Efficient approaches on how to securely audit Defi smart contracts
To those who are new to Smart Contracts, they basically work as contracts but on blockchains in virtual forms. Smart Contracts execute transactions based on predefined conditions. They even have the potential to allow negotiation of contract terms. Smart Contracts take out the need for any third parties such as banks, escrows, and lawyers. A smart contract does a detailed analysis of code to identify any security flaws, errors in codes and anything technical that can be a threat. Flaws in code can endanger funds and result in loss of funds and unforeseen problems such as hacks stealing millions of euros worth of crypto. Malicious people have long been actively propagating the Defi scene and hearing of rug pulls is quite a common thing.
In July 2023, Decrypt reported $24 million worth of crypto stolen from Defi protocols in attacks primarily due to issues in smart contracts.
While audits don’t fend off rug pulls but anyone investing in smart contract auditing is signaling a sign of integrity and good intentions. Whereas someone with the intention to rug pull simply just wants to get potential investors to pool their resources in an exchange with leaving a backdoor open to drain funds after a certain time and run away with the funds. A legit project that is serious would transparently want to disclose to it’s audience that they are investing in identifying and mitigating flaws.
Why are smart contract audits necessary?
Blockchain by nature is immutable and maintaining DApps becomes more challenging as developers are unable to make changes or updates to their codes after they have been deployed. Nowadays, decentralized applications are widely prevalent. However, developers often neglect to consider the security aspects when creating DApps. Because DApps exist off-chain as extensions to on chain elements, they are highly attractive targets for hackers. Applications in GameFi, NFT marketplaces, decentralized exchanges (DEXs), and wallets are constantly monitored by hackers who look to identify vulnerabilities in the codes that can exploited for them.
Gambling DApps that depend on randomization are especially vulnerable to manipulation and need extra care. This emphasizes the need for thorough planning and meticulous coding during the initial development phase. An auditor can assist a project in identifying potential vulnerabilities that may serve as entry points for the members of a team internally or parties operating externally therefore helping to pinpoint and address possible pitfalls.
The costs of audits can depend on various factors like type, complexity and network, you can get an estimation of costs on platforms like immunebites. Generally speaking a competent auditor is likely to charge anything upwards of $1000 plus. Costs can even be in five figures especially if a large organization is concerned. A large organization can risk millions of dollars if its smart contracts are flawed. Therefore an audit can certainly give peace of mind before starting out. A secure and robust code is therefore not a nice to have but a must have.
How to conduct auditing?
According to Alchemy there are roughly 76 blockchain based auditing companies. Auditors like CertiK might not support some blockchains like Cardano because of the unique nature of smart contracts. Before starting out gather what a smart contract auditing delivers, prepare a report of technical functions that need to be set up in preparation, and self-determine if a code follows the best practices and standards. Pre-screen for any other vulnerabilities by doing internal checks, running security monitors and proposing any bug bounty offers to ethical hackers or devs, and this way you would have won half of the battle.
Such preparation is highly important in coming up with the right evaluation of where a project stands and how an audit can be done right. Here is a detailed step by step process.
Step 1. Gather necessary documents
Before a project is audited, any coding must be paused, and tech specs such as architecture, documentation, and GitHub repositories must be collected that can be shown to the auditors, thereby giving them the necessary high-level view of what the project is trying to solve for it’s end users. This is an important step before you figure out what’s the best security infrastructure you should invest in to safeguard your smart contracts.
Step 2. Automatic checks are done for prescreening
These checks do formal inspections to detect any obvious concerns most commonly found in smart contracts. These alerts can serve as the basis for deeper investigation so that targeted vulnerabilities can be penetrated.
Step 3. Manual reviews are conducted
Get cyber security experts with engineering backgrounds to do thorough checks manually. This means that humans have the ability to analyze the code and architecture comprehensively, applying their experience to evaluate better. Cyber attackers use botted techniques to exploit code systems and breaking such patterns often needs human supervision to detect issues and deploy counteroffense.
Step 4. Classification of contract errors
In Defi some DApps usually have to handle a large volume of token transactions and it’s not uncommon for applications to have flawed smart contracts. This means that tokens when being thought in terms of conversations to stablecoins, fiat or mainstream coins are subject to mathematical errors in the form of decimals and zeros or other numeric values that could pose a threat to funds and result in loss. Therefore having checks and balances in place in automated systems that are secure with flawless smart contracts will need auditing. At this stage you should collect all possible combinations ranging from critical, medium and minor that can result in error.
