Navigating The Security Challenges Of Smart Contracts
A smart contract is an application that uses blockchain and acts as a digital contract supported by a set of rules. Smart contracts are not considered contracts in the legal sense in most jurisdictions. It is just an application that meets formal requirements and runs on a distributed blockchain system. The result of the execution of the smart contract may be an exchange of assets between the parties. Smart contracts ensure that transactions are transparent, traceable, and cannot be altered.
Smart contracts have a wide range of use cases not only in the financial sector but also in other industries. Smart contracts allow creating communication protocols that do not require a priori trust between parties. Participants can be assured that the contract will be executed only if all the conditions stipulated in it are met. Moreover, smart contracts eliminate the requirement for intermediaries, significantly lowering the expenses of conducting transactions.
Each blockchain can use its own way of implementing smart contracts. For instance, the Solidity programming language is used to create smart contracts on Ethereum networks. In addition to the code, smart contracts contain two public keys, one of which is provided by the contract’s creator, and the other is a digital identifier unique to each smart contract.
Smart contract immutability
Since smart contracts work within the framework of an immutable decentralized blockchain network, their results cannot be falsified for the sake of illicit profit. But immutability is not only an advantage but also a disadvantage. For example, in 2016, cybercriminals hacked the decentralized autonomous organization The DAO and stole millions of dollars worth of Ethereum by exploiting vulnerabilities in the smart contract code. Because The DAO smart contract was immutable, developers could not patch code.
As a result, the Ethereum network decided to roll back the situation to the moment of the hack and return funds to the owners. The corresponding fork is part of the current Ethereum blockchain. The original blockchain, which received the name Ethereum Classic, did not react to the hack in any way because the course of events in the blockchain must never change.
High dependency on programmer skills and bug proneness
It is believed that hacking well-written smart contracts is almost impossible and that they represent the most reliable way of storing documents in the digital world. Still, any code is written by human programmers who can make mistakes. Since a smart contract is visible to all blockchain users, its possible vulnerabilities are also visible throughout the network, and it is not always possible to eliminate them due to immutability.
In an ideal world, the development of smart contracts should be carried out only by experienced programmers, especially when it comes to sensitive information, personal data, or large sums of money. In reality, a considerable percentage of errors are caused by the human factor.
One of the reasons provoking vulnerabilities lies in the complexity of designing, developing, and testing smart contracts. Compared to simple smart contracts, intricate ones tend to have a higher likelihood of errors due to their complexity. Vulnerabilities and bugs can lead to the theft of funds, their freezing, or even the destruction of the smart contract.
Long-known bugs cause many vulnerabilities:
1. Recursive calling: The smart contract calls another external contract before changes are confirmed. However, after this, the external contract may recursively engage with the initial smart contract in an unauthorized manner as its balance has not yet been updated.
2. Overflowing: A smart contract executes an arithmetic calculation, but the outcome exceeds the storage limit. This can result in incorrect computation of amounts.
3. Preempting: Poorly designed code contains information about forthcoming transactions that outside parties can exploit for their own advantage.
The efficiency of smart contracts
Optimizing the performance of a smart contract is an indicator of the developer’s skills. Some contracts, to perform their function, produce complex series of transactions, and the commission for these operations becomes high. Effective contracts can significantly reduce transaction fees.
The issue of commissions is closely related to security because a situation when funds are forever stuck in the contract is, from a practical point of view, little different from situations when they are stolen. Here, monetary losses and vulnerabilities are caused by the same factor – the developer’s negligence.
Ethereum Virtual Machine
The Ethereum Virtual Machine (EVM) acts as a centralized 256-bit “computer” where all transactions are locally processed and stored by each network node in a synchronized manner. Since EVM is able to execute various arbitrary commands, it is susceptible to exploitation. This vulnerability has the potential to disrupt the functionality of smart contracts. Additionally, a smart contract’s code can overload the virtual machine and slow down its performance, disproportionately to the commission charged for performing these operations. Despite ongoing research efforts to address this issue, it remains a significant concern.
Smart contract security audit
In order to mitigate potential risks, it has become widespread for smart contracts to undergo a security audit. There is no single approach to auditing, and each auditing company performs it at its own discretion. The determinism of the execution of the smart-contract code allows security tests to work everywhere, to be extremely simple to support, and also makes investigation of incidents reliable and indisputable.
Auditors study smart contract code, compile a report and submit it to the project manager. This report includes info on bugs and work done to resolve performance and security issues. In addition, a report usually contains recommendations, examples of redundant code, and a complete analysis of coding errors.
A large part of the audit includes checking contracts for vulnerabilities. Although some problems lie on the surface, many errors can only be eliminated with the help of sophisticated tools and strategies. For example, a faulty smart contract can be attacked in conjunction with market manipulation. To detect these problems, auditors conduct pentests. Security audit of smart contracts widespread in decentralized financial (DeFi) ecosystems and among crypto skaters. As cryptocurrency experts from the staking platform RSTAKING state, a decision to invest in a blockchain project can be partially based on the results of checking the smart contract code.
Undoubtedly, smart contracts greatly impacted the world of cryptocurrency and revolutionized blockchain technology. Due to the permanent nature of blockchain transactions, the security of smart contract code is of utmost importance. Blockchain technology makes it challenging to return funds and solve problems after the incident, so it is better to identify potential vulnerabilities in advance.