Smart Contract Security – Pitfalls and Solutions

Guides / 24.11.2022

Smart contracts are becoming increasingly prevalent as the world moves towards a more digital and automated future. Still, they are far from being the panacea of all technological ills.

Smart contracts are self-executing contracts with a predetermined set of rules. They are stored on the blockchain and run by computers, which makes them tamper-proof and reliable.

However, as with any new technology, smart contracts have associated risks. This article will explore some of the most common pitfalls and how to avoid them.

What Are Smart Contracts?

The web offers many technical definitions for smart contracts, but we will keep it simple for this article’s purpose. A smart contract is a computer protocol that executes the terms of a contract. In other words, it is a way to enforce agreements between two or more parties digitally.

Think about the implications of that for a second. A smart contract could help anyone buy or sell anything of value–a house, car, company shares, etc. The possibilities are endless.

Before understanding the risks of smart contracts, which are the core of this post, let us look at their benefits.

The Benefits of Smart Contracts

As mentioned, smart contracts help to enforce agreements between multiple parties digitally. This can happen without the need for an intermediary, such as a lawyer or a notary. This allows for the execution of transactions at a fraction of the cost and time it usually takes.

Furthermore, smart contracts are immutable, meaning that, usually, no one can change them once they run. This assures all parties that the contract will perform as agreed upon.

Last but not least, smart contracts can help to automate many tasks. This can free up time and resources that you can spend elsewhere.

Now that we know what smart contracts are and their benefits let us look at their risks.

The Risks Associated with Smart Contracts

While the benefits of deploying smart contracts are evident, you must consider several risks. 

One of the most significant risks associated with smart contracts is the lack of security audits. Given the complexity of smart contracts, they must be thoroughly tested and audited before being deployed on a blockchain. 

Unfortunately, this is often not the case, and many smart contracts contain vulnerabilities that malicious actors can exploit.

Another risk associated with smart contracts is their complexity. Smart contracts are often very complex, making them difficult to understand and debug. 

This can lead to errors in the contract code, which can have devastating consequences. 

Finally, smart contracts are often irrevocable, meaning you generally cannot change them once they go live. This can be a problem if a contract contains errors, as there is no way to fix them.

Mitigating the Risks of Smart Contracts

Mitigating the risks associated with a smart contract is no easy feat. You should consider a few key things when developing or utilizing a smart contract. Below are some tips to help you avoid common pitfalls and secure your contract.

  1. Do your research: Look at what your competitors are doing and see what has worked well for them. There is no need to reinvent the wheel when it comes to security.
  2. Use a trusted development platform: Ethereum is the most popular smart contract development and utilization platform. However, other options, such as Solana, are also available.
  3. Test your code thoroughly: Be sure to test it for all possible scenarios. This includes positive and negative test cases.
  4. Keep your code simple: The more complex it is, the more likely it is to contain security vulnerabilities.
  5. Use a top smart contract audit company: Some companies offer security auditing services for smart contracts. Among these, we can mention Solidity Finance, SolidProof, PeckShield, Hacken, and OpenZeppelin. This is a critical step in ensuring the security of your contract. 
  6. Do not put sensitive data on the blockchain: The data stored on the blockchain is public and accessible to anyone. As such, it is essential to avoid storing sensitive data on the blockchain.
  7. Educate yourself and stay up-to-date on best practices: The blockchain and smart contracts world constantly evolve. It is vital to keep up-to-date on the latest news and trends.

By following these tips, you can help to ensure that your smart contract is secure and avoid common mistakes. 

However, keep in mind that no system is perfect, and there are always risks associated with any contract. It is essential to understand the risks involved before entering into any agreement.

The Advantages and Disadvantages of Different Types of Smart Contracts

When it comes to smart contracts, there are a few different types that you can choose from. Each class has advantages and disadvantages you must be aware of before deciding. Here is a look at the most common types of smart contracts:

Centralized Smart Contracts

The main advantage of centralized smart contracts is that they are much easier to develop and deploy than other types. This is because only one entity needs to be involved in the development and deployment process. 

Centralized smart contracts also tend to be more efficient than other smart contracts. This is because they don’t have to undergo the same rigorous verification process as decentralized smart contracts. 

The main disadvantage of centralized smart contracts is that they are much less secure than decentralized smart contracts. Only one entity works to develop and deploy the code, increasing the risk of errors in the contract. 

Decentralized Smart Contracts

Intuitively, the core advantage of a decentralized smart contract is that it enables trustless transactions. In other words, two parties can transact with each other without having to go through a third party or middleman. This is possible because decentralized smart contracts are immutable, as mentioned above.

Having a good idea of the pitfalls of dealing with smart contracts. The so-called “DAO Hack” case will help us better understand the matter.

