurance, the industry risks losing some deposits to money market funds or the Treasury market as customers diversify their excess liquidity.

Cabana's conclusion:

We believe that the last few days have introduced investors/ banks/ policymakers to the new risk of deposit-runs in the age of social media. We believe that absent a change to deposit insurance coverage, corporate CFOs/Treasurers will likely be proactively looking to diversify their deposits away from any single institution. While this may be viewed as a reasonable outcome by some, regional banks could be at the losing end under such a scenario. If maintaining the community banking structure is a priority for policymakers, a higher threshold of deposit insurance seems worth considering.

Alas, if Janet Yellen is to be believed, this isn't on the horizon, at least not until we have another sharp deterioration in the banking crisis.

Stepping back from the accounting intricacies of how the US can backstop the impossible sum of $18 trillion without actually doing so - because it's simply impossible - and turning to the bigger picture implications, we go back to BBG's Simon White who notes that since the dollar is the primary liability of the US central bank; "this would mean further erosion of its real value, compounding the decimation of its purchasing power seen over the last century."

But why is deposit insurance linked to the strength of the dollar... and by extension its persistence as world reserve currency? Simple: it all has to do with that ultimate backstopper of the US financial system (where deposits are the largest liability) and the assets on its balance sheet. Here are some more observations from White:

The 1932 Glass-Stegall Act was the beginning of the end, allowing the Fed to accept a wider basket of collateral it could lend against: riskier assets such as longer-term Treasury securities. The falling quality of collateral has continued, with the Fed lending against corporate debt in recent years

The end result is the Fed’s balance sheet has steadily deteriorated, and with it the real value of the dollar

Obviously, then, an expansion of insurance to all deposits will lead to a further erosion in the Fed’s balance sheet. Why?

  • First: deposit-insurance schemes typically lead to less, not more, bank stability.  Several studies have shown that countries with deposit-insurance schemes tend to see more bank failures. The more generous the scheme, the greater the instability.

  • Second: Moral hazard instills discipline in depositors as they pay attention to the bank’s credit risk (something many depositors in SVB signally failed to do.) It also imposes discipline on banks, incentivizing them to structure their cash flows so that they match through all time, thus mitigating the risk of bank runs (cue SVB again)

Why, then, would greater banking instability lead to a further deterioration in the Fed’s balance sheet? It comes down to how US banking has evolved over the last century.

Banks must manage cash flows from assets and liabilities, and their preference is to minimize their cash position each night in order to maximize the productive use of their capital. There is always a “position making” instrument, a liquid asset that banks can use to park excess cash or make up for shortfalls each day. In the early days of the Federal Reserve system it was commercial loans and USTs; now it is principally the repo market. A bank can “make position” if it can repo in or repo out securities for funds. But if the market for that collateral freezes up, they’re dead.

This is where the Fed steps in - but as the “dealer of last resort” rather than the lender of last resort. To ensure market liquidity, the Fed must underwrite funding liquidity. And to do that it must be willing to accept as collateral whatever the banking sector’s position-making instruments are.

If it doesn’t, the game’s up.

SVB happened to have a high proportion of USTs and mortgage-backed securities on its balance sheet, making the Fed’s life easy in creating the BTFP (Bank Term Funding Program), which accepts government and government-backed collateral. But this does not get to the heart of the problem. Only a fifth of small banks’ assets are currently shiftable on to the Fed’s balance - less than for larger lenders — leaving them considerably exposed!

Ultimately, deposit insurance only mitigates banks’ vulnerability to bank runs; it does not insulate them from liquidity or insolvency risk; and it certainly does not "insure" that a full-scale bank run will see every depositors' money made whole: after all there is just $128BN in the DIF and there are $10 trillion in insured deposits. At best, the DIF provides a first loss backstop only to those who panic first! 

But the punchline is that SVB et al are very likely not the only fragile US banks, and as the economy slows, asset prices fall and delinquencies and bankruptcies rise - especially in commercial real estatewhere small banks also happen to be the biggest lenders - we are likely to see more banks needing support

The logical outcome is that the Fed will have to increasingly accept poorer quality collateral — especially from smaller banks, with their large exposure to residential and commercial real estate. We have been here before, when during the pandemic the Fed began to accept the corporate debt of even junk-rated companies (and when gold and bitcoin hit record highs).

