What is a Smart Contract Security Audit?

by ImmuneBytes
Smart Contract Security Audit

Smart contracts will likely revolutionize how companies do business in the future. Nick Szabo first coined the term in 1996. Smart contracts made their way into the blockchain space after bitcoin itself. But it is only after the commencement of Ethereum that increases use cases associated with smart contracts. 

A “smart contract” is simply code and data residing at a specific address on a blockchain network, programmed to execute functions. With the rising user base for smart contracts, vulnerabilities associated with them are coming into the limelight. 

Smart contract vulnerabilities make them prone to hacking leading to the loss of stored crypto assets. Hence, it is imperative to consider their security aspect seriously. Therefore, comes the need for a smart contract security audit to provide a safety shield to your blockchain project. 

Auditing smart contracts encompass the assessment of contracts for safe deployment on blockchain networks, whose immutable nature does not permit mutations once the code is live. 

This blog will take you through the detailed analysis of a smart contract audit, including its importance, working mechanism, types, and much more. 

Let’s Begin!

What is a Smart Contract Audit?

The audit of A smart contract analyzes the source code to see if it follows the predetermined conditions and behaves as the developer intends. Auditing a smart contract aims to discover possible errors and security vulnerabilities in the code and recommend improvements and ways to fix them. 

Smart contract audits are widespread in the Decentralized Finance (DeFi) space. While most people understand the importance of audits for cybersecurity, few care to dive into the lines of code. However, we suggest that if you’re considering investing in a project, it is better to look into its smart contract code review and then decide.

A smart contract audit involves bringing in a wide range of potential scenarios and running endless, exhaustive tests with a lot of third-party applications to find any bugs. After the initial testing is over, the auditors produce a report for the contract-building team to review. The team gets the chance to address any problems before the audit is over. This offers them the opportunity to add any revisions to the final report. 

To grant an auditing firm a contract, a team must first agree on the audit’s parameters and scope. Before testing can begin, the audit’s criteria must first be set. Auditors can start testing individual smart contract components after defining the audit’s goals to make sure each feature works as it should. Following this, auditors test more extensive portions of the contract and examine the code using automated bug selection methods. Before the final report is released, the team receives the results of a manual code review for corrections.

Why is Smart Contracts Audit Important? 

Hacking smart contracts for vulnerabilities has been havoc in the crypto-space for some time. From the DAO hack to the polynetwork attack and the recent NOMAD fraud, the list is never-ending. Every year we lose billions of dollars worth of crypto to smart contract exploits.  

Once deployed, smart contracts are immutable; you cannot change your code after placing it on a blockchain network.

In contrast to other programs, smart contracts typically involve finances. Every time a function runs, it is recorded as a transaction on the blockchain involving gas consumption. Thus, a faulty smart contract will not only be unable to fix after deployment, but the errors allow hackers to steal crypto stored in it. As a result, we require a bug-free smart contract, and the audit provides the required solution. 

Also, the smart contract audit becomes an essential requirement because of the following reasons: 

  • Better code optimization.
  • Improved performance of smart contracts.
  • Enhanced security of applications.
  • Security against hacks and thefts.

Smart contract security audits help you uncover potential vulnerabilities in your system. It gives you the required time to fix these weaknesses before a malicious entity tries to exploit them and corrupt your platform.

How to Perform a Smart Contract Audit?

Auditing smart contracts involve an in-depth evaluation of the smart contracts of blockchain applications. The underlying methodology of a smart contract audit is relatively standard among audit providers. Following are the steps involved in the smart contract audit process.

Smart Contract Audit Checklist
  1. Requirement Gathering

It contributes to determining the audit scope, intended business behavior, overall architecture, and project’s goal. Auditors must have access to documents such as the business requirement document, project’s whitepaper/ yellow paper, technical specification document, smart contract code via GitHub commits, and others.

  1. Unit Testing

Here, writing unit test cases is the developer’s job. While, the auditor test runs unit test cases, determining if the smart contract is functioning as planned. At this stage, smart contract auditors use auditing tools and testnet, ensuring unit testing covers the maximum risk involved. 

  1. Manual Auditing

It is the most crucial aspect of the auditing process. The auditor scans the code line by line for vulnerabilities. Later, the auditor deploys auditing tools such as Mythril, slither, mythx, scribble, and others for thorough scrutiny of the code.

Auditors advise smart contract changes based on vulnerabilities and code optimization.

  1. Initial Reporting

Following manual and automated audits, an initial report highlighting issues and their severity levels is compiled. Furthermore, the security team provides explanations for issues with the smart contract and its severity levels.

