Guide: How to Audit an Ethereum Smart Contract

The term smart contract is often associated with Ethereum because the Ethereum blockchain was modeled to execute the idea of smart contracts.

Smart contracts employ blockchain technology and automatically execute transactions when certain conditions are met. 

If you have used smart contracts, you must agree that the smart contract consists of assets of millions. Thus, one cannot deploy it on the mainnet without a security check.

A well-audited contract has more chances of project success and increased trust. A  smart contract audit can also detect the weak spots, which can be exploited by cybercriminals and hackers for their gain. As per the reports, 78% of the smart contract limitations can be misused by hackers but these vulnerabilities can be rectified and hacking can be prevented with a robust audit of the smart contract. 

You may have witnessed rising demand for smart contract audits and blockchain development services because it curtails security errors in a smart contract. As a result, Ethereum smart contracts are the most popular among the various smart contract platforms.

Let’s understand the journey of Ethereum from a crypto token to Ethereum 2.0.

What is Ethereum?

Ethereum is a blockchain platform that operates on a peer-to-peer (P2P) network and works on smart contract functionality. Vitalik Buterin, along with other co-founders, started Ethereum in 2013. It is the second biggest cryptocurrency after Bitcoin, known as Ether or ETH. 

While Bitcoin was limited to P2P cash transfer, Ethereum upgraded it to smart contract functionality. It was initiated in 2014, and in the year 2016, a set of Ethereum smart contracts raised $150 million for a project. This makes the Ethereum smart contracts most popular among all blockchain networks.

Solidity is the language for Ethereum smart contracts. Its language Solidity is “Turing-complete,” which infers that time, instructions, and money can solve any computational problem. Turing completeness makes it easy for developers to use the blockchain network for various applications.

Unique Features of Ethereum

• A decentralized platform 
• Open-source and programmable
• Has Smart contract functionality
• Provides developers to create dApps
• Works on Proof-of-Work network

Ethereum 2.0

In the year 2022, Ethereum will transit from the PoW model to the PoS model; this will improve the scalability and security-related issues of Ethereum. Furthermore, the change will give rise to sharding, making the network more efficient. 

How to Develop Ethereum Smart Contracts

Here is a sneak peek at how the Ethereum smart contracts are developed. An understanding of the development part of smart contracts gives a competitive edge. A big question arises regarding the cost of developing Ethereum Smart Contracts. Depending upon specific requirements, the cost lies somewhere between $7500 – $45000.

The Execution

Before you understand the deployment of smart contracts, here are the three basic elements for execution

1. Ethereum Virtual Machine (EVM) is a place to keep all smart contracts and Ethereum accounts. Furthermore, it has powerful hardware to execute all the smart contracts.
2. Gas is the fee or pricing value required for executing contracts. Gas fees allocate funds for EVM so that smart contracts can get accomplished. You need to calculate the charges of designing an Ethereum Smart Contract in “Gas.”
3. Solidity is the programming language of Ethereum used for arbitrary computations. There is a solidity compiler that changes the code into EVM bytecode directed toward the Ethereum network.

Develop the contract

1. Generate a Meta-Mask wallet by installing MetaMask on your Chrome browser. 
2. Select any one network for testing purposes; one can find test networks in MetaMask Wallet itself named Robsten, Kovan, and Goerli.
3. Click on “Deposit” and add dummy ethers into your wallet. The dummy ethers are essential to test the network.
4. Use Remix Browser IDE to write the smart contracts in Solidity and create a .sol extension file. 
5. Deploy the smart contract on the Ethereum network by selecting the “deploy” option on Remix.
6. When the transaction is complete, one can view the address on the right side of Remix.

Applications of Ethereum Smart Contract  

Ethereum provides novel solutions to numerous industries through the service of smart contracts. It made a network of dApps – by offering decentralized autonomous organizations, Initial Coin Offerings, decentralized finance, and Stablecoins. Let’s understand the use cases of the Ethereum blockchain. 

1. DAO: Decentralized autonomous organizations are blockchain-based organizations that work without a central authority. The regulations of the organization are encoded on smart contracts. 
2. ICO: Initial Coin Offerings are very similar to Initial Public offerings. These are the token for sales mainly started by Ethereum to bring up funds for blockchain-based projects. 
3. DeFi: Nowadays, FinTech companies use blockchain for their service offerings. It uses the smart contract functionality of Ethereum to remove third parties and promote consumer self-sufficiency. Decentralized and programmable financial products replace traditional borrowing and money lending.
4. Stablecoins: It addresses the issue of volatility in the cryptocurrency network. To drive the ecosystem, stablecoins accomplish price stability by collateralization. It can be attained by implementing smart contracts.

Problems that have happened with Ethereum

Smart contract applications have historically witnessed millions of losses due to which there were striking setbacks in Ethereum’s Smart Contracts. First, you must know about the three infamous attacks on the Ethereum platform.

• In 2017, $150 million ETH was stolen from an organization called Parity technologies due to a critical vulnerability present in the smart contract.
• In 2016, Genesis DAO was hacked by hackers manipulating a safety loophole in the smart contracts system. Here, hackers scrapped $50 million ETH from Genesis DAO’s crowdfunding investors. 
• In August 2021, one of the largest cryptocurrency thefts occurred. Hackers seized a $613 million value of digital currency from a company called Poly Network.

The list of hacks is never-ending; thus, one can save their business from any type of attack by opting for smart contracts and extensive audits. 

What is a Smart contract audit? 

