Smart contracts have emerged as an integral part of the web3 ecosystem, but smart contract vulnerabilities have led to millions in lost user funds, highlighting the pressing need for smart contract security audits.

In this guide, you will learn what smart contract audits are, what they typically entail, and the role they play in identifying vulnerabilities in web3. 

What Are Smart Contracts?

A smart contract is a self-executing computer program stored on a blockchain that executes automatically when a set of predetermined conditions are met and verified.

Smart contracts are used to create agreements that can execute automatically without any intermediaries or time loss. Beyond agreements, smart contracts may also be useful in automating workflows by triggering a specific action or set of actions when predefined conditions are achieved. As a result, smart contracts have become the bedrock of web3, enabling the development of decentralized applications (dApps) running on public blockchains.

What Is a Smart Contract Security Audit? 

A smart contract audit is the process of comprehensively analyzing the code used by developers to create a smart contract.

The audit is carried out by security engineers to identify any potential security issues, risks, or inefficiencies in coding. This process guarantees the integrity and robustness of smart contracts by providing an avenue for identifying and resolving problems. 

Why Are Smart Contract Audits Important?

Once deployed, changing the smart contract of a decentralized protocol isn’t that simple. So, if any vulnerability exists in the code, it can (and likely will) lead to a loss of funds. Even seemingly small bugs can lead to catastrophic losses for web3 users after a project has launched. Due to such vulnerabilities and consequent hacks, billions of dollars have been lost in the DeFi industry in the last few years.

Other reasons why smart contract auditing has become a crucial requirement for dApps include:

  • Boosting user confidence: Allowing security experts to examine the security and performance of a smart contract instill confidence in users and investors. It assures all stakeholders that their investment is safer than on unaudited dApps.
  • Preventing costly mistakes: Due to the immutability of the blockchain, it’s important to audit code in the development stage. If a severe flaw is detected after the launch, the project may have to redeploy a new smart contract which is both expensive and time-consuming.
  • Expert review: A smart contract audit is typically done by an independent entity, separate from the code writers. Therefore, it offers an unbiased evaluation of the contract’s code, functionality, and security.

How Do Smart Contract Audits Work?

Smart contract audits implement a variety of tools and techniques to identify weak points, resolve vulnerabilities and make smart contracts more secure. While different engineers follow different approaches, the typical process involves the following:

Gathering Documentation

During this stage, the project undergoing auditing submits the technical documentation to the auditors. These may include various elements such as the project’s codebase, architecture, whitepaper, and any other relevant material. This information gives auditors a deeper understanding of the project’s scope, objectives, and implementation.

Automated Testing

Automated testing analyzes all the possible states of a smart contract and pinpoints problems that could compromise the security or functionality of the smart contract. At this point, engineers may also conduct integration, unit, and penetration tests to evaluate the individual functions that make up the smart contract.

Manual Code Review

In this phase, a team of security engineers examines the code line by line to identify bugs, vulnerabilities, and inefficient code that could undermine performance. While automated testing is adept at identifying bugs, it takes human experts to detect architectural or logical flaws within the smart contract. A manual review also provides opportunities to optimize gas consumption and rectify poor programming practices that are inefficient yet technically correct.

Classification of Contract Errors

The classification of contract errors involves labeling all errors according to severity. These may include labels like critical, major, medium, minor, and informational errors.

Initial Reporting

Auditors will develop an initial report that lists the issues identified and how to resolve them. Depending on the auditor, some teams may fix any identified bugs themselves.

Final Audit Reporting

Lastly, the auditor will prepare a final report that includes detailed results of all issues and whether they were resolved or not. This report is provided to the team behind a project and can be made available for the public to review for transparency purposes.

The Bottom Line

By subjecting smart contracts to rigorous audits, dApp developers can strengthen their systems against potential exploits, hacks, and financial losses. In an ecosystem built on smart contracts, smart contract security audits are paramount to creating a secure user-experience.