Security 101: Why Smart Contract Security Audits are Important

2021/12/09 10:42:21

Smart Contracts laid the foundation for decentralized apps and decentralized finance. They revolutionized finance and a myriad of other sectors and generated billions of dollars in revenue, becoming a household name in the process.

Smart contracts are responsible for over $170 billion worth of value locked in the DeFi sector. With that much money flowing around, smart contract platforms should take extra caution to ensure that these smart contracts are not exploited, and that the money generated and money locked are secure.

Faulty and careless programming tends to lead to a host of attacks by hackers like re-entrancy attacks, overflow/underflow attacks, and more, to name a few. Securing smart contracts can be quite difficult. This is because un-addressed security vulnerabilities can quickly turn into existential threats to the platform’s viability.

In this article, we’ll be talking about the top smart contract security risks and why security audits are important for investors to read and consider.

Top Smart Contract Security Risks

Blockchain security auditing teams strive to keep users’ tokens and networks safe from attackers by performing smart contract vulnerability reviews at scale. A meta-analysis across some of the most popular tokens’ security audits resulted in a list of frequent and severe risks based on the impact on their security.

The top security risks fall into three categories:

1) Operational Risks

Operational Risks are authorization features that can be exploited when the platform’s governance is insufficient or flawed. Here are some of the most common operational risks found in smart contract platforms.

SuperUser Account of Privilege Management: Smart Contracts allow a single user or a set of users a privileged role to alter the function of the asset.

Black Listing and Burning Functions: Smart Contracts that allow privileged roles to blacklist addresses from accessing or using a functionality.

Ability to change Contract Logic: Smart contracts that allow privileged roles to make changes in the smart contract logic.

Self Destruct Functions: Smart contracts that implement a function that allows privileged roles to remove the token contract from the blockchain and destroy all the tokens created by the contract.

Minting Functions: Smart Contracts that implements a function that allows privileged roles to increase the circulating supply of the token or balance of a specific account.

2) Implementation Risks

Implementation risks are inherent risks that result in unwanted and unpredicted behavior from smart contracts. Here are some examples of the top implementation risks seen in smart contracts.

Unauthorized Transfers: Smart contracts contain functions that disregard standard authorization patterns for sending tokens from an account.

Incorrect Signature Implementation and Arithmetic: Smart contract functions that can result in unexpected contract states and account balances.

3) Design Risks

Design risks are system features that hackers or tokens can exploit to manipulate smart contract behavior. Here are some of the most common examples of Design risks found in smart contracts.

Untrusted Control Flow: Smart contracts that execute functions on different smart contracts in order to trigger an event not designed in the original contract itself.

Transaction Order Dependence: Smart contracts that allow asynchronous transaction processing that can be exploited for profit.

Why Security Audits Are Important

After the DeFi boom in 2020, there has been a great amount of development in the DeFi sector despite the volatility in the crypto market. DeFi and NFT platforms have been on the rise, and it has become extremely easy to create DeFi applications through third-party development environments and services.

While we can be happy that there is so much development going on in space, we can not ignore the risks. Smart contract vulnerability can be very impactful. They have the potential to damage or destroy a project and scare off potential investment in the ecosystem.

We can take a notable example from DAO, a complex smart contract. The DAO was initially a venture capital fund that would fund all future DApps made in the Ethereum ecosystem. However, because of a loophole in the code, someone could siphon away one-third of DAO’s funds, which was around $50 million at the time, and later caused the splitting of Ethereum Classic and Ethereum.

The DAO attack stirred a lot of drama in the Ethereum ecosystem, hurt the token’s reputation, and led to the shut down of the DAO. The DAO could’ve been saved thanks to security audits.

The only way to make sure projects are safe is by improving security and, of course, opting for a smart contract audit. Moreover, if you’re investing in a platform that uses smart contracts, then you can look for credible smart contract audits (done by third parties) to make sure that your asset is in safe hands. As an investor, it’s of utmost importance that you invest in projects that top security auditing firms have audited to ensure that your assets are in safe hands and can not be exploited.

Closing Thoughts

Identifying exploits, vulnerabilities, and bugs in smart contracts is an important step that every smart contract platform must take. With smart contracts powering the entirety of the DeFi and NFT sectors, it’s important to understand that each attack or exploit deters the trust in the ecosystem and could play a large role in the future of global finance.

As an investor, you need to invest in audited projects to ensure your assets are safe, or it could hurt your reputation, bank account, and trust in the system.

Notice: KuCoin does not provide financial advice. Please do your own risk assessment when deciding how to invest in cryptocurrency and blockchain technology.