Blockchain Smart Contracts: Security Risks and Audit

Learn what is a smart contract, the categories of smart contract risks, and why smart contract audits are important.

Key Takeaways

  • Smart contracts are executed when the blockchain receives the correct instructions in order to execute its terms and conditions.

  • Blockchain and crypto security audits keep the network and user tokens secure by performing vulnerability reviews on smart contracts.

  • Auditing smart contracts is a process of verifying the code to make sure that it performs as expected.

smart contracts - security risks and audit

Ethereum is different from Bitcoin in that it allows programmers to write "smart contracts", which enable self-executing code on the blockchain. This has led to an explosion of interest among companies looking to use smart contracts to make their business more efficient. Since anyone in the blockchain can write these smart contracts, they need to be audited by professionals who ensure security and quality. Unfortunately, this increased exposure makes Ethereum much more vulnerable to attack - because there are many ways that hackers could exploit poorly-written smart contracts.

Smart contracts revolutionized the finance sector, generating billions of dollars to become a household name. It also became the foundation of dApps and DeFi, with hundreds of billions locked in DeFi. Unfortunately, such funds in smart contract platforms pique the interest of hackers. In fact, this year, hackers stole millions of dollars worth of Ether from DAO. The DAO was supposed to be a decentralized venture capital fund, where anyone could contribute Ether and get voting rights on what projects got funded. The fact that this platform had no central authority meant that nobody could step in to stop it when hackers found vulnerabilities.

What are Smart Contracts?

Computer scientist Nick Szabo first introduced the term smart contract in 1996. A smart contract is essentially a digital agreement between two or more parties that the blockchain enforces.

The basic idea of smart contracts is that there are still contractual agreements, but instead of having them written in natural language, they are written in computer code. Smart contracts allow users to agree on terms and use their cryptocurrency instead of legal currency to ensure that obligations are completed.

Essentially, a contract is an agreement (verbal or written) between two parties, and the smart contract is simply a computerized version of said agreement. The code outlines the rules and penalties surrounding the deal. Smart contracts are executed when the blockchain receives the correct instructions in order to execute its terms and conditions. They are designed to help people trust each other, even when they do not know one another because it helps eliminate the need for intermediaries. It also allows transactions to be made securely without the possibility of censorship, fraud, or 3rd party interference because smart contracts are immutable.

When two parties enter into an agreement with a smart contract, they are:

  • Setting the rules and penalties of their agreement with each other.

  • Inputting a value in cryptocurrency to be held by the blockchain until each party has completed their obligations.

  • Agreeing that any transactions will be recorded on the public ledger.

Smart Contract Security Risks

Ethereum has some great benefits, but it also faces serious threats from hackers looking to exploit vulnerabilities in the code. Vulnerabilities in the code may lead to attacks like overflow/underflow attacks, re-entrancy attacks, and so on. Securing smart contracts is a challenge since unaddressed vulnerabilities can quickly become existential threats to the viability of smart contract platforms.

Blockchain and crypto security audits are meant to keep the network and user tokens secure. This security is achieved by performing vulnerability reviews on smart contracts. Some of the top security risks are categorized into:

1) Operational Risks: are caused when the governance is either flawed or insufficient, making the authorization feature exploitable. The most common operational risks in smart contracts include

  • Blacklisting and burning functions - Privilege roles in smart contracts to bar certain addresses from utilizing a functionality.

  • SuperUser Account of Privilege Management - Allows a user(s) privileged roles to change asset functions.

  • Contract logic changeability - Privileged roles allow the platform users to edit or make changes in the contract’s logic.

  • Minting functions - Smart contracts with privileged roles to increment or balance a token’s circulating supply in a specific account.

  • Self-destruct functions - Smart contracts have functions that give privileged roles to erase a contract from a blockchain and damage all the tokens the agreement had created.

2) Implementation Risks: Are inherent risks stemming from smart contracts’ unpredicted and unwanted behaviours. Examples of implementation risks include unsolicited transfers and incorrect signature arithmetic and execution. Unsolicited transfers contracts have functions to bypass standard authorization patterns that send tokens from a user account. Incorrect signature arithmetic and execution are contract functions that cause unexpected account balances and smart contract states.

3) Design Risks: These are system features or tokens that hackers use to manipulate smart contract behaviours. Design risks include untrusted control flow and transaction order dependence. Transaction order dependence is smart contracts allowing asynchronous transaction processing exploitable for gains. On the other hand, untrusted control flows are smart contracts that enable function execution on different contracts to cause unexpected and undesigned events.

Importance of Smart Contract Auditing

Smart contracts are not safe until they are audited. Blockchain developers who want to run their projects online cannot afford buggy smart contracts that shut down the entire project and result in loss of clients and credibility.

Auditing smart contracts is a process of verifying the code to make sure that it performs as expected. It is a penetration testing of the code to find vulnerabilities before they are exploited by hackers to take control of the smart contracts.

There are so many benefits of smart contract auditing. Some of them are:

Avoid Losses Due to Bugs

Smart contracts are immutable, meaning that once the code is deployed on the blockchain, it cannot be changed. So, if there are bugs in the code by any chance, they cannot be fixed. So, smart contract auditing is a way of finding vulnerabilities before hackers exploit them to control smart contracts. Blockchain projects are responsible for their client’s funds, and they cannot afford to go wrong with their smart contracts.

Bugs Cost Smart Contract Platforms their Reputation

Hackers can exploit smart contract bugs to take control of the smart contracts and perform actions on the blockchain project. For example, hackers exploited a vulnerability in the DAO smart contract and siphoned off $50 million worth of Ether. This led to a massive loss of reputation and trust in the Ethereum blockchain. Such bugs can be costly for a project if they don't take the necessary precautions to avoid them.

Auditing is a Competitive Advantage

Auditing a project's smart contracts gives developers an edge over their competitors to gain credibility, security, and quality assurance. Projects, who have successfully completed their smart contract audits, usually give more assurance to users about their credibility. Typically, projects who have conducted their smart contract audits have displayed their reports on their website and their social media.

Avoid Regulatory Scrutiny

Smart contracts are not bound by jurisdiction or laws that govern other software. Instead, they run autonomously on a blockchain. Unfortunately, this also means that criminals can use smart contracts to transfer funds from one account to another without government agencies’ detection.

Auditing smart contracts will weed out the bad actors and safeguard the vital interests of blockchain projects, clients and governments.

Auditing Shrinks the Attack Surface

Auditing is crucial because it minimizes the risk of bugs. It narrows the attack surface by finding the bugs and fixing them before being exploited. This, in turn, makes the smart contract less vulnerable to cyber-attacks.

Ensuring the safety of investors' funds

Every exploit or attack on the DeFi and NFT sector threatens the user’s trust in the ecosystem and plays a vital role in global finance’s future. Hence, identifying vulnerabilities and bugs in the smart contract is essential in ensuring the safety of an investor’s funds and saving a blockchain project’s reputation. Investors should invest in audited smart contract platforms to ensure the security of their assets.