Minsky himself stressed the centrality of banking to financial stability, noting that imprudent banks (read: operating without moral hazard) are more likely to finance unproductive projects, which then leads to inflation.

So there we have it. As White concludes, after the US inevitably implements deposit insurance, what comes next is inflation and much more debasement of the Fed’s balance sheet: "with an abnegation of moral hazard, the long-term value of the dollar doesn’t stand a chance."

Which is also why US authorities are doing everything in their power to rapidly kill-off such counterparty-free money as bitcoin and gold, with headlines such as these now a daily occurrence:

  • U.S. SECURITIES AND EXCHANGE COMMISSION ISSUES INVESTOR ALERT URGING CAUTION AROUND CRYPTO ASSET SECURITIES

...they know very well that during the next crisis - which is imminent - the monetary tidal wave will flow toward them as the bank failure dominoes begin to fall.

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Fund Tokenization Prepares Asset Managers for ‘Perfect Storm’

Synopsis:

  • Great Wealth Transfer will see $84 trillion of intragenerational asset transfer over the next 20 years
  • Gen Y and Z investors favor investment in alternative asset types, which tokenization makes more investable for HNW clients
  • Tokenization encourages platform changes, and will ultimately bring additional operational benefits

A triumvirate of large-scale market changes are set to transform the asset management industry over the next decade.

With trillions of dollars worth of assets set to flow into the wallets of Gen X, Y, and Z investors, much of which will accumulate onchain, asset managers who move first to serve this new market will gain an advantage in capturing this revenue opportunity. The immediate opportunity is similar to when the ETF format was introduced in 1993, with first-mover State Street launching the SPY (SPDR S&P 500 ETF)—now one of the largest ETFs globally. The tokenized asset format is today’s generational opportunity.

Tokenization can unlock accessibility to alternative asset types and more composable assets and structures, enabling a significant change in how investors manage portfolios. With greater automation and rules-based investment allocations, entirely new strategies could also become economically viable. Integrating existing platforms with next-generation digital systems will enable the industry to modernize in stages, ultimately allowing for the adoption of new asset types at scale.

The forthcoming vicennial transformation of the industry will enable it to transform and emerge triumphant. Those at the forefront of this technology evolution stand to dominate and shape the future of asset management.

 

Great Wealth Transfer prompts global investment shake-up

The asset management industry is on the cusp of the largest wealth transfer event ever, set to last for the next two decades. Consulting firm Cerulli Associates estimates $84 trillion in assets is set to change hands as wealth passes from the baby boomer generation to Gen X, Y, and Z investors.

However, the investment behavior of these younger benefactors differs significantly from their forebears in two ways. Holding Web3 wallets and accounts on Robinhood, rather than brokerage accounts like their parents, millennials are opting for a more self-service model in their long-term holdings. Add to that the shift in risk appetite, searching for higher growth through less conventional asset types like private markets and crypto, and the need for the industry to transform quickly is clear.

Whilst the industry is not currently set up to offer this new investor class more customization, as opposed to one-size-fits-all product offerings, an 80% majority of asset managers believe customization for the masses will be an important investment strategy in the next five years.

 
 

                                          Ryan Lovell, Chainlink Labs

 

While asset managers could build their own proprietary blockchain infrastructure and smart contract systems from the ground up, that approach would require significant resources and specialized engineers, extend time to market, and be at higher risk of technical vulnerabilities or implementation errors. On the other hand, fully outsourcing the implementation would leave them with limited roadmap control, interoperability, and customizability, along with dependency risks.

Ryan Lovell, director of capital markets at Chainlink Labs, commented: “That’s why leading asset managers are taking a hybrid approach, leveraging both existing systems and Chainlink’s decentralized infrastructure to implement modular solutions that can scale across multiple blockchains.”

