Without the self-executing code in smart contract programs, decentralized applications (dApps) wouldn’t be "decentralized." Blockchain programmers rely on smart contracts to automate their protocol’s operations and provide dApp users with a transparent, peer-to-peer (P2P) experience. But since smart contracts are so significant in fields like decentralized finance (DeFi), they’re a major attack point in the crypto economy.
Recent reports from blockchain security firms suggest at least 50% of all crypto hacks are smart contract code exploits. With billions of dollars worth of crypto locked in the DeFi ecosystem, it’s understandable why developers and traders are concerned about the security of their dApp’s smart contracts.
To address these safety challenges, some crypto projects use smart contract auditing services to safeguard digital assets while maintaining network decentralization. Let’s explore how smart contract audits work and why they’ve become a crucial blockchain security feature.
What is smart contract auditing?
A smart contract audit is a thorough examination of the code behind decentralized protocols on smart contract-enabled blockchains. These audits aim to spot potential errors and weak points in a smart contract’s coding instructions and reduce the risk of security breaches like hacks, distributed denial-of-service (DDoS) attacks, or reentrancy attacks.
Besides preventing safety threats, smart contract audits point out inefficiencies in a dApp’s code and suggest ways for programmers to optimize their efficiency and scalability before launch. dApp developers typically perform in-house bug assessments while also employing firms like CertiK, OpenZeppelin, and Chainsulting that specialize in smart contract auditing services to offer unbiased third-party reports.
How does smart contract auditing work?
Web3 auditing firms have unique tools and preferred techniques for assessing a dApp’s codebase, but all these strategies fall into one of two camps: manual or automated auditing. While auditors may spend more time with one of these tactics, most use a hybrid model to take advantage of each method’s pros and cons when reviewing a project’s smart contracts.
Here’s how these strategies work and differ:
Manual auditing
Manual auditing procedures take a hands-on, human-centered approach to reviewing each line of code. Firms using this meticulous method employ experts in a specific coding language (e.g., Solidity, Vyper, or Rust) to carefully read through a smart contract’s code, patch bugs, and report any glaring security concerns to the dApp’s team.
A significant benefit of in-depth manual audits is it’s easier for humans to provide a customized assessment and catch nuanced phrases that may not compute on automated systems. On the downside, manual audits take longer to complete and often strain resources.
Professional auditing firms employ certified coding experts, but there’s a constant risk of human mistakes or subjective bias, which may affect the accuracy of these findings.
Automated auditing
An automated audit involves hardware and software tools such as artificial intelligence (AI) bots, algorithms, and bug detection applications to run through a smart contract and identify potential problems. These systems provide a fast way to get a high-level overview of common coding errors and highlight areas of concern for development teams, but they aren’t as efficient at picking up context as a human auditor.
Automated auditing is ideal for projects with large codebases and on a tight schedule as it’s less resource- and time-intensive than its manual counterpart. However, since the algorithms used in automated auditing rely on rigid, predefined rules, they aren’t as effective at spotting new or complex threats––potentially resulting in more false positives or negatives.
Why is smart contract auditing important?
A downside of decentralization is that dApps can’t count on intermediaries to swoop in and save the day if something goes wrong. Blockchain-based programs live or die by the precision of their smart contract’s codebase. Since these applications rely on smart contracts to provide automated P2P services, even seemingly minor coding errors risk draining users’ funds and eroding trust in the Web3 community.
For example, the DAO hack of 2016 is a well-known cautionary tale in crypto history of how poorly coded smart contracts open the doors to disaster. Short for decentralized autonomous organization, the DAO refers to an experimental community-governed fund on the Ethereum blockchain holding $150 million worth of Ether coins (ETH) from crypto traders.
Shortly after the DAO’s launch, hackers discovered a flaw in the DAO’s smart contract code and used this vulnerability to steal $60 million worth of cryptocurrency. The fallout from this hack forced Ethereum developers to create a new blockchain (aka a hard fork) and rewrite the network’s code to redistribute the stolen funds to the DAO participants.
Today, the original Ethereum blockchain is called Ethereum Classic (ETC), while Ethereum is the hard fork chain created after the DAO hack.
News of the DAO hack highlighted the security concerns associated with smart contracts and paved the way for blockchain audits as a potential solution. With trusted smart contract audits, programmers have unbiased evidence on their project’s security standards, which helps inspire greater confidence in potential users. Smart contract audits potentially save programmers millions or billions in lost crypto funds and point out helpful analytics to create the most intuitive user interface.
How to perform a crypto audit
While each blockchain firm has proprietary ways of conducting an audit, most follow a similar step-by-step checklist to stay on track and well-organized. Similar to how doctors examine, diagnose, and treat patients using a standard rubric, auditors follow preset diagnostic and prescriptive procedures whenever they review a new client’s smart contract case.
Here are five steps to follow when conducting a crypto audit:
1. Review documentation and issue a code freeze
Before delving into the details of a dApp’s codebase, auditors need to know the primary purpose a dApp team wants to accomplish with their project. Without knowing why a smart contract protocol exists, there’s no way for firms to accurately judge the efficiency of coding instructions or suggest improvements for the user experience.
Typically, smart contract auditors ask for relevant paperwork on a dApp—including the project’s white paper, roadmap, and technical documents—to get an overarching sense of what programmers want to achieve with their service. Understanding a project’s goals, functionalities, and specifications helps auditors set expectations and strategize their game plan for the subsequent code review. Following this initial documentation stage, auditors ask teams to enforce a code freeze to ensure the smart contract codebase is consistent during auditing.
2. Run an initial automated analysis
Software programs and algorithms scan a codebase in minutes, which is why they’re the preferred tool for an initial smart contract assessment. Automated systems give auditors a comprehensive look into a blockchain project’s design and identify key areas of concern worthy of further investigation. Although automated tools can’t reveal every potential problem and sometimes pick up false positives, they speed up the manual review by providing auditors with a clear starting base.
3. Manually review the codebase
Using the analysis from preliminary automated tests, auditing firms move to the manual review stage where coders carefully comb through their client’s smart contract line by line. Using their expertise in coding standards and business logic—plus their understanding of a dApp’s mission statement—auditors identify and document vulnerabilities and efficiency issues they pick up during their review. Auditors also assign severity levels for problems ranging from critical to low, depending on each issue’s magnitude.
4. Discuss concerns and solutions with dApp developers
Once the manual analysis is complete, dApp developers meet with the auditing team to review the most significant findings and discuss potential solutions. Auditors often use their severity level classifications to establish a priority list of code issues and suggest a plan of action to resolve these problems. At the end of this meeting, programmers have a clear sense of direction on how to proceed with their dApp’s development and whether it’s ready for deployment.
5. Publish audit report
After digesting the info at their final meeting, auditors put together a formal audit report with info such as a finding overview, in-depth technical details and severity assessments, and future recommendations. dApp developers use this report to reassess their development strategies, organize workflows, and revise the roadmap. dApp leaders also frequently publish third-party audit reports on an official website or share them with relevant stakeholders to prove their protocol’s legitimacy and security.
Eligible traders can enjoy perpetual swaps on dYdX
dYdX places extreme importance on ensuring our decentralized exchange meets exceptional security standards. For total transparency, dYdX constantly publishes code audits from third-party firms like PeckShield and OpenZeppelin and regularly releases updates on security procedures and features on our official blog.
Since 2017, dYdX has been a leader in DeFi perpetuals trading for eligible traders, and we continue to offer eligible users a seamless P2P trading experience. To learn more about the basics of security in Web3, check out dYdX Academy for articles on blockchain safety, and eligible traders can start trading on dYdX today.
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