Smart Contract Security Audit: What it Means and Best Practices for Crypto Projects

A smart contract security audit examines the code that underpins the smart contract’s terms and conditions ahead of deployment.

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The phrase smart contract is prevalent in crypto since it is the backbone of decentralization in most blockchain applications. 

In case you’re wondering, smart contracts are self-executing digital contracts with a predefined agreement between all stakeholders (e.g., buyer and seller). While these predefined terms and conditions are put into lines of code and stored on the blockchain, they are automatically executed once all parties involved have fully met or fulfilled their respective sides of the contract.

Now that we’ve established what smart contracts mean, it’s clear that they’re the lifeblood of blockchain technology and decentralized applications (dApps) alike. Moreover, given the critical role smart contracts play in the overall success of blockchain transactions, a potential flaw or discovered error in the self-executing digital contract can be extremely dangerous in terms of security and must be prevented at all costs, birthing the need for a smart contract security audit. So, what does a smart contract security audit really mean?

Understanding Smart Contract Security Audits

Smart Contract Security Audit: What it Means and Best Practices for Crypto Projects |

A smart contract security audit essentially examines the smart contract of a project holistically in an attempt to prevent potential flaws and errors that may compromise the security of a blockchain’s security, or that of a dApp and the valuables (i.e digital assets) contained in it. 

It is also worth noting that if and when the security of a dApp is compromised, and funds are stolen, they can be very hard to recover given that all transactions on the blockchain are irreversible, thereby highlighting the importance of a smart contract audit.

In essence, the smart contract security audit examines the code that underpins the smart contract’s terms and conditions so that developers can easily spot any vulnerabilities or potential flaws before they are subsequently deployed on the blockchain. 

The reason for this, however, is to prevent cyber attackers from exploiting these vulnerabilities as an avenue to hijack a blockchain project or perhaps prevent unauthorized transactions from their likes. That being said, what are some key vulnerabilities that abound in smart contracts?

Examples of Smart Contract Vulnerabilities

Smart contract vulnerabilities vary from one to another, and each can be as dynamic and resilient as the mind behind it. Particularly, some vulnerabilities are easy to spot and exploit, while others require advanced techniques and strategies. However, over the last decade-plus, some common smart contract vulnerabilities that have been prevalent in the crypto space include the following:

1. Reentrancy Issue: This contract vulnerability results from a programming technique that interrupts a functional execution by an external function call. In other words, the external function contains conditions that allow it to recursively call itself before the original function execution can complete.

In this context, a smart contract makes an external call to another smart contract before any effect can be resolved. This way, the external contract can recursively execute certain actions before the original smart contract is fully implemented. For instance, during a transaction, the external contract can call the original smart contract and interact with it inappropriately, given that the originating smart contract’s balance is yet to be updated and may be altered in the process.

2. Front Running Opportunities: This vulnerability is prominent among exchanges and typically occurs when a badly structured code provides forewarning of market activities, including market purchases and sales. The implication is that traders can exploit this information, game the system, and possibly make an out-of-the-line profit. 

3. Integer Overflows and Underflows: Integer overflow occurs when a number exceeds the maximum value the data type can hold. In this case, when a smart contract performs an arithmetic operation, but the output exceeds the storage capacity (often 18 decimal places), it might potentially result in inaccurate amounts being calculated, resulting in a contract vulnerability.

4. Timestamp Dependency: Unlike a typical software program, the smart contract’s execution environment is on the miner’s side. Sadly, when the logic of a contract is based on the current time, the miner can manipulate the current time to influence the execution result and fulfill a specified purpose.

5. Function Visibility Error: Given that most smart contracts are deployed using Solidity, a programing language whereby functions are visible (i.e., public) by default, it is easy for anyone to access and define a private function’s visibility. For instance, anyone can initiate the destruct function to destroy a contract immediately, creating room for yet another vulnerability in smart contract deployment.

6. Lack of Upgradability: As much as this is the core essence of a smart contract, this attribute also poses a major risk post-deployment risk. If an error was made in the code base of a smart contract, there would be no option for modification. The only action that can be done to rectify this before the smart contract proceeds to self-execute is to initiate the self-destruct function, which automatically overrides all predetermined instructions.

Other security flaws in a smart contract may emerge during API integration; for instance, if the website UI is compromised, a dApp may be subject to a DDoS attack or other external attacks. Imagine a scenario where a website user wants to connect their wallets to a website but unknowingly to them, they are interacting with malicious blockchain applications. To prevent this, it is important to carry out a smart contract audit from time to time. So, how does this audit really work?

How Do Smart Contract Audits Work?

Smart Contract Security Audit: What it Means and Best Practices for Crypto Projects |

Just like when a professional auditor is auditing an organization’s financial report, a smart contract audit also requires using several dedicated tools for that purpose. While this implies that smart contract auditing can be approached using various techniques and technology, understanding how the audit works is equally critical.

Generally, a smart contract audit is executed by exploring various vulnerabilities that apply to each smart contract’s business model. In other words, standards for smart contract security vary from one project to another. In addition, most audits assess conformance with the solidity code style guide and verify that the smart contract is void of logical and access control concerns. 

That said, smart contracts can be audited using two major approaches – manual and automated auditing. However, both approaches are typically used interchangeably since a professional human auditor is ultimately required to examine and critique the code base of a smart contract. Let’s dive deeper by firstly explaining how manual auditing works.

Manual Smart Contract Audit

This auditing method necessitates human intervention; here, a team of experienced auditors with strong coding skills and extensive knowledge of blockchain development analyzes a smart contract’s code base for compilation and re-entry issues. This expert also investigates additional issues, such as inappropriate encryption practices, which are commonly overlooked before deployment.