 

Industry transformation through tokenization

The launch of tokenized funds by firms such as BlackRock, Franklin Templeton, and Fidelity International has created a need for the fund administration industry to evolve to an onchain format. However, nearly all, 93% of fund services firms, have not automated data inputs, data checks, and key workflows, so their operations are still manually intensive, leading to increased operational costs, reduced liquidity, and missed investment opportunities. Standard transfer agent processing can take between one and three days for routine transactions, and between five and seven days for complex cases requiring additional compliance checks, cross-border settlements, or manual document verification.

“Operational efficiency is just the starting point of tokenizing funds,” said Lovell. “The real value is meeting the needs of future investors who are increasingly accumulating wealth across multiple blockchain networks.”

In order to reach this new onchain world, asset managers and their service providers may not want to make a huge investment to completely change their infrastructure, but instead adapt their existing systems to make them compatible with multiple blockchains.

For example, in November 2024, SBI Digital Markets, UBS Asset Management, and Chainlink completed the implementation of a tokenized fund to demonstrate how existing fund administration processes can be successfully made compatible with tokenized funds.

SBI Digital Markets, as a custodian and fund distributor, used smart contracts, oracle networks, and multiple blockchains to automate its processes. One of the key components was the digital transfer agent smart contract, which used multiple oracle networks from Chainlink and its blockchain-agnostic architecture to create a unified golden record.

Lovell compared the digital transfer agent to an offchain/onchain coordinator that does everything that a traditional transfer agent does, but in digital form.

“It does not replace the existing system but enables firms to be compatible with blockchain and then offer a service that can scale to all their customers,” he said. “Asset managers should be demanding this from their service providers.”

The pilot showed that a tokenized fund could maintain its share register on one blockchain while using Chainlink’s Cross-Chain Interoperability Protocol (CCIP) to enable the processing of intensive fund lifecycle activities such as subscriptions and redemptions on different blockchains while meeting institutional security and compliance standards.

Swift, UBS Asset Management, and Chainlink also settled tokenized fund subscriptions and redemptions using the Swift network, which enables payments with fiat currencies across more than 11,500 financial institutions in over 200 countries.

                                     Winston Quek, SBI Digital Markets

Winston Quek, CEO at SBI Digital Markets, said in a statement: “This new way of launching fund structures and administering them via smart contracts empowers both fund managers and their service providers to deliver new onchain financial products and lower operational costs to investors, both things they are actively looking for.”

In addition to lowering costs, using blockchains increases transparency and allows real-time reconciliation between the fund distributor and the fund issuer. Lovell highlighted that Chainlink can also use the same architecture to enable investors who want to hold tokens that are backed by offchain assets, settle these tokens across any blockchain, incorporate data that is needed to process transactions onchain, such as NAV data, and coordinate payments between distributors and the asset managers.

In the U.S. there are requirements around private and public funds and Chainlink enables asset managers to consolidate and consume onchain record keeping while fulfilling regulatory obligations. U.S. funds also require the distributor to onboard users and buy and sell the fund while the custodian and fund accountant provide reporting data.

“We allow all of those service providers to coordinate outside of their firewalls,” said Lovell. “Chainlink’s goal is to enable the TradFi and DeFi worlds to seamlessly connect, which increases utility.”

 

The Great Wealth Transfer is driving asset management onchain

With $84 trillion set to flow from baby boomers to Gen X, Y, and Z, their demand for alternative asset types and customization will shape the future of asset management. While today’s systems may be prohibitively expensive to offer these benefits at scale, tokenization changes the economics.

Tokenized funds by BlackRock, Franklin Templeton, and Fidelity International have already proven the demand for onchain assets, while a solution by SBI Digital Markets, UBS Asset Management, and Chainlink has demonstrated the operational efficiencies of blockchain technology and how onchain assets can be provided at scale.

The choice is clear for asset managers and service providers: embrace the tokenization revolution and lead the next era of finance or risk being left behind. Those who act now will not only gain a first-mover advantage but also shape the future of the industry.

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Stellar's Ecosystem Surges Forward: Smart Contracts, Lightning Speed, and Real-World Impact in 2025

The Stellar blockchain ecosystem is experiencing remarkable momentum in 2025, with groundbreaking technical achievements and expanding real-world adoption that position it as a major player in the decentralized finance landscape. From lightning-fast transaction speeds to innovative smart contract capabilities, Stellar is demonstrating that blockchain technology can deliver both performance and practical utility.

