What is a smart contract security audit? A beginner's guide

Key takeaways

• A smart contract security audit is a complete review to find and fix vulnerabilities in the code to protect against hacks and failures.
• Regular auditing is critical for robust security while also building trust and regulatory compliance.
• The process requires an initial assessment, analysis with tools, manual code review, reporting and remediation. 
• Choosing an audit provider requires an understanding of the process so an operator can be judged on reputation, experience, and transparent processes.

Blockchain is a high-stakes industry. Successful Web3 projects can quickly build billions in value when holding and transacting users’ funds. Security audits are the building blocks of a fortress against malicious attacks and devastating code failures. 

Constant assessment and refining of your code are essential to build trust and avoid catastrophic financial losses. So, don’t leave your project exposed. Secure it with a robust smart contract audit process.

What is a smart contract audit?

A smart contract security audit is an exhaustive code review of a smart contract to identify potential vulnerabilities while also checking functions as required. The idea is to find and fix security flaws before they are deployed to prevent hacks and failures.  

Smart contract audits are a full health check on your code. Just as a doctor examines a patient to spot any health problems before they become serious, an auditor inspects smart contract code to find any security issues or bugs. 

Generally, it requires experienced auditors to carry out a manual smart contract code review with automated tool support. On audit completion, a detailed report is produced highlighting any potential weaknesses that need to be addressed.

Who are smart contract auditors?

Smart contract auditors are professionals, teams, or firms (e.g., CertiK) responsible for reviewing and verifying the code of smart contracts to ensure they are secure, functional and free of vulnerabilities. Their primary goal is to identify flaws that could lead to financial losses, breaches or exploits once the smart contract is deployed on a blockchain.

Key skills of a smart contract auditor are:

• Proficiency in blockchain development languages (e.g., Solidity for Ethereum).
• Understanding of blockchain protocols and architectures.
• Expertise in cybersecurity and cryptographic principles.
• Familiarity with automated auditing tools (e.g., MythX, Slither, Oyente).

Why are smart contract audits important?

Understanding the importance of smart contract audits helps to highlight the requirement to build robust security measures to protect blockchain assets while building trust in an application.  

Security is the number one reason for conducting regular audits that reduce hacking risks and financial losses. For instance, The DAO exploit in 2016 led to losses exceeding $60 million due to a smart contract vulnerability. 

The cryptocurrency industry has often been referred to as the Wild West. This sentiment was echoed by Gary Gensler, the United States Securities and Exchange Commission chair, in 2021. So, trust is paramount for every project. Without it, rumors and accusations spread quickly. Regular audits build confidence with users, demonstrating a strong commitment to security. 

Compliance is another industry hot button. Projects can help meet their regulatory requirements throughout the security process, which includes a blockchain security audit. It provides another tick in the trust box and prevents frustrating legal issues to safeguard a project’s future.

Did you know? The DAO hack in 2016 was so severe that it caused a hard fork of the Ethereum blockchain to roll back transactions and recover funds. It’s why there is now Ethereum and Ethereum Classic, the latter being the original (and less popular) blockchain.

How smart contract audits work

Taking a comprehensive approach to your security audits ensures that vulnerabilities are identified and addressed efficiently. A meticulous, detailed smart contract audit checkli st is required to minimize the risk of exploits while also enhancing the credibility and reliability of a project.

Here is the step-by-step smart contract audit process:

1. Initial assessment: The starting point is to understand the smart contract’s intended functionality and scope. It is important to set the context for the entire audit and align it with the contract goals while highlighting deviations in performance. 
2. Automated analysis: Initially, automated tools are used to scan and identify problems and bugs in the code. This helps to systemize and speed up the process, especially with large code bases.
3. Manual review: Next, security experts conduct line-by-line analysis to review the code manually. Auditors are able to identify subtle flaws and logical errors that machines otherwise miss. 
4. Reporting: The audit results are documented and paired with recommended fixes. The report should contain vulnerabilities and impacts and explain how to remedy them. 
5. Remediation: With the report, developers can update the code to address the issues. This should then be followed by a re-audit to double-check that fixes are effective. Fixing the problems is the ultimate goal of a security audit.

