A Beginner's Guide to a Smart Contract Security Audit

Smart contracts play a crucial role in the DeFi ecosystem, but it is vital to verify that they function as intended. Despite being self-executing, smart contracts are not immune to security vulnerabilities. Therefore, it is advisable to establish a process for conducting smart contract security audits. But how do you begin with a smart contract security audit, and what does the process entail?

In this guide, we will explain the significance of smart contract security audits and provide a step-by-step process for conducting one for your DeFi application.

What is a Smart Contract Security Audit?

Smart contracts have become a crucial component of blockchain technology. While they may seem simple, smart contracts play a vital role in transparent DeFi applications and blockchain-based services. As you may already know, smart contracts are self-executing programs that are triggered when certain conditions are met. This functionality ensures the smooth operation of blockchain services. However, it is important to note that deploying these contracts can also expose security vulnerabilities.

A smart contract security audit is a process that assesses the security and reliability of a smart contract. Conducting a thorough audit helps minimize the risks, vulnerabilities, and potential losses that may arise from a security breach after deploying a smart contract. Given that smart contracts are immutable and cannot be reversed, it is crucial to minimize security risks and have an actionable audit in place.

A smart contract security audit generally involves analyzing the code to identify potential bugs, security weaknesses, and flaws that could be exploited by an attack. In this guide, we will delve into the importance of smart contract security audits, key vulnerabilities, and how to address them.

Why is it Important?

The reality is that smart contracts enable millions of dollars worth of transactions every day. DeFi applications and blockchain services depend on smart contracts to automate these transactions while maintaining the transparency associated with blockchain technology.

However, the immutable nature of the blockchain highlights the significance of smart contract security. With that in mind, let's explore some of the key reasons why smart contract security audits are crucial:

• Accuracy — As mentioned, transactions on the blockchain are not reversible. Smart contracts must be executed with utmost accuracy. When a smart contract transaction has a security flaw, it can result in issues with the transaction or even millions of dollars being lost due to hacking.
• Closing vulnerabilities — Security audits not only ensure the accuracy of smart contract transactions but also help prevent attacks by identifying potential entry points and vulnerabilities that hackers could exploit.
• Stay updated on new threats — The blockchain is constantly evolving, with new technologies being implemented regularly. Additionally, security threats and techniques to exploit vulnerabilities are also evolving. Conducting regular security audits helps your team stay informed about these threats and continuously reassess current security requirements.
• Compliance - Regular security audits not only help teams demonstrate compliance but also build trust with stakeholders and users. By conducting regular smart contract security audits, a team showcases its commitment to the security of its network.

Manual vs. Automated Auditing

In the broadest sense, two different types of audits can be conducted - manual or automated security audits. Each type has its own set of pros and cons.

During a manual smart contract security audit, auditors need to carefully examine each line of code and identify any problems or vulnerabilities. Manual security audits can be more comprehensive as auditors can also identify other code-related issues, such as optimization problems, in addition to security flaws. However, manual audits require a significant amount of time and resources, and conducting them regularly is not as convenient.

On the other hand, automated auditing utilizes bug detection software to identify bugs and security issues. This approach allows for faster audits and more regular security updates. However, automated software has limitations in terms of the scope of what it can search for and identify, which means that some issues may go unnoticed.

An ideal way to conduct security audits might be a combination of these two approaches. Regular automated audits can be conducted to ensure smooth operation, while less frequent manual security audits can provide a more comprehensive overview of your smart contract code.

How to Perform a Security Audit

Whether you choose a manual or an automated security audit approach, there are certain steps that you can take during a typical audit process. Here are some steps you might take if you’re performing a security audit:

Collecting Models of Code Design

The first step in conducting a smart contract security audit typically involves collecting code design models. Auditors will compile code specifications and examine the project's architecture to gain a better understanding. This allows them to identify potential vulnerabilities and weaknesses that may arise when integrating third-party smart contracts.

During the collection phase, auditors can review the documentation and code base of the smart contracts. They will also analyze the functions, variables, and other interactions when the smart contract is executed. This collection process may be performed manually or with the assistance of automated tools. Regardless, it helps auditors comprehend the contract's functionality, making it easier to identify common security risks.

Run Unit Tests

Of course, auditors will also need to test each function of the smart contract. Unit tests involve creating test cases to identify potential vulnerabilities and bugs that attackers could exploit.

This process can be done manually or with automated tools, often using a combination of both. Manual audits allow auditors to carefully analyze different test scenarios and uncover security flaws that may be missed by automated tools. The automated tools, in turn, help ensure that nothing is overlooked during the manual process.

When conducting a smart contract audit, it is important to take a thorough approach. Running unit tests using both manual and automatic tools will minimize the risk of leaving any security vulnerabilities undetected. It is crucial to leave no stone unturned.

Select Auditing Approach

As discussed, manual and automatic auditing approaches have their advantages and disadvantages. However, it is generally agreed that manual auditing is the preferred approach due to its thorough nature. While automated tools can be helpful, their limitations make manual audits the best approach for now.

Relying solely on software increases the risk of missing potential security issues. It is important to identify any security risks before they result in financial losses or execution errors in smart contracts. Manual auditors can detect more complex attacks, such as front-running, which automated software may overlook. Although manual audits may require more time and effort, the peace of mind and protection against security flaws make the hands-on approach worthwhile.

Drafting the Initial Report

Once the security audit is complete, the auditors will draft an initial report that breaks down every code flaw and vulnerability they discovered. This report should summarize the potential risks that need to be addressed, and it is then passed on to the programmers. In some cases, the audit team may even handle these risks themselves.