Technical Breakthroughs Drive Performance

The Stellar Development Foundation's Q1 2025 quarterly report reveals impressive technical milestones that showcase the network's maturation. The platform now processes an astounding 5,000 transactions per second with remarkably fast 2.5-second block times, putting it among the fastest blockchain networks in operation today.

This performance leap isn't just about raw numbers—it represents Stellar's commitment to creating infrastructure that can handle real-world demand. Whether it's cross-border payments, asset tokenization, or decentralized applications, the network's enhanced capabilities provide the foundation for scalable blockchain solutions.

Smart Contracts Get Smarter with Soroban

One of the most significant developments has been the launch and continued evolution of Soroban, Stellar's smart contract platform. The introduction of Contract Copilot represents a major advancement in developer experience, enabling faster and safer smart contract development through enhanced tooling and guidance.

This focus on developer experience is crucial for ecosystem growth. By lowering barriers to entry and improving the development process, Stellar is positioning itself to attract innovative projects and talented developers who might otherwise choose competing platforms.

New Token Standards Meet Market Needs

The Stellar Development Foundation has introduced new token standards developed specifically based on feedback from developers and institutional users. This responsive approach to platform development demonstrates Stellar's commitment to building technology that meets actual market needs rather than theoretical requirements.

These standards are particularly important as institutional adoption continues to grow, with organizations requiring robust, compliant, and flexible token frameworks for their blockchain initiatives.

Global USDC Integration Expands Utility

The integration of USDC across Stellar's global network represents a significant milestone for practical cryptocurrency adoption. Stablecoins like USDC provide the price stability necessary for everyday transactions and business operations, making them crucial for blockchain platforms seeking real-world utility.

This integration is particularly impactful in emerging markets, where access to stable digital currencies can provide financial services to underbanked populations and facilitate more efficient cross-border transactions.

Industry Events Build Community Momentum

The Stellar ecosystem's growing influence is evident in its presence at major industry events. The foundation's participation as a sponsor at Consensus 2025 in Toronto and Digital Assets Week in New York demonstrates its commitment to engaging with builders, investors, and institutional leaders across the blockchain space.

These events serve as crucial networking opportunities and platforms for showcasing innovative projects within the Stellar ecosystem. Recent Meridian events have highlighted creative projects like Skyhitz and HoneyCoin, illustrating the collaborative spirit and diverse applications being built on the platform.

Real-World Impact in Emerging Markets

Perhaps most importantly, Stellar's growth isn't just about technical metrics—it's about real-world impact. The platform's focus on emerging markets addresses genuine financial inclusion challenges, providing efficient payment rails and access to digital financial services where traditional banking infrastructure may be limited.

This practical approach to blockchain implementation sets Stellar apart from projects that focus primarily on speculative trading or theoretical use cases. By solving actual problems for real users, Stellar is building sustainable demand for its technology.

Looking Ahead: Enterprise-Grade Infrastructure

Stellar positions itself as offering enterprise-grade asset tokenization alongside its DeFi capabilities and payment infrastructure. This comprehensive approach makes it attractive to institutions looking for a single platform that can handle multiple blockchain use cases.

The combination of fast transactions, low costs, smart contract capabilities, and regulatory-conscious development creates a compelling value proposition for enterprises considering blockchain adoption.

The Road Forward

As 2025 progresses, Stellar's ecosystem appears well-positioned for continued growth. The technical infrastructure improvements, developer-focused enhancements, and real-world adoption initiatives create a strong foundation for expanding use cases and user adoption.

The blockchain industry has seen many projects promise revolutionary capabilities, but Stellar's focus on delivering measurable performance improvements and practical solutions suggests a mature approach to blockchain development. With transaction speeds that rival traditional payment systems and growing institutional adoption, Stellar is demonstrating that blockchain technology can move beyond experimental phases into mainstream utility.

For developers, institutions, and users looking for blockchain solutions that prioritize both performance and practical applicability, Stellar's 2025 developments represent significant progress toward a more accessible and useful decentralized financial ecosystem.

Source: The Dinarian ⚡ Claude AI

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Soroban Security Audit Bank: Raising the Standard for Smart Contract Security

The Stellar Development Foundation (SDF) is deeply committed to helping ensure that the highest security standards are available for projects building on the Stellar network. Last year SDF launched the Soroban Security Audit Bank, an initiative to provide projects access to auditing experts and tooling that are proven to help prevent hacks by catching potential bugs, inefficiencies, and security flaws before contracts go live. Through the Soroban Security Audit Bank, we’re empowering teams building on Soroban with comprehensive security audits from leading audit firms, enhanced readiness support, and robust tooling, significantly elevating the ecosystem’s safety and efficiency.

Since launch, the Soroban Security Audit Bank has successfully conducted over 40 essential audits, deploying over $3 million to support security of the smart contracts on Stellar. Check it out!

 

Ecosystem Success Stories: How the Soroban Audit Bank Drives Security Forward

By making automated formal verification available to developers, in addition to allocating significant budget for securing many of the top DeFi protocols built on top of Stellar, SDF has established a new security standard in the Web3 ecosystem. Mooly Sagiv, Co-Founder of Certora
SDF has been a strong partner as we’ve worked with teams across the Stellar ecosystem. SDF’s Audit Bank initiative allows for a smooth and streamlined review process, and is a clear reflection of the Stellar ecosystem’s enhanced commitment to security. Robert Chen, CEO of OtterSec
 

Leading projects within the Soroban ecosystem have highlighted the impact of the Audit Bank

Finding a good auditor is difficult, expensive, and high-stakes. The Audit Bank streamlines the process and supports ecosystem projects with security review at critical growth milestones. Markus Paulson, Co-Founder of Script3
The audit firms we worked with deeply understood the full ecosystem and the underlying protocols used. Their expertise and the tools from the Audit Bank strengthened our security and supported user and investor trust. Esteban Iglesias Manríquez, Co-Founder of Palta.Labs

What's New in 2025: Enhanced Audit Support for Soroban Builders

Teams building financial protocols, high-dependency data services, high-traction dApps funded by the Stellar Community Fund are able to request an audit and will typically be matched with a reputable audit firm within two weeks. We recently restructured the program for this year to enhance audit efficiency and incentivize accountability, and rapid and complete vulnerability remediation:

  • Complimentary Initial Audit: Projects will need to contribute 5% of the audit cost upfront, but this co-payment amount is eligible for a full refund, provided that critical, high, and medium vulnerabilities identified are swiftly remediated within 20 business days of receiving the initial audit report (learn more).
  • Incentivized Security at Key Traction Milestones: Complimentary, extensive follow-up audits are available as projects achieve critical traction milestones (e.g., $10M and $100M TVL). These audits include deeper assessments such as formal verification or competitive audits, significantly boosting project security at pivotal stages.
  • Advanced Security Tooling: Projects can enhance their security self-serve through complimentary or discounted access to specialized tooling, which provide vulnerability detection and formal verification capabilities (see full list of available tooling). These tools are encouraged to capture ‘easy-to-spot’ issues prior to audit as well as a final check post-audit to increase the effectiveness and thoroughness of audits.
  • Enhanced Audit Readiness Support: Projects receive structured preparation support, including the implementation of best practices and security standards based on the STRIDE threat modeling framework. This ensures project teams are thoroughly prepared, optimizing audit efficiency and minimizing delays.

Get Started Today

If you're already funded through the Stellar Community Fund, meet the criteria and ready to secure your smart contracts, check your email for an invitation to submit an audit request–if you haven’t received one, contact [email protected].

If you haven't built on Stellar yet, we encourage you to start your journey with the Stellar Community Fund to become eligible for future security audits and ecosystem support. For any broader questions on the program, contact [email protected].

Also, we’re organizing an exciting series of workshops–join us for the kick-off on Soroban Security Best Practices on Friday, May 30, 2025 at 2 PM ET on @StellarOrg. Together, we're shaping a secure and resilient future for smart contracts on Stellar.

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