How much does a smart contract audit cost?

The price for a smart contract audit varies widely, typically starting at $5,000 and reaching up to $15,000 or more. Factors such as the size of the codebase, the complexity of the contract and the additional support or re-audits needed can impact the final cost.

Notably, the duration of a smart contract audit can range from a couple of days for simple contracts to several weeks for complex decentralized applications, significantly influencing the final cost.

Key vulnerabilities in smart contracts

Oracle manipulation is one of the most common smart contract risks. Oracles are used for contracts to access external data. Malicious actors can manipulate them to serve their interests. For example, distorting asset prices in flash loan attacks to borrow money without collateral and make a profit. 

Denial-of-service attacks have transitioned from Web2 to Web3. This results in attackers stopping contracts from executing and creating unpredictable reverts. It can allow hackers to manipulate values in financial transactions and auctions.  

Integer overflow and underflow attacks are on the rise as contract issues are exploited to drive arithmetic operations outside of the expected range of values. This triggers instability in a smart contract as the logic undergoes rogue modification and ends up with invalid operations. 

Furthermore, reentrancy attacks, where a malicious contract repeatedly calls the target contract before the previous execution completes is another known vulnerability in smart contracts. Finally, smart contracts can suffer from logic errors, backdoors or insecure programming practices. Simple mistakes in coding can lead to catastrophic vulnerabilities.

As you can imagine, the list of smart contract vulnerabilities is ever-growing, and new attacks are coming every day. Using high-quality audits is essential for effective risk management to protect against known issues and solve problems before they cause irreparable damage. 

Did you know? A study from security firm Hosho found that 25% of smart contracts had critical vulnerabilities. The firm claims to be the leading smart contract auditor by volume and says that many projects would have been ‘crippled’ if they hadn’t had a smart contract audit.

Smart contract audit benefits

Regular smart contract auditing is a wise investment. Along with robust security, blockchain audits have several benefits in the development process and adoption of Web3 technology. 

• Risk mitigation: Regular audits reduce the likelihood of security breaches. In the worst-case scenario, a smart contract attack can destroy a project in seconds. 
• Cost savings: While audits can be a costly process, they should be regarded as an investment rather than an expense. Financial losses from hacks can be far more costly than audits.
• Performance: Identifying inefficiencies in the code provides the opportunity to optimize operations. You might find opportunities to run processes faster and cheaper. It’s better for business and more enjoyable for users. 
• Reputation: DApps built with smart contracts live and die by their reputations. A comprehensive audit process protects a project's reputation with robust reliability, security and transparency. 

Did you know? Parity Wallet suffered a $30 million Ethereum hack due to a flaw in the essential elements of contract logic. Attackers were able to exploit the Parity Multisig Wallet function to steal funds, leading to serious questions over the company's security processes. 

Considerations while choosing an audit provider

Choosing a smart contract auditor is similar to choosing any other service provider. You want proven experience, a positive reputation and a competitive price. With security being such a top priority, there are also some other aspects to consider before making a choice. 

• Experience: On your list should be operators with extensive experience in auditing smart contracts. History of work with large protocols and high TVLs are green flags that show experience in smart contract integrity checks.
• Reputation: Reputation within the blockchain community says everything about the auditor’s quality. When asking for recommendations, look for companies with concrete reputations and identify projects that haven’t been susceptible to hacks. 
• Transparency: Before engaging, the audit company should be clear about its processes. You should receive an in-depth explanation of their approach and how they present their findings. 
• Expertise: Some auditors specialize in specific blockchains, architectures and patterns. Pick an auditor that has expertise in dealing with your application and contracting methodology. 
• Cost: Price shouldn’t be the determining factor. A great auditor is priceless. But all organizations have budgets to work within, so assess the operator for the value they provide.  

Thus, growing sophistication of Web3 threats makes continuous auditing and vulnerability assessments vital. Smart contract audits are no longer optional — they are a cornerstone of robust blockchain security.