After filing the initial report, the team will proceed to fix all the errors that were found. They will carefully review the report and make the necessary adjustments. Finally, they will conduct a final sweep to ensure that none of the suggestions were overlooked. The initial report is crucial for a smart contract security audit as it ensures that the issues are addressed and potential exploits are mitigated before they become problematic.

Publish the Final Audit Report

Once all the bugs and vulnerabilities identified in the initial report have been addressed, the final report can be published. This final audit provides a documented and comprehensive overview of all the security improvements made to your smart contract processes.

Typically, you will share the final audit report with the project team and stakeholders. This demonstrates the steps taken to resolve security vulnerabilities and shows your commitment to security. The final audit report promotes transparency and accountability, reassuring stakeholders that you regularly assess security risks and take appropriate actions.

Having the final audit report allows businesses to move forward with confidence, knowing that their smart contract is robust, secure, and ready for deployment.

What are the Key Vulnerabilities?

When it comes to smart contract security, it is crucial to be aware of the key vulnerabilities that can put your contract at risk.

Here are some of the most common security vulnerabilities for smart contracts:

• Reentrancy Attack — One of the most common and damaging vulnerabilities in smart contracts is the reentrancy attack. In this type of attack, a hacker can exploit a loophole in the code of a smart contract to repeatedly make external calls to an untrusted contract. By doing so, the attacker can use a malicious contract to call back to the original function and manipulate the flow of funds, potentially stealing significant amounts of assets.
• Timestamp Vulnerabilities — Miners, who have control over the execution environment for smart contracts, can manipulate timestamps to influence the execution of a smart contract. This vulnerability is particularly exploitable when the terms of a smart contract are time-dependent. Miners can adjust the timestamps to execute the smart contract in a way that benefits them.
• Random Number Vulnerability — If a smart contract utilizes a random number generator that is derived from publicly available seed numbers, an attacker may be able to predict the generated random number and exploit the smart contract.
• Function Visibility — Function visibility is a common coding mistake that can occur when coding in the Solidity programming language. If a developer forgets to define the visibility of a function as private, Solidity will default to public visibility. This vulnerability exposes the function and allows any external attacker unauthorized access to manipulate the execution of the smart contract.
• Human Recognition - It is important to be able to differentiate between humans and contracts. Failing to do so can have unintended consequences. Ensure that your smart contract code can accurately determine whether the caller is a human or a contract.
• Spelling — Even something as seemingly minor as a spelling mistake in a constructor can have significant consequences. A misspelled constructor can result in a function being unintentionally set as public, exposing it to potential attackers.

To conduct a comprehensive smart contract security audit, it is crucial to be aware of these key vulnerabilities. By understanding these vulnerabilities, you can take the necessary steps to enhance the security of your contract and safeguard it against potential exploits. It is recommended to include a systematic process for identifying these vulnerabilities, particularly during a manual audit. By highlighting potential issues, your audit team can focus their search and uncover the most common and harmful security vulnerabilities that your smart contracts may be susceptible to.

Ways to Improve Security

Security is always a top priority for any technology. However, since smart contracts are self-executing, it is crucial to be particularly thorough with the code and ensure that your security measures are top-notch. To address vulnerabilities and maintain trust in your protocol, there are several steps you can take to keep your security up to date. Here are some of the best ways to improve security:

• Conduct regular audits — It is important to regularly conduct audits to continually reassess your security needs and identify any new vulnerabilities in your smart contract protocol.
• Define your auditor team — If you have a sufficiently large team, define roles and assign responsibilities for conducting regular audits. Consider providing training to team members who lack experience in smart contract audits, or hire individuals with smart contract auditing experience.
• Consider hiring an auditing firm — Training someone for auditing or finding someone with auditing experience may not always be feasible, so it is worth considering hiring an auditing firm for an external review of your smart contracts. A smart contract auditing firm can provide a thorough assessment of your security risks and help you address any vulnerabilities promptly. While this option may incur additional costs, the savings from avoiding security exploits will make it a worthwhile investment.
• Ensure reliable data for your contracts — Well-written code is essential for smart contract security, but it is equally important to ensure that your smart contracts have access to reliable market data. Without access to low-latency market data, your smart contracts may not function correctly.

Improving the security of your smart contracts should always be a top priority. This not only instills trust in your stakeholders but also ensures that your protocol functions properly.

One critical aspect that underpins the accuracy and reliability of smart contracts is access to dependable market data. Smart contracts rely heavily on data to function as intended. Without real-time, high-quality data, the execution of your smart contracts might fall short of expectations. If you require reliable and secure data to connect to your smart contract applications, oracle solutions like the Pyth Network can assist you.

Make Smart Contracts More Secure

One of the most crucial elements for accurate smart contract execution is the availability of reliable market data. However, if that data is compromised, your smart contract application is once again in danger of being exploited. The oracle data source you choose must be secure and its outputs should not be easily manipulable.

The Pyth Network provides a solution to address this challenge. Pyth Price Feeds are cost-effective, low-latency, high-fidelity price feeds for smart contract applications. These feeds reflect the most up-to-date price data sourced from reputable institutional and decentralized sources. The Pyth protocol is also open source and audited. By integrating oracles like Pyth Price Feeds into your application, you can significantly enhance the security, efficiency, and overall effectiveness of your smart contract protocols. You can explore the Pyth Network documentation here.

We can’t wait to hear what you think! You can join the Pyth Discord and Telegram, and follow us on Twitter. You can also learn more about Pyth here.