To become successful in the highly competitive world of DeFi, security must be a priority. As most DeFi projects rely on an intricate web of complex smart contracts, a smart contract security audit is vital for the project to even get off the ground. Furthermore, smart contract security audits can prevent attacks before they occur and ensure that users’ funds are safe. Accordingly, many DeFi projects wear their smart contract security as a badge of honor.
In this article, we’re going to dive deep into the world of smart contract auditing. We’ll explore the underlying technology that powers decentralized finance (DeFi) protocols. Also, we’ll discuss the auditing process for these protocols. Plus, we’ll take a look at some of the top smart contract auditing firms keeping DeFi safe.
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What are Smart Contracts?
Smart contracts are automated, self-executing, immutable agreements on the blockchain. The parameters of these contracts are written into code and cannot be changed after the execution of a smart contract. Also, smart contracts are transparent and traceable when used on a public blockchain such as Ethereum.
Furthermore, smart contracts facilitate complex transactions between anonymous parties without the need for a central authority. These parties do not need to trust each other; instead, they can trust math and science. Plus, the execution of smart contracts takes place without any third parties or intermediaries.
Also, smart contracts create the underlying architecture of decentralized finance (DeFi) protocols, operating as a sort of programmable money on the blockchain. However, the scope for this technology stretches well beyond finance. Moreover, smart contracts can automate all types of complex data transactions, such as supply chain management, initial coin offerings (ICOs), and voting.
What is Decentralized Finance (DeFi)?
Decentralized finance (DeFi) is a series of permissionless, open-source protocols and financial services operating on public blockchains. Most DeFi protocols use smart contracts to automate trades and create liquidity pools for borrowing and lending services. Plus, DeFi protocols operate outside of the legacy financial system. The only prerequisite for participation is an internet connection and a device that connects to it.
Furthermore, DeFi replicates several elements of the legacy financial system. However, it achieves this without the need to trust custodians or third parties. Instead, DeFi protocols use smart contracts to automate the borrowing, lending, buying, and selling of crypto assets. The term “DeFi LEGO” refers to the interconnectivity of these DeFi protocols.
Using multiple DeFi platforms simultaneously can allow for complex financial tools such as flash loans and yield farming. Accordingly, smart contracts need to be secure. Moreover, DeFi has the potential to bank the unbanked and bring about financial freedom, regardless of wealth, status, or nationality.
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DeFi is inherently risky, and users should always exercise caution when interacting with DeFi protocols. However, the teams creating the applications have a responsibility to ensure that they do everything in their power to prevent losses from theft or bugs.
Although it is pretty difficult to provide legally binding guarantees about the safety of a smart contract or protocol, a series of comprehensive audits by a reputable firm is one of the best ways of reducing the probability of a hack or bug in a smart contract.
What is a Smart Contract Security Audit?
A smart contract security audit is a comprehensive inspection and analysis of the underlying code of a smart contract. These audits aim to highlight any flaws or vulnerabilities in the code, fix them, and make improvements. Furthermore, a smart contract security audit is a necessary step for developers of decentralized applications (dApps) that deal with financial assets.
A smart contract security audit entails playing out numerous potential scenarios and running countless tests with a range of third-party applications to determine any bugs. Once the first round of testing is complete, auditors create a report for the consideration of the team building the contract. Before the audit is finished, the team has an opportunity to fix any issues. This gives them a chance for any amendments to be added to the final report.
However, a team must agree on the scope and parameters of an audit before an auditing firm can be given a contract. The criteria of the audit must first be established before testing can take place. Once the purpose of the audit is laid out, auditors can begin testing individual components of the smart contract to ensure each function operates as it should. After this, auditors test larger parts of the contract and use automated bug selection tools to analyze the code. After a manual inspection of the code, results are given to the team for fixes before the final report is issued.
How Does a Smart Contract Security Audit Work?
Each smart contract auditing firm will have a particular way of doing things. Also, each project will vary depending on the services it provides and the level of complexity of the code. However, most smart contract audits will include most of the below steps in a similar order.
Study the Project – Auditors must study the architecture of a protocol before auditing any smart contracts. Understanding the desired outcomes for each interaction and comparing them against the whitepaper often prompts further discussion between developers and auditors about the architecture of the protocol.
Code Freeze – This is the finalization of the code. It enables auditors to locate the exact source file for the code and prevents developers from making adjustments to the code during an audit, and ensures that the code version in use is the one that is released to the public.
Code Review – After freezing the code, auditors will look it over and inspect it further to try and gain a better understanding of how it should operate. Also, auditors will establish how much testing has already taken place to understand the security history of the code.
Automated Analysis – Using bug selection software, auditors can quickly scan for vulnerabilities. Developers will also use these tools before giving their code to an auditor to check for any major issues in their code. Furthermore, auditors may give the codebase back to a development team for reworking it if the initial automated analysis brings up several significant issues.
Manual Analysis / Functional Analysis – Automated analysis software is still relatively new. Accordingly, auditors will have to manually inspect code after running this software to ensure that it operates as it should. Often, multiple auditors will observe the code and compare results to reduce the chances of errors going unnoticed.
