Smart contracts can be conceptualized as UNDERSTANDING SMART CONTRACTS

agreements encoded into computer programs, automatically executing predefined terms upon the occurrence of specific conditions. Conceptualized by the digital pioneer Nick Szabo in the 1990s, smart contracts can be likened to ‘automated virtual commitments’ fortified with protocols for their enforcement. The Bitcoin protocol, which essentially validates a transaction, is a rudimentary form of a smart contract.

CONDUCTING A SMART CONTRACT AUDIT

An audit of a smart contract seeks to identify potential vulnerabilities inherent to the business logic of the contract, ensuring compliance with the Solidity coding standards and verifying the absence of logical and access control flaws. Each smart contract audit is uniquely tailored to the project at hand and can be conducted either manually or automatically.

Manual Auditing

In manual audits, expert auditors meticulously scrutinize each line of code, focusing on detecting issues such as re-entry and compilation errors, and other less conspicuous security deficiencies, such as weak encryption techniques.

Automated Auditing

In automated audits, specialized software tools are deployed to detect bugs and errors, which is often the method of choice for time-sensitive projects that require swift market entry. Automated audits help in rapidly identifying potential vulnerabilities.

SMART CONTRACT AUDIT PROCEDURE

Though the specific procedure may vary, smart contract audits generally follow a standard process:

  1. Collection of Code Design Models Auditors gather the specifications of the code, examining the architecture to ensure compatibility with third-party smart contracts. This helps them grasp the project’s scope and objectives.
  2. Execution of Unit Tests Each function of the smart contract is tested using manual and automated tools, ensuring the comprehensive coverage of the smart contract’s code in the unit test cases.
  3. Selection of Audit Method Auditors prefer manual audits as they are typically more effective than their automated counterparts. This approach enables quick detection of potential attacks like front running.
  4. Drafting of Initial Report Any identified code anomalies are compiled into an initial report and provided as feedback to the project team. Most smart contract service providers have a team in place to rectify any discovered bugs.
  5. Publication of the Final Audit Report Upon fixing the identified bugs, the auditors publish a final report detailing the steps taken by the project team and external experts to rectify the issues.

OPTIMIZING SMART CONTRACT SECURITY

Regular Audits and Penetration Testing

Regardless of the perceived robustness of a system, it is crucial to conduct regular audits and penetration testing to preemptively identify and address potential security flaws before they can be exploited.

Security Best Practices for Smart Contract Audits

  • Use a Static Application Security Testing (SAST) tool for conducting static analysis to detect style discrepancies and vulnerable code.
  • Use reliable tools like Mythril and MynthX for secure smart contract analysis.
  • Test for every vulnerability specified in the SWC register.
  • If an experienced security team is lacking, consider organizing a bug bounty program.
  • Create a comprehensive report outlining the identified vulnerabilities and suggesting remediation strategies.

Adherence to a Blockchain Security Checklist

To enhance the security of blockchain-based applications, follow a well-designed, practical checklist that includes enforcing multifactor authentication, leveraging Security Incident and Event Management (SIEM), implementing access level policies, and mandating Identity and Access Management (IAM) for accessing blockchain solutions.

Usage of Automatic Security Scanner

An automated security scanner can aid in the security analysis of smart contracts by identifying code vulnerabilities and providing remediation suggestions. This scanner, supported by the Ethereum Foundation for Ethereum smart contracts, can provide detailed information about the vulnerability, affected components, remediation steps, impact of the vulnerability, potential financial losses, severity, and CVSS score.

SMART CONTRACTS

The functioning of a smart contract mirrors that of other blockchain transfers, following a standard sequence of steps:

  1. A user sends a transaction from their blockchain wallet.
  2. The distributed database receives the transaction and verifies the user’s identity.
  3. The transaction, which could involve a transfer of funds, is authorized.
  4. The transaction includes code specifying the transaction type to be executed.
  5. The transactions are appended to the blockchain as a block.
  6. Any updates in the contract status are added to the blockchain following the same procedure.

SMART CONTRACT PLATFORMS

Several platforms facilitate the development and execution of smart contracts on the blockchain, including Ethereum, Hyperledger, Counterparty, and Polkadot, each offering unique features and advantages.

APPLICATIONS OF SMART CONTRACTS

Smart contracts can be applied in various fields where traditional contracts are used, such as record keeping, trade, supply chains, mortgages, property market, human resources, intellectual property, health, elections, and insurance.

ADVANTAGES OF SMART CONTRACTS

Smart contracts provide numerous benefits:

  • Independence: Participants can decide directly, eliminating the need for intermediaries.
  • Trustworthiness: Securely stored on a distributed network, contracts cannot be manipulated or falsified.
  • Security: Contracts, duplicated across all network nodes, cannot be lost.
  • Cost-efficiency: The elimination of intermediaries and commissions reduces costs.
  • Precision: The automatic execution of terms minimizes the risk of errors.
  • Sustainability: Digital contracts reduce paper usage and associated pollution.

KEY FEATURES OF SMART CONTRACTS

  1. Decentralized: Smart contracts operate independently of intermediaries thanks to their decentralized system, with code written once and securely managed by the network.
  2. Autonomous: Once initiated, smart contracts require no further intervention, demonstrating their decentralized nature.
  3. Self-executing: Smart contracts can manage monetary transactions, distribute resources, and expand storage and computational capabilities, executing all processes automatically.

FUNCTIONING OF SMART CONTRACTS

Bitcoin was the first cryptocurrency to support basic smart contracts, allowing value transfer between users with the network nodes validating the transaction only when all conditions are met. Ethereum further advanced this technology by enabling developers to create their own custom programs, surpassing Bitcoin’s functionality. With Ethereum’s ‘Turing-complete’ language, developers have the liberty to code more complex smart contracts.

PRINCIPLES GUIDING SMART CONTRACTS

Smart contract’s function is based on triggers and perform specific tasks according to the stipulated conditions. The beauty of smart contracts lies in their precision and transparency, leaving no room for ambiguity or risk.

WHO CAN IMPLEMENT SMART CONTRACT TECHNOLOGY?

Though smart contracts have existed for over a decade, their popularity surged with the advent of blockchain technology. Currently, their use is mainly within the realm of seasoned programmers who have a comprehensive understanding of this technology. However, as blockchain technology becomes increasingly accessible, the application of smart contracts is extending beyond this limited group. With their promise of security, cost-effectiveness, speed, and scalability, smart contracts have transformed complex processes into accessible and streamlined procedures.