  1. Code Refactoring

At this stage, auditors directly collaborate with project developers, where developers amend the code based on the initial report. Ideally, every bug, irrespective of its severity level, must be considered, but the developer should first prioritize resolving high and medium severity issues.

  1. Final Report

Post code refactoring, auditors once again scan through the smart contract, reverifying for optimal code functionality. 

What are The Vulnerabilities in Smart Contracts?

Security flaws in a smart contract can be serious for several reasons.

  • Most smart contracts are used to secure financial transactions.
  • Due to the immutable nature of the blockchain, smart contract errors cannot be corrected.
  • Transactions of faulty or fraudulent contracts cannot be reversed on the blockchain.

The list of the 5 most common smart contract vulnerabilities that we found generally are:

Indirect execution of unknown code

A smart contract’s fallback function provides a possibility of indirect execution. This function can be called due to several reasons like:

  • If there is a typo in the signature string passed for encoding, or if a function with such a signature does not exist, then the fallback function will be called.
  • Due to the way in which Solidity handles the fallback function, if a developer mistakenly declares an interface for a contract that does not exist, it will be called.
  • The generated call deposits the user’s ether to another contract, which then triggers a fallback function.

The block gas limit

The Ethereum blockchain imposes a limit on the amount of gas that can be used in each block—a measure intended to prevent blocks from growing too large. If a transaction consumes too much gas, it is considered invalid and will not be processed by the network.

Reentrancy

The reentrancy attack is one of the most common exploits in smart contracts. When an external call is made from a contract to another untrusted contract, and then the untrusted contract makes a call back to the original function in an attempt to drain funds.

Frontrunning

Front-running is the course of action that’s taken when someone benefits from early access to market information about upcoming transactions and trades.

Lack of pre-condition controls

Verifying function and system parameters before use helps prevent failures. A common mistake is to forget to check parameters or permissions against zero (for example, address parameters or unauthenticated user balance).

Additional Read: Top 10 Smart Contract Vulnerabilities

What Are The Types of Projects that Require Smart Contract Auditing?

Because smart contract deployment is irreversible, businesses are legitimately concerned about the viability of their projects. You also risk losing the entire contract and all associated assets due to security flaws in smart contracts. Following are the projects that must go for a smart contract audit.

  1. Token Contracts/Crowdsales

Launch a crowd sale to sell your tokens with expert Token smart contract audits across major protocols and languages like C++, Solidity, and JavaScript, among others.

  1. Defi Projects

Defi alone contributed more than 90% of all crypto hacks in 2022. In complex systems such as those using smart contracts, it is preferable to use Defi audits to secure them. An interim audit can help secure smart contracts like dYdX, Aave, and Compound.

  1. DApps

A dApp audit must be done for safe deployment on a blockchain platform. DApp’s backend, like any other web application, is implemented through a set of codes known as a smart contract, which requires a thorough security audit to ensure it is free of vulnerabilities. 

  1. NFTs and Marketplace

NFTs thrive on autonomous platforms, allowing users to trade their digital assets. The fact that these platforms own private keys to all assets in their space demonstrates the importance of uncompromised security.

Types of Smart Contracts 

Programming languages like Solidity and Vyper are used to create and deploy smart contracts over a network. To carry out the deployment process smoothly, one needs to possess enough ETH. 

We can classify smart contracts into 4 different types based on how they are used by programmers to build applications. 

They are: 

Decentralized Autonomous Organizations (DAOs)

They have a set of fixed rules and regulations that are controlled by the members of the organization. Any kind of external entity does not influence these rules. 

Smart Legal Contracts

They have strict legal resources that are bound by law. This is the reason they are also referred to as enforceable smart contracts. A computer program automatically executes these contractual agreements. 

Distributed Applications

They are application-based codes that are either in sync with or in combination with other smart contracts. 

Contracts of Applied Logics (ALCs)

They are built on a decentralized network that combines the front-end user interface with the smart contract.

Smart Contracts Use Cases

Ethereum has been a game changer for smart contracts or vice-versa, but this has considerably increased use cases for smart contracts. 

Following are ten use cases of smart contracts:

  1. Financial Services
  2. Digital identity
  3. Business Management
  4. Healthcare sector
  5. Real Estate sector
  6. Supply chain management
  7. Gaming
  8. Digital Marketplace
  9. Corporate and governance
  10. Crowdfunding 

How can Smart Contracts be secured?