The DAO hack occurred on the Ethereum blockchain in 2016. In short, a hacker managed to exploit a flaw in the code of the DAO smart contract. This trick let him siphon off about a third of the funds that the DAO had raised.

This incident led to a hard fork of the Ethereum blockchain, which resulted in the Ethereum Classic (ETC) creation. This is a typical example of how things can go wrong when dealing with decentralized smart contracts.

Choose the Right Type of Smart Contract

Choosing the right type of smart contract is essential to the success of your project. Should you trust the higher security of a decentralized smart contract, or should you prefer to manage a centralized system? As is often the case, the correct answer depends on the scenario.

For instance, a decentralized smart contract is more likely to be secure against scrutiny than a centralized one. On the other hand, a centralized system may offer more control and transparency. In any case, you must carefully consider the advantages and disadvantages of each smart contract before making a decision.

You see so many centralized exchanges (or CEXs) because they offer easier onboarding and faster transaction. In general, they are more user-friendly for first-time crypto users. However, this comes at the expense of security.

CEXs hold users’ private keys in centralized storage (i.e., servers that criminals may hack). This makes them a bigger target for hacking than decentralized exchanges (DEXs), which don’t have a single point of failure.

DEXs are often seen as more advanced and therefore intimidating for new users. They can be harder to use and may have longer transaction times. However, they offer increased security because hackers do not have a central server to target.

In the end, the best type of smart contract for your needs depends on the specific circumstances of your project. A decentralized smart contract may be the best option if security is paramount. However, a centralized system may be better if you need more control and transparency.

In any case, remember that history has brought us many cases of unmanageable centralized systems and hackable decentralized platforms. There is no perfect solution, but with some research, you can find the best option for your project.

The importance of Auditing Smart Contracts

If you think auditing a smart contract is unnecessary, think again. Just because a contract runs on the blockchain doesn’t mean it is infallible. Smart contracts are susceptible to the same vulnerabilities as traditional software applications. 

That’s why you must have your contract audited by a qualified security professional before you deploy it. An audit can help you find and fix potential security issues before they cause problems. 

Here are some of the most common smart contract security pitfalls: 

  • Reentrancy vulnerabilities: Hackers can exploit a reentrancy vulnerability if a contract calls an external address that calls back into the first contract. This attack can drain the first contract’s balance and send it to the attacker’s address. 
  • Short addresses: With a short address, you might accidentally send your Ether (ETH) to a contract instead of a personal wallet. This mistake can be costly, as you will not recover your ETH if it goes into a contract. 
  • Integer overflows and underflows: If a smart contract uses a 32-bit integer, it is susceptible to an integer overflow or underflow attack. This attack can cause the contract to execute unintended code, leading to loss of funds. 
  • Unchecked send: If a contract calls the send function without checking the recipient’s address, it could send ETH to a hacker. This type of attack is known as an unchecked send attack. 

Best practices for Writing Secure Smart Contracts

The good news is that some best practices can help you write more secure smart contracts. Following these practices can help mitigate many of the common security issues.

Use a Secure Language

Choosing a secure programming language is the first step to writing a secure smart contract. Several languages are particularly well-suited for writing smart contracts, including Solidity, Vyper, and Bamboo. 

These languages let you write smart contracts, and they all include features that help to make contracts more secure. For example, Solidity includes a static type system that can help prevent some types of attacks.

Use an Auditor

Before deploying a smart contract, it’s essential to have it audited by a professional. An auditor will look for potential security issues and help you fix them before anyone can exploit them.

Use Test Networks

When testing smart contracts, it’s important to use a test network instead of the main network. Test networks are separate from the main network, allowing you to test contracts without putting real money at risk.

Keep Your Contracts Simple

The more complex a contract is, the more potential there is for errors. And, of course, errors can lead to security issues. So, if you can keep your contracts simple, you’ll be more likely to avoid security problems.

Use Security Tools

Several tools can help you secure your smart contracts. For example, the MythX tool can help you find potential security issues in Solidity contracts. Some open-source libraries can help you add security features to your contracts.

Following these best practices can help you write more secure smart contracts. However, it’s important to remember that there is no such thing as a completely safe contract. 

Even the most well-written contract is exploitable if not correctly implemented or deployed. So, always exercise caution when working with smart contracts.

Wrapping Up

Smart contracts are a powerful tool, but they’re not without risks. Before writing or deploying a smart contract, it’s essential to be aware of the potential security pitfalls. Following some simple best practices can help ensure that your contracts are as secure as possible. 

Do not underestimate the role of hiring good developers for your contract. In any case, you should always do an audit from a professional to mitigate as many risks as possible. And, of course, always use caution when working with smart contracts.

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Wayne is a Blockchain enthusiast and expert in crypto trading. Currently, he covers trendy issues on digital currencies.