Known Vulnerability Analysis – Auditors will put each line of code up against a list of known vulnerabilities and attacks. This is what many consider to be the main bulk of the audit. Any issues found during this step are categorized by their severity.
Live Test / Pen Testing – Auditors can deploy the code of a smart contract on a local testnet and perform “white hat hacking” tests.
Gas Usage – After completing the main bulk of the auditing and testing, auditors will assess the gas usage of the code to check for efficiency and functionality.
First Report – Upon completing the above steps, an initial report can be made available for clients. This report will include any findings and recommendations for fixes.
Review of First Audit Fixes
When the first round of fixes are complete, auditors can review the changes and commence further testing. This can go on for multiple rounds of testing until all vulnerabilities are addressed and a new version of the code is submitted.
Final Report – The final report becomes available once all of the above stages are complete. Upon receiving the report, the development team will understand how best to secure their code.
Smart Contract Auditing Firms
Now that we understand the need for thorough smart contract auditing procedures, let’s take a look at some of the top smart contract auditing firms that are securing the crypto ecosystem.
CertiK is a web and blockchain security firm responsible for pioneering “formal verification” technology for smart contracts and blockchains. Established in 2018 by professors of Yale University and Columbia University, CertiK has carried out more than 1,800 smart contract security audits. This includes audits for BNB Smart Chain (BSC), Bancor, OKEx (OKX), and Huobi. Furthermore, the Binance accelerator fund uses CertiK smart contract audits before investing in any project.
Established in 2017, Chainsulting is a prominent smart contract auditing firm. Also, Chainsulting offers software development services for decentralized applications (dApps). Top clients include the likes of MakerDAO, 1inch, and other prominent DeFi protocols. Furthermore, the auditing firm has conducted audits for industry-leading blockchain networks, including Ethereum, BNB Smart Chain (BSC), and Solana.
OpenZeppelin is one of the most prominent names in Web3 development. The open-source smart contract framework provides tools for creating and automating secure Web3 applications. Also, OpenZeppelin offers auditing services to some of the biggest names in blockchain, including the Ethereum Foundation and Coinbase. In addition, the platform provides modular contract templates for making secure smart contracts on Ethereum.
ConsenSys is a leading blockchain technology company specializing in producing developer tools and enterprise blockchain solutions. Also, ConsenSys Diligence is the security arm of the firm that offers a comprehensive, enterprise-grade smart contract auditing service. Features include automated security analysis, threat modeling, and incident response planning.
Hacken is a leading cybersecurity consulting and Web3 auditing firm. The company offers a range of blockchain security solutions and is the sole cybersecurity data provider for CoinGecko’s “Trust Score”. Also, Hacken offers various smart contract security audit services on Ethereum, Polygon, Solana, Avalanche, and BNB Smart Chain (BSC).
Why are Smart Contract Security Audits Important?
As smart contract-based DeFi projects become more elaborate and complex, the possibilities for new types of attacks and vulnerabilities increase. Also, the competence of the malicious actors carrying out such attacks is on the rise, so developers need to up their game constantly to stay on top.
A smart contract security audit can prevent all kinds of problems. For instance, any bug found in the code of a protocol once live could cause a divide in the community if it disagrees with making changes. Ironing out any issues before launch could save countless headaches in the future and help to avoid costly errors that put large amounts of funds at risk.
Furthermore, the rise in cross-chain DeFi, layer-2 solutions, and interoperable smart contracts significantly increase the potential for exploits. What works on one network may not be replicable across multiple blockchains. As such, the process of making smart contracts secure is becoming exponentially more challenging.
Often, the credibility and integrity of a DeFi project hinge on the level of auditing undertaken. Millions have been lost due to smart contract vulnerabilities and hacks on some of the most popular DeFi protocols. Accordingly, a smart contract security audit by one of the biggest firms gives users confidence when interacting with a DeFi protocol.
What are Smart Contract Audits? – Summary
As the world of decentralized finance (DeFi) continues to grow, the need for smart contract auditing is becoming increasingly important. Sophisticated hacks on DeFi protocols and smart contracts put users’ funds at risk. Plus, with around $100 billion of value locked in DeFi protocols, the stakes are high. Accordingly, DeFi projects are going to extraordinary lengths to ensure that their code is flawless.
When a DeFi project has undertaken extensive smart contract security audit procedures, it helps to instill confidence in users. Also, since the industry is so young, smart contract audits could help with compliance and institutional and enterprise blockchain adoption. Moreover, the more focus on security within the industry, the higher the allocation of funding each project can allocate for things such as smart contract security audits. The threat of hacks and attacks is constantly accelerating. As such, development in smart contract security is of the highest priority to most competitive DeFi projects.
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This course teaches students about some of the most famous smart contract exploits and how to avoid similar mistakes in your code. We explore upgradeable contracts, risk management, software design principles, and more. Join Moralis Academy today and start your journey to becoming a Web3 developer! Also, don’t forget to follow us on Twitter @MoralisAcademy! We’d love to hear your thoughts about blockchain security and smart contract security audits. In addition, check out our “Ukraine and Cryptocurrency” and “Top Gaming Tokens” articles to further expand your blockchain and Web3 knowledge!