TL;DR

Security audit provides a detailed analysis of a project's smart contracts. They are important to maintain the security of funds invested through these contracts. Since all transactions on the blockchain are final, funds cannot be recovered in the event of theft. Typically, auditors examine the code of smart contracts, issue a report, and provide it to the project team to work on necessary changes. A final report is then released, detailing any outstanding bugs and work already done to resolve performance or security issues.

Introduction

Smart contract security audits are very common in the Decentralized Finance (DeFi) ecosystem. When investing in a blockchain project, your decision may be partially based on the results of a smart contract code review.

Although most people understand the importance of audits for cybersecurity, few pay attention to the details of the lines of code. Let's take a look at the methods, tools, and results typically seen in smart contract security audits so you can make more informed decisions.

What is a smart contract audit?

A smart contract security audit examines and comments on a project's smart contract code. Typically, these contracts are written in the Solidity programming language and provided via GitHub. Security audits are particularly valuable for DeFi projects that handle multi-million dollar blockchain transactions or a large number of players. The audit process is generally done in four steps:

1. Smart contracts are provided to the audit team for initial analysis.

2. The audit team presents its analysis to the project team so that necessary action can be taken.

3. The project team makes changes based on problems found.

4. The audit team releases its final report, considering any new changes or outstanding errors.

For many cryptocurrency users, smart contract audits are essential when investing in new DeFi projects. The audit process has become a standard for serious projects seeking a good reputation. Some audit providers are seen as industry leaders, making their audits more valuable in the eyes of investors.

Why do we need smart contract audits?

With large amounts transacted or locked in smart contracts, they become targets for hacker attacks. Small coding errors can lead to the theft of large amounts of money. For example, the DAO hacker attack on the Ethereum blockchain stole around $60 million worth of ETH and caused a hard fork of the Ethereum network.

Because blockchain transactions are irreversible, it is essential to ensure that a project's code is secure. The highly secure nature of Blockchain technology makes it difficult to recover funds and resolve issues after the fact, so it is best to avoid vulnerabilities at all costs.

How do smart contract audits work?

The audit process for a smart contract usually follows a standard. While each auditor's approach may differ slightly, the process is generally as follows:

1. Determine the scope of the audit. The smart contract and project specifications are defined according to the purpose of the project and its overall architecture. Specifications help the audit team understand the project objectives when writing and using code.

2. Provide an initial quote based on the amount of work required.

3. Run tests. The exact nature of each test varies depending on the audit team, its analysis tools, and its methods. Typically, manual and automated tests are performed.

4. Create a first draft of the report with errors found and provide it to the project team for feedback and corrections.

5. Publish the final report, considering the actions and measures taken by the team to resolve the issues raised.

Smart Contract Audit Methods

Gas Efficiency

Smart contract audits don't just focus on blockchain security. They also look at efficiency and optimization. Some contracts make a complicated series of transactions to accomplish an intended function. With the high cost of gas fees on networks like Ethereum, more efficient contracts are able to save a lot on transaction costs.

Performance optimization is also an indicator of developers' technical knowledge. Inefficient steps provide more points of failure and should be avoided. When Gas costs are high, smart contracts may not execute, especially when the Gas limit used is low.

Contract vulnerabilities

Most work in audits involves checking contracts for security vulnerabilities. While some issues may be easy to identify, many exploits (malicious code that exploits system vulnerability) involve advanced techniques and strategies for stealing funds. For example, market manipulation can be used with weak smart contracts to carry out flash loan scams. To find these problems, auditors begin the break testing process, simulating malicious attacks on the smart contract. Common vulnerabilities include:

1. Reentrancy problems: It is a programming term that refers to when a smart contract makes an external call to another external contract before the effects of previous actions are completed. The external contract can then recursively call the original smart contract and interact with it in ways it should not because the status of the original contract has not yet been updated.

2. Integer overflows and underflows: When a smart contract performs an arithmetic operation, but the output exceeds the storage capacity (generally 18 decimal places). This may cause calculation errors.

3. Front running opportunities: Poorly structured code can provide advance warning of purchases or sales in the market. This, in turn, allows others to use the information and trade for their own benefit.

Security flaws on the platform

Most audits include evaluating the network hosting the contracts and even the API used to interact with the DApp. A project could be vulnerable to a DDoS attack or have its website user interface compromised, meaning users will actually connect their wallets to malicious blockchain applications.

What is an audit report?

The audit report is provided at the end of the process. Ideally, projects should be transparent and share results and discoveries with the community. Most reports categorize issues by severity level, such as critical, major, minor, etc. The report also lists the status of issues, as projects have time to resolve them before the final report is released.

Along with an executive summary, a standard report contains recommendations, examples of redundant code, and detailed information about coding errors. Before releasing the final version, the project has a deadline to act on the findings and reported issues.

Where to request a smart contract audit?

Several smart contract auditing services have become known for their services. Two are particularly popular, and getting an audit of them will require an initial quote and information delivery.

CertiK

CertiK is an industry leader in smart contract audits. Hundreds of projects have audited their smart contracts with them. PancakeSwap, BSC's largest Automated Market Maker (AMM) protocol is an example. Below is a section of the PancakeSwap audit carried out by CertiK.

The vast majority of projects supported by Binance Labs have also audited their contracts with CertiK. CertiK publishes a leaderboard of audited projects that allows you to compare each one, along with a security score. Note that in addition to Ethereum, CertiK also covers projects from BSC and Polygon.

ConsenSys Diligence

Run by Joseph Lubin, co-founder of Ethereum, ConsenSys is one of the biggest names in the cryptocurrency industry in the blockchain development sector. At ConsenSys Diligence, the company offers audits of smart contracts on Ethereum. They also provide an automated service that checks Ethereum Virtual Machine (EVM) contracts, identifying common errors.

How much does a smart contract audit cost?

The cost of an audit depends on the number of smart contracts to be scanned. Typically, an audit costs thousands of dollars. In the case of a large project, the process can easily exceed US$10,000. The reputation of the company carrying out the audit also has an influence on the cost.

Final considerations

Fortunately for investors and users, smart contract audits have become a standard. However, if every project has an audit, it will no longer be an indicator that guarantees value and legitimacy. Therefore, it is extremely important that you read the audit yourself. Even if you don't have the technical knowledge, it's a good idea to take a look at the comments and the severity level of the potential problems.

Now, when faced with an audit, you should have a little easier time understanding its content. As always, before making any investment decision, evaluate the big picture well and take all information into consideration.