What are Smart Contract audits and why are they important?

  • Smart Contract 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.
  • The audit is the only tool that can provide some guarantee to users that the Smart Contract is secure 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 shouldn’t be any vulnerabilities. However, no human construction is perfect, especially at the beginning.

You have probably ever heard it said: “To err is human”, and this is precisely what happens with Smart Contracts, or Intelligent Contracts, as they are human constructions, a certain number of vulnerabilities are added to them that, if found by hackers , can lead to an exploit.

For those who are unfamiliar 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, audits of Smart Contracts 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 , the codes that make up the Smart Contract are basically analyzed to detect vulnerabilities and security problems and, with this, determine whether or not the project is safe for the user. public use.

Specifically, there are several reasons why a project should audit its Smart Contracts. Here some of them:

  • Identify any potential bugs found in the code.
  • Make sure the code is safe for users to transfer funds.
  • It is a way through which 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 traps in their code to steal from their users.
  • Consequently, the audit provides, to some extent, a degree of professionalism to the project and guarantees, to some extent, the security of the funds.

But, to really understand the importance of audits, it is essential to understand what Smart Contracts are and how they are built.

What are Smart Contracts?

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 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 “if/when…then…” type that are written in code on a blockchain. Once the predetermined conditions have been met, the contract is executed automatically, so there are no intermediaries. These are two interested parties executing 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 on 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 wants to buy and the machine will tell her what the necessary amount is 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 total 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 the developers and the 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 failures 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 genuinely be concerned about the security of the Smart Contract that is the basis of all its projects, 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 isn’t costly. It is certainly possible that Smart Contracts contain errors and that is normal, however, it is not sufficient justification . Bugs in a Smart Contract can be costly, and therefore code should be audited early in its development lifecycle.
  • The audit gives the developers of a project greater assurance that their code is safe and, consequently, their funds.
  • Continuous audits allow developers to improve project security.
  • Audits are a kind of guarantee for users of the good intentions of the developers.

How are audits carried out?

Smart Contract 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 objective that there are no conflicts of interest.

There are essentially two types of audits for Smart Contracts, manual and automated.

  • Automated Audit: An error detection software is used. It basically gives the auditors a help by locating 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 Auditing : As you can imagine from its name, this method consists of experts examining the code line by line in search of certain problems. In particular, this type of audit is key to detect possible bad practices of the project. In fact, this is currently the most important, accurate, and therefore most secure method.

Process of an audit to a Smart Contract

The audit of a Smart Contract may vary due to the specifics of the code or the project. However, there is a relatively standard procedure, although it can 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:

Collection of code specifications:

Although white papers and other documents are helpful, auditors require code specification and documentation on the project 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 auditors to understand what the code actually does, and with that, they will be able to assess whether or not it works according to the project.

Unit tests:

Auditors test each function of the Smart Contract depending precisely on its specifications. And they evaluate its behavior in search of weak points.

In general, tests allow you 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 errors and vulnerabilities.

Initial report

Once the auditors have examined the code, the discovered code flaws are written along with a series of recommendations to the project team to correct those problems.

End report

After the errors have been corrected, the auditors will publish a final report that clarifies what has been discovered along with the actions taken to resolve the problem.

Most common vulnerabilities

  • Reentrancy attacks : It 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.
  • misspellings
  • Early Execution Opportunities – Poorly structured Smart Contract code can provide early 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.
  • Low Gas efficiency: Gas is the commission charged for transacting 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, it is possible that the Smart Contract will not be executed. run.

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 big red flag.

The audit is the only tool that can provide some guarantee to users that the Smart Contract is safe and that their money will not be lost . The word “certain assurance” 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 do several audits over time even with different auditors to reduce risks. In general, communication, transparency and scrutiny are critical elements for the success of auditing projects. to Smart Contract.