It is possible to secure a smart contract against attacks and vulnerabilities in the following ways:

  1. Follow the best security practices: The leading organizations within this industry set some of the best security practices that they follow themselves. Ensure to follow those practices when you write your code. This will make it more secure. 
  2. Perform audit and pentesting periodically: Even if your smart contract is bug-free and safe, hackers can always find a method to attack potential security flaws and vulnerabilities. Security audits and pentesting assist you in identifying possible vulnerabilities in your system and providing you with time to address these flaws before a hacker(s) attempts to exploit them and attack your platform.
  3. Stick to the blockchain security checklist: Following well-researched and realistically executed checklists for the security of your blockchain-based apps is always a smart practice. Some of these include sticking to multifactor authentication, enforcing IAM control, leveraging SIEM, and more. 
  4. Practice running automated security scans: It may assist you in identifying defects in code that might lead to security vulnerabilities, as well as preventing several assaults.
  5. Rely only upon trusted blockchain tools: Without giving it a second thought, you can go for reliable blockchain tools like SWC-registry, Awesome Buggy ERC20 Tokens, MythX, Octopus, Echidna, SmartCheck, Manticore, Ouente, etc. 

Benefits of Smart Contract Audits

Blockchain enterprises are often troubled concerning smart contract implementation. Considering its irreversible nature, an attack once made can’t be rolled back. Furthermore, you risk losing the entire contract and its assets due to security vulnerabilities in smart contracts. 

Following are the benefits of a smart contract audit.

  • A security audit identifies the major systemic flaws in your project and avoids costly errors. Auditing code early in the development lifecycle can prevent potentially fatal flaws after launch. 
  • Establishing trust with your investors and users is critical. An audit acts as a security stamp, adding a layer of security to your project.
  • Security audits are critical for developing risk assessment plans and mitigation strategies for organizations dealing with individuals’ sensitive and confidential data.
  • An audit will erect a hack-proof wall around your project, shielding it from any potential threats.
  • Auditing not only detects code errors but also optimizes them for performance.

Types of Smart Contracts Audits

Smart contract auditing can be categorized based on.

Types of Smart Contracts Audits

An audit can be categorized in two ways: External and Internal Audit

  • External auditing signifies outsourcing smart contract auditing to a third-party unrelated to the project development. External auditing adds a different dimensionality to your smart contract. The external audit team consists of a specialized team of security professionals providing an unbiased perspective on your project. Also, hiring an outsider is typically cost-effective rather than maintaining a team of security professionals.  
  • Internal auditing implies an internal team of security professionals to test projects for vulnerabilities. Undoubtedly, this could be the first line of assessment for your project. Also, unlike an external audit, there is no need to pre-plan an audit which can be done periodically. Although, it can be costly to maintain a whole team of security experts.  

Smart Contract Auditing Tools

An accurate and detailed examination of smart contracts aids in the detection and elimination of vulnerabilities. Although manual auditing is commonly used, smart contracts are sometimes enormous and dynamic for manual monitoring and exploration. You will need tools to review the code thoroughly while avoiding any remaining hidden bugs.

Following is a list of tools commonly used for auditing smart contracts:

  1. Slither
  2. Mythx
  3. Mythril
  4. Scribble
  5. Echidna
  6. Solidity visual developer
  7. Manticore
  8. Foundry
  9. Truffle
  10. Hardhat
  11. Securify

How much does a Smart Contract Audit Service Cost?

There are no predefined criteria for determining audit costs. However, the audit price is affected by the type and complexity of smart contracts under review. The audit cost is additionally dependent on the smart contract audit company conducting the audit.

Because auditing is critical to ensuring a smart contract’s security, it must be integral to the deployment process. Visit our audit cost calculator to get an accurate estimate of your blockchain project audit.

How to Become a Smart Contract Auditor?

A smart contract auditor is a security professional who manually examines the smart contract line by line and uses smart contract audit tools to check for bugs.

An auditor verifies that a contract is securely and correctly implemented on a blockchain network.

Demand for auditors has increased with the rising popularity of smart contracts and the growing crypto-heists associated with them. Although there could be several ways to become a smart contract auditor, here is a step-by-step that you can follow. 

  1. Learn programming—any language, whether Java, C++, or python, would work. The aim is for you to understand the fundamentals of coding. 
  2.  Once you understand coding, move to Ethereum basics and token standards, including ERC20, ERC721, ERC777, ERC1155, ERC4626, and BEP20.
  3. Learn Solidity, an EVM-compatible programming language used for most of the smart contracts presently. And due to its widespread popularity, it has a plethora of documentation and study material compared to non-EVM-compatible languages.
  4. Smart contract audit is not only about detecting bugs. It is responsible for optimized code functioning as well. Therefore, it is essential to read about gas optimization, upgradable and proxy contracts, smart contract helper libraries, blockchain protocols, and smart contract debugging. 
  5. Develop a clear understanding of decentralized finance(DeFi), the hottest area for auditing. DeFi hacks are one of the most popular and recurring phenomena in blockchain space today. Hence, you must have detailed knowledge about DeFi smart contract functioning and its vulnerabilities. 
  6.  Try hands-on smart contract audit tools for a thorough review of the code. 
  7. Reporting is an integral part of an audit. Learn report reading so that even you can develop one without errors. 
  8. To stay informed about blockchain security, follow and read the blog posts of top security researchers such as Samczun, peckshield, Mudit Gupta, and others.
  9. Practice auditing with the Ethernaut challenge. 