Step 5. Receive initial report
Once all the required information is provided to the auditors, you can expect to receive detailed feedback on how to address any issues that were identified. Depending on the type of bugs, you may need to engage various experts to address them accordingly. After resolving these issues, your smart contracts will be ready to be deployed.
Step 6. Release of conclusive audit findings
After thoroughly examining the project, the auditor compiles a comprehensive final report that encompasses all the observations made during checks. The report classifies the identified concerns as either settled or unsettled. This detailed document is then shared with the project management team, and in many cases it is also made available to the public. The process ensures complete transparency regarding the issues uncovered during the audit process by granting users and other stakeholders access to this report. This transparency serves to build trust and confidence among those utilizing or interested in the project.
What are the pros and cons of doing smart contract audits?
Benefits of Smart Contract Auditing
Recognition
A professional audit badge on Coinmarketcap can ensure that a visitor to the project page can rest assured that a token’s smart contract has passed the audit. Doing an audit from a known leader is a display of confidence that a business values the security and safety of the users and their assets held in a DApp.
More transparency
Since the results of smart contract audits are publicly available. Measures of KPIs such as community trust, operational resilience, governance strength, Github activity and others do have a significant influence on how a project is perceived by potential users. It also enables the community to see if a project has been actively growing and debugging issues. Marketing alone and reviews don’t make a blockchain project stand out, the companies must be active in mitigating any challenges that could compromise security.
Expereince is the key
A smart contract audit that is done well and has the right numbers in place to present to customer base defientoely has an upper hand at UX. Wherever a user interacts with a DApp, they feel rest assured that they are interacting with a secure smart contract that is equipped to hedge against any illicit drain of funds. A positive experience resulting in a positive reputation is important for logentitvity and mainstream adoption.
Disadvantages of Smart Contract Auditing
No guarantee of ROI
Hiring an auditing firm is an expensive feat. This can create a barrier for entry for new DApp ventures in decentralized finance. This is also where more established firms can get the upper hand at security that their smaller competitors might lack. Another myth buster is that the audit always minimizes security issues. If the developers don’t take notes and bugs reported in audits, there is likey no safeguarding either. From a user perspective, a well-audited Defi project that is well taken care of with its codes does not protect against project scamming or the value of its tokens always giving high returns. Audit has nothing to do with the financial performance in the near or long term of a project lifecycle.
Auditing can take time
In the case of decentralized applications, since smart contract serves as the foundation for everything else and a proper audit is needed, there can be significant delays in the launch. Audition can take time, and so does resolving the problems reported out of audits. Code examinations and analysis by engineers can take time, so proper and in advance planning is certainly recommended. Auditors don’t always detect the trouble in codes either so relying solely on their feedback to employ security measures might not be the best idea.
Ignores external factors
A well-functioning and secure smart contract doesn’t just depend on factors in control, such as those through regular audits. Factors outside of control, such as fluctuations in market sentiment, financial events, blockchain development, and partnerships, can make or break it. External factors like that do impact security.
Role of DApps & smart contracts in securing betting exchanges
The significance of DApps in eliminating the need for third-party intermediaries in betting exchanges and ensuring the security of transactions is where a well guarded smart contract can play a huge role. A major issue arises with the flawed security of many centralized betting websites that require the engagement of third party payment providers to handle and distribute money. This also applies to some gambling websites that enable players to deal in crypto and play with their favorite tokens. There is a security risk to that. Many passionate sports fans enjoy making bets on their beloved teams with the aim of making profits. But why rely on middlemen and agents to handle the funds in and out? This is precisely where smart contract powdered DApps in Defi offer a solution. By utilizing smart contracts, intermediaries become unnecessary as transactions are governed and executed solely by code. Consequently, all your finances are managed by a well audited code rather than being entrusted to a potentially unreliable third party.
Conclusion
To ensure that the blockchain applications and products are secure and able to protect hard earned funds of users, identifying the flaws and then addressing those is a critical function of auditing platforms in building secure products. Audits are vital in Defi especially because as the sector grows so will the need for the security and serviceability of those contracts. It’s important to note, though, that a one-time audit is not sufficient, and periodical, thorough audits are considered best practice in the competitive Defi space.
Transparency through audits is increasingly a popular value proposition and important for furthering the Defi world. Statista projects that the number of Defi users is expected to grow to 22 million by 2028 reaching a staggering 37K million US $ in value. Innovation and development will always be vital in targeting new users and onboarding them as soon as possible. Almost about a third of Ethereum based smart contracts have vulnerabilities. Those reasons are good enough for the space to take a solid and pragmatic approach to auditing.
