A Complete Beginner’s Guide to Smart Contract Auditing

Smart contracts are the backbone of many blockchain applications today. They handle everything from secure transactions to decentralized apps. But here’s the catch: even one small bug can lead to major losses. In 2023,  nearly $2 billion was lost due to smart contract vulnerabilities!

For anyone involved in crypto or blockchain, knowing how to audit smart contracts—or at least why it’s so important—is becoming essential.

Smart contracts make sure that blockchain or crypto codes are secure, solid, and not open to attacks. Even though it sounds technical, you don’t need to be a developer to get the basics of how this process works. In this guide, we’ll break down the what, why, and how of smart contract auditing.

As the famous security researcher and hacker, Bruce Schneier, once said, “Security is a process, not a product.” In the case of smart contracts, the process of securing them can make or break a project.

Key Takeaway

• Smart contract audits are very important, as they protect assets and prevent vulnerabilities that could lead to major losses.

• Effective audits involve both automated and manual testing to catch potential issues in code.

• Skilled auditors and reputable firms bring experience that strengthens a contract’s security and trustworthiness.

• As blockchain evolves, continuous audits and updates are key to maintaining secure, reliable smart contracts.

“Over $3.8 billion was stolen from blockchain-based projects in 2022, with smart contract exploits accounting for a significant portion.”

What Is a Smart Contract Audit?

Source: PixelPlex

A smart contract audit is a thorough inspection of a smart contract’s code to uncover any potential vulnerabilities, inefficiencies, or flaws. It’s a crucial step that developers or projects take to ensure that the code behaves as expected, and is secure from exploits.

A smart contract essentially operates as a self-executing digital agreement. The terms are coded and automatically enforced. This means that there’s little room for errors.

When an audit is conducted, security experts or specialized teams review the code line by line. They do this using both automated tools and manual checks. The audit helps identify bugs or weaknesses that might lead to a loss of assets or the failure of the contract’s functions.

Without it, these vulnerabilities could become entry points for hackers or cause malfunctions that disrupt the entire system.

Why is a Smart Contract Security Audit Important?

Smart contract audits are more than just technical due diligence—they’re critical for trust and security in blockchain. Here’s why:

Preventing Financial Losses

With smart contracts often holding millions or even billions in digital assets, any security gap can lead to devastating financial losses. For example, in 2023 alone, vulnerabilities in smart contracts led to nearly $2 billion in losses. Audits are essential to safeguard these funds.

Boosting Trust and Confidence

Projects that undergo regular, reputable audits show a commitment to security. Investors, users, and partners are more likely to engage with projects that take this step. This reduces the risk of hacks and increases the reliability of the system.

Maintaining Code Integrity

Even the best developers can make mistakes. Audits provide a fresh set of eyes to catch any errors that may have been overlooked during development. They help ensure the code is not only functional but also efficient and optimized for the blockchain.

Reducing Legal and Compliance Risks

As blockchain regulations continue to evolve, more jurisdictions are requiring projects to adhere to security standards. A comprehensive audit demonstrates compliance and helps projects avoid potential legal repercussions.

Ensuring Long-Term Viability

A secure and optimized contract is crucial for the longevity of a project. With a strong codebase, projects are better positioned to adapt, scale, and grow in an ever-changing industry.

Preparation for a Smart Contract Audit

Source: PixelPlex

An audit can be a challenging process, especially for complex contracts. Before jumping into it, thorough preparation can streamline the process, enhance audit outcomes, and minimize risks. Here’s how to prepare:

Prepare Functional Requirements

Before starting an audit, clearly define the functional requirements of the smart contract. This involves outlining what the contract is supposed to do, how each function is expected to behave, and the specific rules it should enforce.

Functional requirements act as the blueprint of the contract. They guide auditors on the intended behavior of the code. A clear list of functions and expected outcomes makes it easier for auditors to identify deviations or weaknesses.

Prepare Technical Description

A technical description is like the “user manual” for your smart contract. But, it is for developers and auditors. It explains the logic, flow, and design decisions made during development. This description should include an architecture overview, data flow and function logic.

An architecture overview is a high-level summary of how the contract is structured. This should include any dependencies or external interactions. Data flow is an explanation of how data moves within the contract. It details where data is stored and how it’s accessed or modified. While, function logic is a description of the key functions, their inputs, and expected outputs.

Set Up Development Environment

To conduct an effective audit, you’ll need a well-prepared development environment that matches the production settings as closely as possible.

First, ensure that the contract is deployed on a test network that mirrors the mainnet settings. Then, confirm that the libraries, frameworks, or external integrations are fully installed and configured.

Tools like Truffle, Hardhat, or Remix can make it easier to test and review the code. Make sure these tools are properly set up so auditors can examine the contract in real-time.

Prepare Unit Tests

Unit tests are essential for confirming that each part of the contract works as expected. Before the audit, make sure to include tests for every function and scenario, especially edge cases. Test how the contract behaves under normal conditions and stress conditions.

Also, aim for high test coverage, which indicates that a large portion of the code is being tested. Utilizing tools like Mocha, Chai, or Jest, can help streamline testing. This makes it easier to detect failures and identify areas for improvement.

Code Style and Best Practices

Maintaining a consistent code style and following best practices isn’t just about making the code look neat. It improves readability and reduces the risk of introducing bugs.

Variable and function names should be self-explanatory, indicating their purpose within the contract. Also, each function should perform a single task. Complex functions are harder to audit and increase the risk of errors. 

While comments can be helpful, excessive or redundant comments can clutter the code. Only use comments where they add clarity. Lastly, minimizing gas costs on blockchains is crucial. Use efficient data structures, reduce storage operations, and keep function logic as streamlined as possible.

“An attacker exploited a reentrancy vulnerability to drain approximately 1,300 ETH (1.43 million USD) from the NFT money market platform called Omni.”

How to Perform a Smart Contract Audit

Source: Medium

A smart contract audit involves a structured and meticulous process, ensuring the code is secure, optimized, and bug-free. The steps include collecting documentation, setup, testing, auditing, analyzing, verification, and publishing.

Step 1: Collect Documentation

Before you start coding, gather all relevant documentation for the smart contract. Documentation provides the contract’s purpose, features, and expected behavior. This helps guide the auditing process.

Collecting Models of Code Design

Start by collecting models and diagrams that illustrate the code’s design. These models, such as flowcharts or architectural diagrams, help visualize how the contract’s functions are structured and interact.

They offer insight into the logic flow, dependencies, and potential risk points. This makes it easier to spot design flaws or inefficiencies early in the audit.

Step 2: Pre-Audit and Setup

Before the main audit begins, set up a suitable testing environment and familiarize yourself with the development tools required to work with the smart contract. During this pre-audit phase:

• Ensure test environment readiness: Configure your development tools and ensure they mirror the live deployment environment.
• Install necessary dependencies: Any libraries, frameworks, or protocols that the contract interacts with should be in place.
• Review functional requirements and code design: Familiarize yourself with the expected functionalities so that you understand what each component of the code is supposed to accomplish.

Step 3: Automated Testing

Automated testing uses specialized tools to scan the code for vulnerabilities, inconsistencies, and common errors. Here’s how automated testing benefits the audit:

• Identifying low-hanging issues: Automated tools like Mythril, Slither, and Echidna can quickly identify basic vulnerabilities, such as reentrancy issues, integer overflows, and uninitialized variables.
• Saving time: Automated testing covers a wide range of potential issues efficiently, reducing the workload for manual auditing.
• Providing a risk overview: These tools often generate a preliminary report that categorizes issues by severity, giving auditors a sense of where to focus their efforts during manual reviews.

Step 4: Manual Auditing

Manual auditing is the heart of the audit process. It involves going through the code by hand, and scrutinizing each function and line of code for security gaps, inefficiencies, and logical errors.

Classification of Code Errors

One of the first tasks in manual auditing is to categorize any code issues identified. Common classifications include:

• Critical vulnerabilities: Errors that could lead to significant asset loss or compromise contract integrity.
• High-severity issues: Problems that may lead to unintended behaviors or financial exposure but are less critical than catastrophic vulnerabilities.
• Medium and low-severity issues: Minor issues or inefficiencies that don’t pose an immediate threat but may impact performance or usability. 

Difficulty of Exploitation

For each vulnerability or issue found, assess the level of difficulty required for an attacker to exploit it. Consider factors like:

• Ease of access: How easily can a malicious actor trigger the vulnerability?
• Technical skill required: Does the exploit require specialized knowledge or tools?
• Potential impact: If exploited, what would be the scale of the damage?

Step 5: Line-by-Line Review

A line-by-line review takes the manual audit further, ensuring that every part of the code behaves as expected. This meticulous examination verifies adherence to logic. Each line should align with the functional requirements and avoid deviating from intended outcomes.

Look for potential bugs, undefined behaviors, or code redundancies. Ensure that the code is readable, well-documented, and adheres to best practices. This makes it easier for future developers to maintain and understand.

Step 6: Analysis & Verification

Once vulnerabilities are identified, it’s time to analyze and verify each issue to confirm whether it’s a true vulnerability or a false positive. During this step:

• Double-check critical issues: Re-examine any major vulnerabilities to ensure they are indeed exploitable and not edge cases that don’t pose actual risks.
• Test mitigation strategies: Suggest potential fixes and test them to see if they resolve the vulnerability without introducing new problems.
• Confirm contract behavior: Verify that all functionalities perform as intended under normal and edge-case scenarios.

Step 7: Drafting the Initial Report

With the audit complete, compile an initial report summarizing the findings. This report should include a comprehensive list of vulnerabilities, organized by severity and exploit difficulty. For each issue, provide a clear explanation of the problem, its impact, and how it could be exploited.

Offer recommendations for addressing each vulnerability, including code snippets or refactoring suggestions where applicable. Then, summarize the general strengths and weaknesses observed in the contract’s code.

Step 8: Publish the Final Audit Report

Once the development team has implemented fixes, conduct a follow-up audit to verify that all issues have been resolved. The final audit report should then be published. This report typically includes:

• Summary of findings: A high-level overview of the audit’s outcome, including a general statement about the contract’s security status.
• Resolved issues: A list of vulnerabilities from the initial report, marking each as resolved or unresolved.
• Remaining risks: If certain issues are not fully mitigated, include them along with an explanation of why they may not pose a significant threat.
• Code review commentary: Any additional observations or recommendations for ongoing security maintenance.

“Ethereum accounts for 80% of the total funds locked in DeFi, making it the most targeted platform for smart contract exploits.”

Common Smart Contract Vulnerabilities

Preventing common vulnerabilities in smart contracts is essential to building secure blockchain applications. Here’s an overview of frequent vulnerabilities and how they can impact a contract’s security and reliability.

Reentrancy Issues

A reentrancy attack occurs when a malicious contract repeatedly calls a vulnerable function before the initial function call is completed. This exploit can drain funds from a contract by interrupting its usual flow.

A well-known example is the DAO hack in 2016, where attackers repeatedly called a withdrawal function before the contract updated its balance. This drained millions in the process.

To prevent this, you can make use of the “checks-effects-interactions” pattern, where the contract first updates its state (checks and effects) before making external calls (interactions). Additionally, consider using reentrancy guards. This prevents a function from being called again until it has completed its first execution.

Integer Overflow and Underflow

Integer overflow and underflow happen when a mathematical operation exceeds the storage limit of a variable. For example, if a function tries to subtract 1 from 0, the variable may wrap around to the maximum possible integer value, leading to unexpected behavior and security risks.

One way to prevent integer overflow and underflow is Solidity’s `SafeMath` library. You can find it in the latest Solidity versions. This library ensures that mathematical operations are performed safely, reverting the transaction if an overflow or underflow occurs.

Timestamp Dependency

Smart contracts that rely on block timestamps to make critical decisions can be vulnerable to manipulation. Miners can slightly adjust the timestamp of a block within a range, potentially altering contract behavior if it depends on specific time-based conditions.

In order to prevent this, avoid using timestamps for critical decisions, especially in gaming, lottery, or any contract requiring randomness. Instead, rely on other data points or external oracles to generate time-based logic more securely.

Frontrunning Opportunities

Frontrunning is an attack where a malicious actor observes a pending transaction in the memepool and submits a similar transaction with a higher gas fee, allowing it to be executed first. This tactic is commonly used in DeFi and trading applications to manipulate transactions to their advantage.

To counter this, use techniques like committing and revealing values instead of directly submitting transactions with sensitive data. For example, submitting a hash and later revealing the original value can help prevent frontrunners from gaining an advantage.

Replay Attack

A replay attack happens when a transaction is maliciously duplicated on another network. If a contract doesn’t properly verify which network it’s operating on, attackers could replicate transactions across networks to exploit funds.

Implement chain ID checks in the contract’s logic to verify the network’s identity, making sure transactions are valid only on the intended network.

Random Number Vulnerability

Random numbers are challenging to generate securely on blockchain because they rely on deterministic processes. If a contract depends on random values, such as in lotteries or gaming applications, an insecure random number generator can lead to predictable results and exploitation.

Avoid using block variables like `block.number` or `block.timestamp` to generate randomness. Instead, consider using external oracles, such as Chainlink’s Verifiable Random Function (VRF), which provides provably random values on-chain.

Function Visibility Errors

Function visibility (public, external, internal, or private) determines who can access specific functions in a contract. Visibility errors occur when functions that should be restricted are left open to public access, allowing unauthorized users to interact with sensitive functions.

Defining function visibility explicitly and restricting access to critical functions using access control patterns like `onlyOwner` or `onlyAdmin`, can help prevent function visibility errors. Regularly review contract functions to ensure that only the intended users have access.

Centralization Risks

Centralization risks in smart contracts occur when a single entity or key holder has too much control over the contract. If a contract’s owner can override critical functions or pause the contract, this centralization defeats the purpose of decentralization. It can lead to potential abuse.

One way to avoid this is by limiting  privileged roles in the contract and implementing multi-signature requirements for critical functions. Decentralize control as much as possible to avoid dependency on a single party and ensure transparent governance.

Failure in Differentiating Humans and Contracts

Smart contracts sometimes need to differentiate between user accounts (externally owned accounts) and smart contracts (contract accounts). Failing to do so can lead to scenarios where contracts can call certain functions that were only meant for human users. This could potentially enable exploits.

To prevent this, use checks like `msg.sender == tx.origin` to ensure that calls are coming from an EOA and not a contract. However, be mindful that `tx.origin` has its limitations and risks, and should not be relied on as the sole security measure.

Unlocked Compiler Version

Leaving the Solidity compiler version unlocked in a smart contract allows the contract to be compiled with different versions of the compiler. This potentially introduces compatibility issues or makes it vulnerable to known bugs in newer or older compiler versions.

To ensure consistent behavior across deployments, you can specify a specific, stable Solidity version in the contract code. This helps protect against unintentional issues that may arise from compiler updates or downgrades.

Spelling Mistakes

While it may sound trivial, spelling mistakes in smart contracts can lead to serious issues. A simple typo in variable names or function calls can alter the functionality of a contract, cause unexpected behavior, or even lock funds if critical functions are miswritten.

Always Double-check code and use descriptive, meaningful variable names. Peer reviews and automated linting tools can also catch spelling mistakes before deployment.

“Hackers made nearly $120 million exploiting DeFi protocol vulnerabilities in March, 2023.”

Conclusion

Smart contract auditing is more than just a technical check; it’s a critical safeguard in the blockchain space. With rising assets managed by code, a thorough audit ensures that contracts are secure, reliable, and resilient against potential vulnerabilities.

Smart contract audits protect both projects and their users. As blockchain technology continues to grow, prioritizing security through careful auditing will be essential for building trust and longevity in decentralized systems.

Frequently Asked Questions