Smart Contract Security: Vulnerabilities and Best Practices

Smart Contracts Explained

A smart contract is a type of code that is designed to be executed on a blockchain and enforce the terms of an agreement between parties. Depending on the terms of each specific agreement, this can involve exchanging assets or other types of transactions. By running on a blockchain, a smart contract ensures that transactions are autonomously and accurately executed.

There are many blockchain platforms that support smart contracts — Ethereum, Hyperledger Fabric, Binance Smart Chain, and Corda to name but a few. Each blockchain can implement smart contracts differently. For example, the Solidity programming language is utilized to create smart contracts on Ethereum networks.

It is safe to say that smart contracts is a very promising technology that has all the potential to transform the way we do business. Here’s why:

Smart contracts have a wide range of applications. There's a variety of use cases for smart contracts, not only in the financial sector but also in other industries. For example, smart contracts can be used to handle supply chain management, real estate transactions, and even voting.
Smart contracts are decentralized. They are specifically designed to automate the execution of transactions and other business processes without the need for intermediaries. This reduces associated expenses since there’s no longer any need for costly middlemen, such as lawyers, banks, or brokers.
Smart contracts are immutable. This means that once they are deployed on the blockchain network, they cannot be modified. As a result, transactions are made fully transparent and traceable, preventing any unauthorized alterations for illicit gain.
Smart contracts are secure. Participants can be assured that the contract will be executed only if all the conditions and requirements are met.

Smart contracts power NFTs, DeFi, and Web3 platforms, which hold billions of dollars in digital assets. It's crucial to prioritize the security of smart contracts to avoid financial losses and damage to platform reputation resulting from any breaches or attacks.

Security Risks

In many ways, what is considered to be an advantage of smart contracts, can also become a source of security issues. As mentioned before, smart contracts are immutable — once a smart contract is deployed, it cannot be modified or updated. This means that if any vulnerabilities or errors are identified in the code after deployment, it can be extremely difficult, if not impossible, to fix.

Generally smart contract security risks can result from either vulnerabilities in the blockchain itself or coding errors.

For instance, frontrunning attacks exploit how blockchain processes transactions. Scammers can buy a significant amount of tokens in response to big transactions that will boost the token's price. They then add a higher fee than the big transaction they're targeting to ensure their transaction is processed first. Once the big transaction changes the token's price, they sell the tokens they purchased for a profit.

Smart contracts can also face security risks from 51% attacks on the underlying blockchain network. This kind of attack happens when an attacker has control over the majority of the network's computing power. This gives them the ability to manipulate the network and create fraudulent transactions, which can result in stolen digital assets from smart contracts or the contracts themselves getting modified.

As for coding errors, let’s look at why they might occur in the first place. The primary reason is complexity. Smart contracts are extremely intricate to design, develop, and test. Additionally, they are created using specific programming languages, e.g. Solidity. This is a relatively new programming language, and developers may not be fully familiar with its syntax and rules. This can result in coding errors that can be exploited by attackers. Since any blockchain user can access a smart contract, its possible vulnerabilities are also visible throughout the network, and it is not always possible to eliminate them due to immutability.

Here are some possible vulnerabilities that result from errors in code:

Reentrancy vulnerabilities: This vulnerability occurs when an attacker repeatedly calls a function before the first invocation finishes, enabling them to withdraw balances multiple times until their balance is reduced to 0.
Over/Under Flows: When an integer variable attempts to store an integer above or below its accepted values, vulnerabilities such as overflow or underflow can occur. These vulnerabilities can create unexpected logic flows and enable attackers to exploit the smart contract.
Recursive calling: This happens when a smart contract calls another external contract before the changes are confirmed, and the external contract may then interact with the initial smart contract recursively in an unauthorized manner as its balance has not yet been updated.

Security Best Practices

Now, let's discuss some security best practices that can help mitigate the vulnerabilities we've outlined above.

1. Design and Architecture

This is one of the staples in smart contract security. Use modular and reusable code, proven design patterns, trusted libraries and frameworks, or open-source tools. OpenZeppelin and ConsenSys are two popular time- and community-tested frameworks that provide a range of secure smart contract templates. Open-source libraries are useful for the same reasons — they have been audited by many developers and are less likely to contain vulnerabilities.

2. Testing and Code Quality

There are many industry-standard testing frameworks and tools that can help to identify vulnerabilities before they become a problem. For example, the Solidity compiler provides built-in security checks such as integer overflow and underflow protection.

Penetration testing can also help to identify weaknesses in your smart contract's design. This can be done manually or using automated tools such as fuzz testers. Fuzz testers generate random inputs to the smart contract to test for unexpected behavior and help to uncover vulnerabilities that other testing methods couldn’t detect.

Test the smart contract on a testnet before deploying to the mainnet. Testnets are blockchain networks used specifically for testing purposes and do not contain real digital assets.

Finally, conduct regular code reviews to check for vulnerabilities such as reentrancy, overflow/underflow, unchecked return values, and unprotected functions.

3. Access Control and Authorization

Make sure that only authorized parties should be able to access and modify your contract. The two key access control mechanisms are role-based access control (RBAC) and permissioned access. RBAC allows you to define roles and assign permissions to those roles. Permissioned access can be used to restrict access to your smart contract based on the user's identity.

4. Auditing and Certification

Smart contracts should be inspected by independent security auditors who cover all aspects, including the code, architecture, and business logic. Certification from reputable auditing firms can provide additional assurance that the smart contract is secure.

5. Multi-Signature Wallets

Multi-signature wallets require more than one person to approve a transaction or contract upgrade before it is executed. This provides an additional layer of security, as it ensures that no single person can make changes to the contract without the approval of others.

6. Timelocks

Timelocks can be used to prevent unauthorized access to digital assets and are commonly used in DeFi applications. A timelock can delay the transaction — e.g. the withdrawal of funds — until a certain period of time has passed. In the case of a security breach, it gives the owner of the smart contract time to respond before any damage is done.

7. Bug Bounty

A bug bounty program was created to incentivize ethical hackers to identify and report security flaws in a smart contract. By offering rewards for finding vulnerabilities, you can tap into the expertise of the wider community and fix security issues before they are exploited by attackers.

Conclusion

Smart contracts are now a fundamental aspect of the DeFi ecosystem, and as time goes on, they will likely become a vital part of various business operations and everyday activities. As this happens, it's expected that we'll find better ways of ensuring the utmost security of smart contracts. I trust that this article has given you helpful information on how to tackle the vulnerability challenges associated with this technology today.