Smart contracts have caused a reduction in malicious parties. But a smart contract audit goes one step further to ensure a sense of trust. Want to know more about smart contracts?

Read 0defect’s blog on The Complete Beginner’s Guide to Smart Contracts 

A smart contract audit is an analysis of smart contract code on the crypto; the process is mainly to understand errors and show improvements in order to fix them. In addition, cybersecurity professionals check to ensure that the code is free from errors and vulnerabilities. The checks are intricate and include manual code analysis and running tests before implementing the smart contracts. 

Consider the Ethereum blockchain network, it has excellent security, but the application running on it can still be exposed to vulnerabilities. Therefore, the audits are paramount for DApps, investors, stakeholders, smart contract developers, ICO startups.

The Advantages of Smart Contract Audit

Security plays a significant role in smart contracts. A smart contract without an audit can lead to high risk. In addition, there is a risk of losing the contract. 

You know, one of the best things about an audit is that it is recognized in the business world and attracts investors who align with your business. A few advantages of a smart contract audit are:

1. An audit results in well-optimized code and improved performance of codes.
2. It gives enhanced security against hacking attacks.
3. Secure the assets before deploying code on the mainnet.
4. Enhances the performance of the smart contract.
5. A perfect way to gain the trust of inventors.
6. An essential step to track the – inefficiency, misbehavior, and security flaws.

Vulnerabilities in Smart Contracts

Talking about bugs, almost 25% of all smart contracts are laden with bugs. Security plays a vital role in smart contracts because it deals with economic assets. Also, blockchain technology is immutable means once the smart contracts are published, they cannot be corrected. Thus the contracts need a thorough audit prior to getting published. Here are four vulnerabilities that occur in smart contracts.

Timestamp dependence

Ethereum Virtual Machine does not impart information about IP address, host operating system, and time. The EVM provides information about transactions and blocks only. Smart contract developers find the information from the timestamp field present in the block’s metadata. Malicious block miners can easily access the timestamp information as the timestamp data is arbitrary. 

Re-entrancy

Solidity uses three functions named — send, transfer, and call, to transfer currency. A hacker may use these functions to create a fake function and implement something back in the original contract. This causes a payment to reach the hacker instead of the original contractor. The payment loop will continue until the victim smart contract holder loses all the money.

Incorrect Calculation 

As technology grows, the number of transactions has also increased day by day. Smart contracts require tokens’ transfer, but there is often incorrect token handling, wrong dialing of decimals, and forgetting accuracy constants. An audit is also helpful in correcting the math functions so that users don’t lose funds due to slight decimal errors.

Access Control

One can access smart contracts through external functions. The attackers can access an insecure visibility setting — if contracts use [tx.origin] to handle extensive authorization logic. The hack on Parity happened due to access control problems.  

Overflow or underflow of Integer

The storage capacity for a smart contract is 18 decimal; if the output surpasses the limit, it results in inaccurate amounts calculated.

Process of Smart Contract Audit 

The smart contract audit process consists of manual review and automatic code review. While automated analysis takes 48 hours to 72 hours, a manual review can take a few weeks to months, depending upon the project.

Therefore, a question must have arisen in your mind regarding the cost of the audit. The cost of an audit depends on numerous factors such as:

• The lines of code – The size of the contract influences the cost of an audit. 
• Outsourcing an audit – Often, companies go for an audit in-house which costs less. However, a third-party audit may have an exorbitant initial cost, but it’s more helpful in strengthening the defense of a smart contract. 

A typical smart contract audit cost lies somewhere between two thousand dollars to twenty thousand dollars. But, the prices can be more depending upon the scope of work.

In the manual process, scrutiny of every line of code is done to track errors. To implement smart contracts in the long term process, the audit team checks the compilation and security-related issues. And in the automatic code review, the audit team finds the vulnerabilities by automatic code analysis. 

At 0defect, we follow detailed steps for the Ethereum smart contract audit:

1. First, our audit team understands the scope of the audit and its purpose. Then, a quick scan of the developer’s library is done to recognize how the project aims to function.
2. Various dynamic analysis tools perform an automated analysis of your smart contract. 
3. Our passionate audit team does manual review and vulnerability analysis of the code. Then, a first audit report is handed over to our client for review. 
4. After fixing the code and making necessary changes, a last round of auditing is done. Finally, a final audit report is presented again to nullify all the confusion.

Smart Contract Performance Validation

A good security audit consists of performance validation. A performance validation is essential to put together a smart contract that is highly operable and adaptable. 

Further, your developers should give importance to contract upgradeability. Because many times a new upgrade makes it challenging to implement. To perform an audit, automated tools can be used. 

The verification starts with a basic understanding of the compiler, which is EVM in the case of Ethereum. 

The next step is to share brief information about the compiler and source code. Then you present the constructor arguments. The column below the Constructed Function is the smart contract library address. 

After modifying a few of the default settings, click on “Verify and Publish” if your contract is well-audited, it will get verified. The verification ensures that the contract code is correctly deployed and allows the public to audit and read the agreement.

A Final Advice

While decentralization makes the crypto world unique but at the same time, it increases the risk of hacking; thus, one needs to be cautious.

With a broader range of applications for smart contracts, its auditing has become one of the crucial elements to identify the security vulnerabilities and keep an eye, so the transactions aren’t misused.

While we removed the intermediaries in the smart contract process, we still need to work on the correct code that isn’t affected by cyberattacks.   

Get in touch with us to achieve security and better efficiency of smart contracts for your business.