- Smart Contracts audits analyze the codes that make up the Smart Contract to detect vulnerabilities and security problems and, with this, determine whether or not the project is safe for public use.
- As the crypto ecosystem grows and, with it, more money is handled, the audit of Smart Contracts becomes more relevant.
- Auditing is the only tool that can provide some assurance to users that the Smart Contract is safe and that their money will not be lost.
Have you ever wondered why there are so many exploits in the cryptocurrency ecosystem?
In theory, everything should be programmed perfectly and there should be no vulnerabilities. However, no human construction is perfect and even less so at the beginning.
You have probably heard the saying: “To err is human”, and this is precisely what happens with Smart Contracts, or Intelligent Contracts, being human constructions, add a certain number of vulnerabilities that, if found by hackers, can lead to an exploit.
For those who are not familiar with the term, an exploit consists of taking advantage of a vulnerability that, in this case, is found in the Smart Contract to obtain benefits.
Audits, a tool to prevent exploits
Consequently and as a way to prevent exploits, Smart Contract audits have become popular in the Decentralized Finance (DeFi) ecosystem. An audit consists of a deep inspection or verification carried out by a third party, in the crypto ecosystem basically the codes that make up the Smart Contract are analyzed to detect vulnerabilities and security problems and, with this, determine whether or not the project is safe for public use.
Specifically, there are several reasons why a project should audit its Smart Contracts. Here some of them:
- Identify any possible errors found in the code.
- Make sure the code is safe for users to transfer funds.
- It is a way through which the developers can provide security to the users who will use the project. Just as the codes may have unintentional errors, there may be some Smart Contracts that hide cheats in their code to steal from their users.
- Consequently, the audit provides, to a certain extent, a degree of professionalism to the project and guarantees, to a certain extent, the security of the funds.
But, to truly understand the importance of audits, it is essential to understand what Smart Contracts are and how they are built.
What are Smart Contracts?
“Smart Contract” translates into Spanish as “Intelligent Contract”. Like other contracts “Contracts”, Smart Contracts establish agreements that contain a series of conditions. However, unlike other types of contracts, Smart Contracts digitize the agreement by converting its conditions into a computer code that is executed automatically once the established terms have been met.
Smart Contracts are made up of a series of statements or conditionals of the type “if/when… then…” that are written in code on a blockchain. Once the predetermined conditions have been fulfilled, the contract is executed automatically, so there are no intermediaries. These are two interested parties that execute a transaction and therefore are “intelligent”.
The actions of a Smart Contract may include the release of funds to the corresponding parties, the issuance of a fine, the sending of notifications, among others; and, once executed, the transaction is recorded in the blockchain and, therefore, cannot be changed.
A simple example of how a Smart Contract works could be obtained in a common interaction in everyone’s life:
Andrea wants to buy some cookies from a vending machine. Ella Andrea will have to select the product that she wishes to acquire and the machine will tell her the amount necessary for it. If Andrea agrees with the price, she will enter the amount of money and the machine will verify that the correct total amount has been entered. And, if so, she will dispense the chosen product.
Consequently, the machine only delivers the product to Andrea once all the conditions have been met, which, in this case, is: Did you enter the full amount of the product or not? And, depending on whether the answer is affirmative or negative, the machine will or will not deliver the product.
Why do Smart Contracts require audits?
Since Smart Contracts work by long lines of code made up of conditionals, many things can be hidden in them, from errors to intentional bad practices.
In any case, the vulnerabilities of Smart Contracts represent a problem for both developers and users who use them, and as the crypto ecosystem grows and, with it, more money is handled, the audit of Smart Contracts becomes more relevant.
In the event of security flaws or exploits of a Smart Contract, there is a risk of losing all the assets that make up the contract and, therefore, the costs are extremely high. Therefore, a professional company must be genuinely concerned about the security of the Smart Contract that is the basis of its entire project, especially due to its irreversible nature.
This is why the reasons why audits should be carried out are:
- To err is human, but that doesn’t mean it’s not costly. It is certainly possible that Smart Contracts contain errors and that is normal, however, it is not sufficient justification. Errors in a Smart Contract can be costly, and therefore, the code must be audited from the beginning of its development life cycle.
