While blockchain technology is secure, vulnerabilities may be found in the blockchain application. For instance, the smart contracts that are built inside these applications may have errors in them. The code is the law in smart contracts. Hence, there is no room for even minor errors. Once the code is deployed, developers can’t fix it back.
Therefore, it is imperative to have a system that timely identifies the vulnerabilities and critical bugs that may be present in the underlying smart contracts. A smart contract audit is a process where blockchain security engineers pay attention to the code line of a crypto or blockchain project to identify security issues and inefficient coding.
What are smart contracts?
Smart contracts are digital contracts that use blockchain technology to enforce the terms of an agreement. The execution of an agreement is automated in smart contracts, and the participants are certain of the outcomes.
The program ensures that the predetermined conditions are met and verified during cryptocurrency transactions. Businesses from various sectors benefit from smart contracts' applications, including supply chain, healthcare, and international trade.
History of smart contracts
Smart contract technology was introduced in 2014 as a part of the Ethereum specifications. So when it comes to smart contracts in financial transactions, Ethereum is the key to the game. The smart contracts reside at a specific address on a blockchain and are composed of code (functions) and data (state). This is one of the reasons why so many dApps are meant to run on Ethereum and Ethereum-compatible blockchains.
Working of smart contracts
Smart contracts quickly resolve disputes among the vendors, thus helping them build strong relationships. Besides being able to self-execute and reduce time and resource costs, smart contracts have the advantage of being integrated into the Blockchain.
Smart contracts started out as simple IF/THEN statements. The developer who coined the term “smart contract” wanted to describe a smart contract as the blockchain version of a vending machine: IF the right coins are deposited, THEN it dispenses a snack. In a sense, the vending machine is intelligent, i.e., it can perform its task automatically and independently.
On Ethereum, a smart contract could specify that IF an amount is received in the user's wallet, THEN 10% is transferred to a second wallet set aside for long-term savings. Like other information on the blockchain, smart contracts are immutable, i.e., cannot be altered after being distributed, and irreversible, i.e., cannot be deleted.
Most developers make the source code of their smart contracts available for inspection so users can be sure that the entire contracts don't divert some or all of their funds to the developer's wallet.
Use of smart contracts in cryptocurrencies
While smart contracts can be used for various purposes, they have found wide popularity and application in the context of blockchain-based cryptocurrencies. Bitcoin and Ethereum, for example, are two cryptocurrencies that use smart contracts to enforce the terms of their transactions. When someone sends Bitcoin to another person, a smart contract is used to verify that the transaction is valid and executes it accordingly.
This allows the developers to offer a number of benefits, including safety, efficiency, and cost reduction. When talking about smart contracts, actual contracts are not referred to, as one might mistakenly think. These are IF/THEN functions that are found within computer or software protocols, which, when certain conditions occur, give a very precise answer.
The technology behind smart contracts
These "contracts" are called smart, i.e., intelligent, because they are based on blockchain technology. In practice, they work exactly like a standard contract. For example, if a rule set forth in the contract is broken, the system automatically applies a penalty.
These contracts are smart because, in theory, they allow people to carry out many activities without resorting to intermediaries such as lawyers or notaries. To have a true smart contract, the execution of consequences under certain conditions should be automatic. The software takes care of everything in smart contracts without human intervention.
Since smart contracts work within the blockchain, most of the ones used today are related to cryptocurrencies and the financial market. However, these could probably be extended to other areas with the refinement of the discipline.
Why should one choose a smart contract over a standard contract?
The smart contract provides a high degree of safety in the blockchain. In addition to eliminating intermediaries, the internal encryption system further adds security. This makes the contracts indecipherable to those not involved in the deed.
A second benefit concerns the economic side. Paying a notary or a lawyer is more expensive than creating a contract independently through one of the platforms that allow it, such as Ethereum.
To draw up a normal contract, you must entrust yourself to a lawyer or a notary, while you can manage a smart contract with total autonomy. When the contract is loaded, the software automatically generates the response. To write a smart contract, you need to know the programming language and the basics of smart contract deployment.
This allows all information to be recorded and made immutable, secure, and accessible. Some of the benefits of smart contracts and blockchain include transparency, traceability, integrity, elimination of bureaucracy, and elimination of authority figures.
What is a smart contract audit?
The smart contract auditing process involves a methodical examination and detailed analysis of the smart contract code to identify any incorrect coding or any security issues that may be present. This ensures the reliability of the blockchain applications and provides ways to resolve problems. Usually, smart contract security audits involve running tests through analysis tools and manual code analysis.
With the boom in DeFi, more and more financial applications are now being built with blockchain technology. The investors and users of these applications expect them to be non-custodial, open, transparent, composable, and above all, secure. A smart contract audit is a way to ensure that all the contracts are fully performance-optimized and there are no vulnerabilities or security issues.
Why do we need smart contract auditing?
Since blockchain applications have to manage large sums of money, security is one of the most pressing problems for deploying smart contracts. Considering the damages that might occur due to errors in blockchain applications, a security audit must be considered an integral part of smart contract development. For example, a theft of around $60 million in Ether (ETH) occurred during The DAO breach on the Ethereum blockchain.
Also, smart contracts are irreversible in nature. If a vulnerability is identified after deploying smart contracts, you could risk losing the entire project and the related assets. Through smart contract security audits, you can get your application checked by veteran security auditors who will double-check your code to find the bugs and errors.
Possible security vulnerabilities in smart contracts
Considering that smart contracts are made up of code, there’s always a chance of error or negligence while designing the security architecture. Here are a few possible security vulnerabilities that may be found in smart contracts:
Function visibility errors
Solidity is a high-level programming language for implementing smart contracts. The default visibility property in this language is set to public. If the developer forgets to define a private function’s visibility, there is a big chance that anyone can destroy the contract by calling the Destruct function.
The contract’s logic is dependent on the current time. This means that the miner can manipulate the execution results by simply changing the current time in the device.
Random number vulnerability
The attackers can use random number generation (RNG) to accurately guess the random number generated by a smart contract that employs a publicly known variable as a seed.
Failure to differentiate humans and contracts
The smart contract may fail to identify whether the smart contract caller is a person or a contract. For instance, hackers can exploit the FoMo3D game by accurately predicting a contract's timestamp (using the airdrop function).
Constructors are commonly used to initialize the contracts and determine their owners. In Solidity, the function to set the state variables is invoked when the contract is constructed. At times during programming, the compiler would not notice the misspelling of the function hence resulting in anyone from the public being able to call the function in public constructors.
A reentrancy attack occurs when a function makes an external call to another untrusted contract. This can occur due to the developer’s uncaring attitude and negligence. As a result of this attack, the untrustworthy agreement can make a recursive call back to the original function in an attempt to drain the funds.
Gas Griefing Attack
If your Ethereum smart contract cannot check the required gas to execute a sub-call, you can be vulnerable to the gas-griefing attack.
Types of smart contract audits
The types of smart contract audits may vary depending on the nature of the projects. Below, we will discuss both manual and automated smart contract auditing techniques. This can cause the attacker to bypass the payments and fool the smart contract.
Automated smart contract auditing
Automated smart contract auditing ensures a much faster response time by removing human auditors from the process. The program used in this audit is designed to identify the parameters that run the program, thus making it easier to spot common coding errors. This type of audit is as effective as the automated analysis tool used.
Manual smart contract auditing
While the automatic flaw detection software effectively identifies the common errors in the code, it disregards the underlying motives of the developers for having the audit conducted. Manual inspection is a crucial prerequisite for enhanced discovery of security flaws in the smart contract code.
This audit is carried out as a unique project under the supervision of qualified smart contract auditors. In such an audit, the engineers inspect the code, carefully assess the application's specifications and ensure that the project performs as per the anticipated functions.