Read more for a detailed analysis of how to become a smart contract auditor.

Smart Contract Security Audit: The Top 5 Burning Questions 

Q1: What is an Automated Audit?

In an automated smart contract audit, advanced software is being used to detect vulnerabilities. Though this approach significantly reduces the time required for the audit, the software will always have limitations. False positives are always a possibility. Furthermore, automated tools could fail to identify more complex security flaws.

Q2: When to look for an external smart contract auditing service?

We would classify the smart contract audits into 2 categories: Interim Audit and Final Audit or Full Security Audit 

We recommend an Interim Audit if you are building an application with complex components that have already been coded and want an expert to look at them with a fresh pair of eyes for any vulnerabilities and to ensure that you are on the right track.

A Full Security Audit is another type of audit. Suppose an application is complete from a developer’s perspective, with all functional level testing finished at the developer level, and you want to introduce the product on the main net. In that case, it is time to perform a full security audit. The auditor’s job in a Full Security Audit Company would be to find security flaws throughout the smart contract code.

Q3: How long does it take for a smart contract auditing process?

The length of the audit process is determined by several factors, including the complexity of the business requirements, the quality of the code, dependencies, and integration with existing protocols. 

In terms of time duration, an ERC20 token audit is achievable within 48 hours, for token/crowdsale contracts with added features take up to 2 weeks. A Defi/ dApp or an NFT contract Audit project with complexities can take up to 4-5 weeks. It also depends upon the goal of the developers.

Q4: What are the standards for smart security audits?

Currently, there are no standards or government entities that verify and accredit the accuracy of smart contracts in terms of the code mirroring the signed contract.

Q5: Are evaluations commanded without regulations a genuine opportunity to pursue?

To avoid bugs, it is far more beneficial to undertake Smart Contract Audit in all cases. It is extremely beneficial to conduct astute settlement reviews regularly to avoid any major monetary misfortune which can result in massive financial loss and a negative impact on your partnership’s reputation. An evaluation from a business entity such as ImmuneBytes provides you with true reassurance and self-awareness about the state of your Smart Contract.

Q6: What is an audit report?

When the complete auditing process gets completed, the auditors provide this report. It helps in establishing transparency in the process. Every finding is listed in the report that the community can view. The issues that are found by professional cybersecurity experts are then, categorized as per their severity. There are three categories of vulnerabilities which are critical, major, and minor. In this audit report, there is also a list of the status of the issues. Depending on them, the projects get time to resolve those issues before the final report is released. 

There are different sections of this report which include an executive summary, recommendations, redundant code examples, and a complete analysis of the coding errors that exist. 

Q7: Why rely on audits?

Smart contract audits, fortunately for investors and users, have become the gold standard. When every project has one, however, it is no longer a simple sign of merit. This is why it is critical to read the audit yourself. Even if you lack technical understanding, it is beneficial to review the remarks and severity of probable errors.

When you come across an audit, you should now have a better knowledge of its contents. As usual, be sure that every investment decision considers the big picture and all available facts.

Did you know? 

There have been several events recently that point towards the fact that smart contract as blockchain technology is not secure completely. 

  • On August 3rd, 2022, hundreds of Solana (popular blockchain for fast transactions) wallets were emptied, totaling roughly $ 8 million. The exploits were considered to have occurred as a result of difficulties in importing accounts.
  • On February 2, 2022, the Wormhole Cross Chain Bridge Attack cost Solana and Ethereum, two major blockchains, more than $320 million.
  • One of the largest cryptocurrency heists occurred in August 2021. Hackers seized $613 million in digital money from the Poly Network corporation. They took advantage of a flaw in the digital contracts used by Poly Network.
  • Due to a critical vulnerability in their Ethereum smart contract, $150 million in ETH was stolen from a business called Parity Technologies in 2017.
  • In 2016, a DAO dubbed Genesis DAO was compromised by a hacker(s) who took advantage of a security flaw in the system. In this case, hackers stole $50 million in ETH from Genesis DAO’s crowdfunding investors.

If you have a question regarding Smart Contract Audits, please contact our team by clicking here or writing to us at team@immunebytes.com. We will make sure to answer your queries. You can also leave your questions and feedback in the comments section below. For any smart contract auditing consultation, call us directly at +91 7303699708 or reach out to us by filling out the form on the right side.

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