Also, there are two ways by which manual auditing can be achieved; the first is running an exploratory check based on the developer’s personal experience. On the other hand, the second approach is evaluating and confirming a standard list of flaws based on the smart contract’s business model.

Autometed Smart Contract Audit

Automated auditing, on the other hand, requires the use of various software tools that are dedicated to this purpose. In most cases, the software tools are designed to examine a smart contract’s database and detect the presence of a bug or any other potential vulnerabilities that may be hidden along the lines of code. Unlike the manual approach, automated smart contract audit is much faster and is typically employed by projects that require a faster time-to-market. 

However, unlike manual auditing, which involves human intervention, automated auditing tools may not always understand the context of a code and may overlook certain vulnerabilities while inspecting the code base. For example, if a specific vulnerability is not well-defined in the audit program, the software may fail to recognize any vulnerability outside its scope. This is also why most developers use automatic and manual audits interchangeably.

Some prominent examples of automated smart contract audit software tools include CertiK and ConsenSys Diligence. CertiK is an industry leader that is known for auditing some of the biggest names in the industry, including PancakeSwap, Binance Smart Chain (BSC)’s largest Automated Market Maker (AMM).

ConsenSys Diligence is another well-recognized software tool for automated smart contract audit, and it is particularly specialized in crypto projects. The company is also known for auditing EVM-compatible smart contracts for commonly ignored mistakes. 

What Is the Process for a Smart Contract Audit?

Every smart contract audit follows a standard procedure, which may differ significantly among smart contract auditors. However, regardless of the differences, the typical process for executing a smart contract security audit is as follows:

1. Requirement gathering/Collection of codebase data: The first process in a smart contract audit is for the auditor to collect the code specifications and examine the architecture to ensure a safe deployment.

2. Unit testing: Once all necessary data has been collected, the auditor then proceeds to explore various vulnerability tests by putting each smart contract function to the test against a list of standard assessment protocols.

3. Select auditing approach: This process is typically used by manual auditors, and it requires the auditor to choose some specific vulnerability tests to conduct on a project. Usually, this is a more effective approach compared to the automated alternative.

4. Initial reporting and code factoring: Reporting usually occurs only after the smart contract auditing has been completed. In this case, auditors provide two different reports, a draft report and a final report, which are eventually published to the public. 

The draft report is the initial report sent to the project team, identifying all flaws that need to be rectified. This particular report also contains feedback to the project team about how they can manage and fix any identified error.

However, before the final report, auditors work directly with project developers, who modify the code based on the initial assessment. At this point, every bug, irrespective of its severity level, must be considered, albeit the developer is expected to prioritize resolving high and medium-severity issues.

5. Final reporting and publication: On the other hand, the final report is documented only after the initially reported flaws and the development team has fixed vulnerabilities. Here, the auditor publishes the final report, which also entails all actions taken by the project team or external experts to fix all issues that were previously raised.

Smart Contract Security Audit: Benefits and Best Practices for Crypto Projects

To begin with, smart contract auditing is required for various initiatives, including token contracts/crowdsales, dApps, DeFi projects, NFT marketplaces, and any other blockchain project that leverages smart contracts.

Smart contract auditing can benefit any project in more than one way, including identifying and preventing major systemic flaws, establishing trust among investors and end-users alike, risk assessment and mitigation, and the erection of hack-proof walls around a project, among others. 

While the benefits are endless, it is also important for projects to adhere to industry best practices for smart contract development, which include but are not limited to the following:

1. Conduct regular audits and pentests: It is important to conduct audits and pentesting regularly, even when the system appears flawless. This is because hackers can always find a method to attack potential security flaws and vulnerabilities, even when there appear to be none. However, by conducting a periodic security audit, it is much easier to spot potential vulnerabilities in your system while also gaining enough time to fix them before a hacker(s) exploits them and attacks your platform.

2. Adhere to the blockchain security checklist: It is always a good idea to follow well-researched and practically executed checklists for the security of your blockchain-based apps. Some prominent checklists include sticking to multifactor authentication, enforcing IAM control, leveraging SIEM, and more.

3. Run automatic security scans: This can help you uncover problems in code that could lead to security vulnerabilities, as well as prevent other varieties of attacks.

4. Use only trusted blockchain tools: You can use trustworthy blockchain tools such as ConsenSys, SWC-registry, Awesome Buggy ERC20 Tokens, MythX, Octopus, Echidna, SmartCheck, Manticore, Ouente, and others.

Why You Should Care

Smart contract security audits have become the industry standard for crypto initiatives. Similarly to how people care about what Trustpilot thinks about a website, investors and end-users rely on smart contract security audits to determine how trustworthy the project they are investing in or using is.

Find out more on why smart contracts are important in web 3.0:
What Is A Smart Contract, And Why Is It Important In Web 3.0?

Read more on Solidproof’s license approval:
Solidproof Obtains Licenses for its Transformational Auto Audit Tool Solution

This article is for information purposes only and should not be considered trading or investment advice. Nothing herein shall be construed as financial, legal, or tax advice. Trading forex, cryptocurrencies, and CFDs pose a considerable risk of loss.

Tunbosun Oyinloye

Bosun is a crypto writer and public relations specialist with nearly a decade of experience. He delved into the crypto world in 2016, the same year he purchased his first crypto asset. He has since made it his mission to continually hone his crypto knowledge and writing skills. In recent years, he has collaborated with a number of reputable crypto brands and firms such as: Coin Rivet, Market Across, Esteem Finance, and Koettum. At DailyCoin, Bosun covers educational content and listicles. When he isn’t working, you will likely find him streaming a law or crime series on Netflix.