Key benefits of auditing your project’s smart contract
Auditing your project’s smart contract is of utmost importance to improve its security, usability, and trustworthiness.
Fixing potentially costly security vulnerabilities
Coding flaws, if not identified timely, can result in significant losses. For instance, hackers managed to steal 120,000 wETH or $326 million from an escrow system called Wormhole due to a vulnerability in the signature verification protocol. Therefore, conducting a smart contract audit is more of an investment than a cost.
Receiving actionable suggestions from industry leaders and experts
Once the audit is completed, the audit providers carefully critique the code. Based on the identified concerns, the audit team provides the project team with suggestions and recommendations to make the necessary modifications.
Giving your community extra peace of mind
Having your project audited by industry experts and tweaked for enhanced security gives your community extra peace of mind. There is increased trustworthiness, and they use the applications more confidently.
What are the steps of a smart contract audit?
Most of the smart contracts are built using the Solidity programming language. Before the smart contract audit starts, the code errors and difficulty of exploitation are classified according to their severity.
While many smart contract audits follow a standard procedure, there might be differences based on the project's nature and the auditor's style. Following are the steps that are involved in the security audit process:
Defining the audit’s scope
In this step, access to the Ethereum smart contracts is given to the audit team to conduct a preliminary examination and define an audit scope. The auditor collects the necessary data to audit your blockchain application and starts working on an executive summary.
This mainly includes going through the smart contract security specifications, including the project’s architecture, development methodology, and design decisions. The code specifications are gathered, and the architecture is examined. Also, the auditors try to determine the audit's scope and understand the project's goals.
Conducting unit testing
The auditors use specialized tools to test each smart contract function. The entire contract’s code may be included in the unit tests. Unit testing concentrates on specific functions and examines the whole code using integration tests.
Running a manual audit
In this stage, the auditors don’t rely on using the software. Instead, they use their professional experience and expertise to identify potential smart contract vulnerabilities. It might involve simulated cyberattacks like penetration testing. This helps the auditors in detecting front-running attacks efficiently.
Running an automated audit
Automated auditing is the analytical phase of the audit and involves using bug-detection software. This stage includes the smart contract’s overall code. Considering that the code cannot be changed once it’s deployed, the auditors look out for the “code freeze” now. There is no room for any inconsistencies and flaws at his particular time, and no modifications will be made after the final draft stage. Automated auditing is much faster as compared to manual audits.
First audit report with suggestions
After the auditors are done with auditing smart contracts, they document the discovered code flaws and provide feedback to the project team so that they can resolve the errors. Some smart contract audit companies may help fix each vulnerability found.
Final audit report with post-fixing evaluation
In the final report, the auditor will provide detailed findings and recommendations based on their analysis. This audit report is a valuable resource for anyone involved in developing the blockchain application. It lists potential security concerns and a roadmap for fixing weak smart contracts.
How long does it take to audit a smart contract?
The time it takes for a successful security audit depends on the project's complexity, unit test cases, and size. It also depends on the type of audit process that is being conducted. While an automatic audit can take up to one day for ERC20 and BEP20 contracts, the manual audit may take much longer. The audit process can take anywhere from two to 14 days for a normal-sized project. However, it could take up to a month for complex projects.
How much does a smart contract audit cost?
The smart contract audit cost depends on the application's complexity and size. Depending on the nature of the project, the cost of each step of the smart contract audit varies. These steps include a collection of code design, unit testing, auditing approach, initial draft, final audit report, and audit assessment.
The smart contract audit companies decide this cost. Usually, the total cost is between $5000 to $15,000. In exceptional cases, the cost may be even higher. Once the audit is complete, the auditing firm will provide you with an audit report detailing the faults in the code and proposals to improve the application's overall security.
A smart contract audit for your blockchain project can help you avoid costly errors and receive a detailed vulnerability report and mitigation guidance from security engineers. This can help you in improving the functionality of your smart contracts and application. It should be a necessary part of the project before the launch of the blockchain applications.