With the development of blockchain technology, smart contracts are becoming increasingly important. Our last article mentioned the importance of checking a smart contract before investing in a project. Security of funds is the most crucial element. The blockchain’s history knows all sorts of cases of attacks on the network and the outflow of cryptocurrencies worth tens of millions of dollars. Today we will expand on the topic of security and talk about what smart contract audits are and how they work.

A reminder - what is a smart contract? 

A smart contract is an open-source agreement between two parties that is self-executing after certain conditions are met. It is unchangeable, transparent, stored in the blockchain, and widely used in the financial, logistics, or real estate industry. It automates the process of purchasing a cryptocurrency or NFT. They are most often written in languages such as Solidity, Vyper, JavaScript, C++, or Go and are shared on the GitHub platform.

Despite the number of benefits that smart contracts bring, they are like any other software prone to errors. It's essential to thoroughly understand smart contracts before investing in a project, as its shortcomings can lead to serious financial consequences. 

Find out what is a smart contract audit

A smart contract audit is a process of checking the code and functions of a smart contract to identify potential errors, weaknesses, or risks. This is an essential process to avoid dangerous situations where another party could take advantage of the program's technical shortcomings. Elements such as code correctness and logic, potential programming errors, security vulnerabilities, and architecture are checked to make sure there are no unnecessary elements that expose the program to risks. Auditors also check whether the smart contract is resistant to reentrancy attacks (calling the smart contract multiple times before the previous call is completed), front-running (using confidential or private information to gain a commercial advantage), flash loan attacks (using DeFi's flash loan tool - to manipulate transactions). Transparency is another aspect analyzed. As part of the audit, it is checked whether the contract works according to the declared rules and whether transactions are carried out transparently and honestly.. This way, the user knows that the smart contract does not contain hidden functionalities that could affect his interests. 

Methodology for auditing smart contracts

A smart contract audit methodology is a set of consecutive operations with a program to audit as accurately as possible. There are standards for programmers, such as the Consensus Audit Guidelines (CAG) or the OpenZeppelin Contracts Security Standard. They describe how an audit can be performed most accurately. The audit team must rely on its technical expertise and experience. It also often works with the development team to better understand the project and identify which areas are key areas for testing. These are as follows: 

Analyzing the source code - understanding the logic of operation, identifying bugs, and evaluating the structure. 

Verification of compliance with good practices - checking memory management, data validation, and avoiding vulnerabilities. 

Functional testing - verifying that functions work as expected, scenario testing including boundary conditions and exception cases.

Security testing - the possibility of a reentrancy attack, overuse of resources, or risks associated with data storage and processing. 

Analysis of interaction with other smart contracts - analysis of interfaces, source code, security, documentation, and scenario testing. 

Documentation - preparation of an audit report.

Updates - re-audit in case of code changes. 

Summary

In the context of a dynamic and rapidly evolving blockchain system, smart contract auditing is increasingly becoming an indispensable part of navigating this space. Auditing firms play a key role in ensuring security. It is also useful to have our knowledge of the technical side of smart contracts to avoid risks. As blockchain becomes more widely adopted, there will be an increasing need for security assurance. Along with the benefits the technology brings, one must always keep in mind that many scam projects on the market work against your interests. The ability to distinguish between fake initiatives and those worth investing in is critical to avoid losing your money.

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