Smart contracts continue to broaden the horizons of what’s capable on the blockchain. These on-chain digital apps enable DAO voting, play-to-earn games, interactive NFTs, and more. Still, that doesn’t mean they’re infallible. And the more popular they become, the more attractive they are to hackers. Smart contract security must be top of mind when developing, deploying, or interacting with smart contracts.
What is smart contract security?
A smart contract is a program stored on the blockchain that can automatically execute when predetermined conditions are met. These contracts are typically used to store or enable transactions between various digital assets. When all goes as planned, smart contracts accelerate the use and growth of blockchain technology, but security vulnerabilities often surface, resulting in lost trust and stolen funds.
Smart contract security refers to the security principles and practices used by developers, users, and exchanges when creating or interacting with smart contracts. Blockchain is a dynamic industry worth billions of dollars. Bad actors often seek vulnerabilities in smart contracts to make a quick buck. These vulnerabilities may lead to all of the funds being drained from a smart contract wallet.
Innovative application of blockchain technology has resulted in the development of new types of blockchain. One of the key differences is the consensus mechanisms they use and the security implications of those mechanisms. Hedera, for example, uses virtual voting with hashgraph. This system offers the strongest kind of security possible: asynchronous Byzantine fault tolerance.
Of course, developers must be informed on contract security, because many bugs can be corrected during a contract’s development phase. Still, security is vital for users to understand since their wallets will interact with smart contracts.
What are smart contract vulnerabilities?
One recent example of a significant smart contract problem is the theft of over $3 million from The Tinyman exchange on the Algorand blockchain in January 2022. Hackers added tokens to an asset’s liquidity pool, burning the pool tokens. Then they exploited the contract to receive two of the same tokens instead of the two they initially added. The exploiters were able to swap some of the tokens they received each time so they could repeat this process. Once the details were leaked, copycat exploiters popped up almost immediately, leading to Tinyman halting trading for nearly a month.
These types of exploits aren’t uncommon. Decentralized exchanges act as custodians of digital assets since they use liquidity pools to facilitate transactions. Although these exchanges are typically secure, they are prime targets for exploiters, as they usually hold large sums of cryptocurrency.
One of the fundamentals of smart contract technology is its immutability. Being unchangeable after deployment is an excellent security feature, but it makes it hard to patch known bugs after deployment.
Let's take a look at some common security flaws:
Reentrancy: Reentrancy vulnerabilities happen when an exploiter repeatedly calls functions prior to the first invocation finishing. Attackers using this bug can withdraw balances multiple times before their balance is set to 0.
Over/Under Flows: The Ethereum Virtual Machine uses fixed-size data for all integers. If an integer variable can only store numbers between 0-255, trying to store an integer above or below the accepted values will result in an overflow or underflow. These vulnerabilities allow attackers to create unexpected logic flows.
Frontrunning: Frontrunning attacks take advantage of how blockchain technology processes transactions. Because transactions are collected into blocks and added to the ledger as a part of various blocks, bad actors can buy large sums of tokens in response to large transactions that will swing the token’s price. By adding a higher fee than the large transaction they’re targeting, they can guarantee their transaction will be processed first. After the large transaction swings the token’s price, the exploiters sell the tokens they purchased.
Incorrect calculations: Because smart contracts deal with large amounts of money and, occasionally, various types of tokens, it’s essential that all mathematical calculations are correct. Incorrect decimal handling and fee calculations can result in the loss of funds or funds being locked indefinitely.
What makes smart contracts secure?
Most smart contract security measures take place during the development process. Unlike traditional systems, smart contracts are nearly impossible to patch once deployed. For this reason, it’s essential that developers understand a few basic smart contract security principles.
Smart contract code should be written so it can be paused when things go wrong. In addition, a well-thought-out upgrade path for bug fixes should be in place. Adding rate-limiting and maximum usage features is an excellent way to manage the amount of money at risk. If a bug is discovered in another contract, developers should inspect their code to ensure it isn’t present, especially if similar development processes were used.
When trusted tools or code are already available, developers use them rather than write new code. Before releasing a smart contract for public use, it’s good to hire a trusted team to perform a smart contract security audit. Security audits can be costly, but companies like Certik are known for flushing out bugs that could potentially wreak havoc once the code is released.
Releasing a smart contract on testnet and offering bug bounties to users is another great way to find potential exploits. Bug bounties effectively crowdsource the security audit process. Still, it’s best to use both a security auditor and bug bounty program.
Be aware that external contract calls can execute malicious code and change the control flow. Public and private data in smart contracts may be viewable by anyone. Miners can influence transaction execution time, so using the time component for important functions isn’t recommended.
Developers should aim to make their contracts as simple as possible — complexity increases the likelihood of errors. Still, it’s essential to understand that simplicity may come at the cost of malleability. Developing an upgradeable smart contract adds to a contract’s complexity, creating more room for error.
The future of blockchain technology depends on the developers building into it. Smart contract security is widely perceived as blockchain security, so the actions of independent developers influence the public perception of the blockchain. Project teams must consider proper security practices when developing smart contracts. Hedera hired third-party security auditors and assurance providers to audit the development team’s work, such as its network services. Hedera also has a continuous bug bounty program that rewards users for finding and submitting bugs.