- The audit gives greater confidence to the developers of a project that their code is safe and, consequently, the funds.
- Continuous audits allow developers to improve project security.
- The audits are a kind of guarantee for the users of the good intentions of the developers.
How are audits carried out?
Smart Contracts audits consist of finding possible vulnerabilities in the code as well as evaluating that there are no logical and access control problems.
However, the standards for security audits of Smart Contracts vary, since it is not possible to apply the same standards for different projects, and in general, the audits are usually carried out by third-party entities with the aim that there is no conflicts of interest.
There are essentially two types of audits for Smart Contracts, manual and automated.
- Automated Audit: Error detection software is used. It basically gives the auditors a helping hand by pinpointing the exact location where the error is. This does not mean that this type of audit guarantees 100% that the code is free of errors. The reality is that software may not understand the context of the code and may miss certain vulnerabilities.
- Manual Audit: As you can imagine from its name, this method consists of experts examining the code line by line in search of certain problems. Particularly this type of audit is key to detect possible bad practices of the project. In fact, this is currently the most important, precise and, therefore, the most secure method.
Process of an audit of a Smart Contract
The audit of a Smart Contract may vary due to the specificities of the code or the project. However, there is a relatively standard procedure, although it may also differ depending on the auditor.
Regardless of this, for the purposes of this educational guide, the step by step that is usually followed will be indicated below:
Compilation of code specifications:
While whitepapers and other documents are helpful, auditors require code specification and documentation on the project’s architecture, design options, and build process.
Therefore, the first thing that is done is to determine and ensure that the project has a complete specification, which will be the backbone of the entire audit process.
This first step is essential because it allows the auditors to understand what the code actually does and, with it, they will be able to evaluate if it works or not according to the project.
Unit tests:
The auditors test each function of the Smart Contract depending precisely on its specifications. And they evaluate the behavior of the same in search of weak points.
In general, the tests allow to reduce the number of errors that are easily detectable and, therefore, facilitate the work.
Focus is selected
Auditors will need to decide whether to have a manual or automated approach. However, until now, the manual approach is the one that guarantees a higher rate of discovery of bugs and vulnerabilities.
initial report
Once the code has been examined by the auditors, the discovered code flaws are written up along with a series of recommendations to the project team to correct those problems.
Final report
After correcting the errors, the auditors will make public a final report clarifying what was discovered along with the actions taken to resolve the problem.
Most common vulnerabilities
- reentry attacks: Happens when the Smart Contract makes an external call to another unreliable contract. The untrusted contract can then call the original Smart Contract and interact with it in ways it shouldn’t.
- Spelling Errors
- Opportunities for early execution: Poorly structured Smart Contract code can provide advance warning of market buys or sells. That is, it provides information that gives an advantage to the person who receives it to trade in their favor.
- Little Gas Efficiency: Gas is the commission that is charged for trading on the blockchain and some Smart Contracts are not optimized in such a way as to reduce this expense, and if the costs are very high, the Smart Contract may not be executed.
Smart Contract auditing companies
As previously mentioned, the fact that a project has performed one or more audits on its code is a good sign for crypto users.
Some of the most recognized auditing companies are:
- Certik, web security and Blockchain organization. This company has audited the code of BNB Smart Chain, Bancor and Huobi.
- Chainsulting: Started in 2017 and performs code audits on Blockchains such as Algorand, Ethereum and Solana.
- OpenZeppelin: This company has provided auditing services to Coinbase and the Ethereum Foundation.
final thoughts
The audit of a Smart Contract is a necessary requirement for all the projects that currently make up the crypto ecosystem. In fact, if a project hasn’t done any auditing of its code, this can be considered a huge red flag.
The audit is the only tool that can provide some guarantee to the users that the Smart Contract is safe and that their money will not be lost.. The word “some guarantee” is key because an audit does not guarantee 100% that there are no problems in the code.
It is precisely for this reason that, in general, projects tend to carry out several audits over time, even with different auditors, to reduce risks. In general, communication, transparency and scrutiny are critical elements for success in the audit of projects. a Smart Contract.
You might be interested in: