Just like a physical contract, a smart contract is an agreement between two individuals who agree on a set of terms and conditions for conducting transactions through a trusted third party. In 1994, American cryptographer Nick Szabo used this concept to come up with ‘smart contracts’ that were executed on the terms of automated transaction protocols with a distributed ledger. It works against data tampering and all involved parties can track the transaction without revealing their identities.
Smart contracts execute on prespecified conditions and are created using blockchain technology for conducting transactions. The credibility of these contracts lies in their full transparency and the level of security offered. However, there are certain aspects regarding smart contracts that need to be addressed in order to avoid security vulnerabilities. And this is done by performing a smart contract security audit.
How Do Smart Contracts Work?
Smart contracts can be considered as a type of Ethereum Account operating on a blockchain-based platform, with ether (ETH) as balance. The smart contract is used to communicate between two parties or more who can then access the data by themselves. All transaction requests work through certain predetermined functions programmed to work in a specific manner when the network receives such requests. Thus, smart contracts are majorly used in cryptocurrency transactions.
These digitized transaction protocols ensure that agreements are verified and self-executed through computerized codes embedded on the blockchain, provided the parties meet the specified conditions. There are three main components – signatories, contract’s subject, and contract’s terms to be met. The terms of the agreement will include a list of rules – and repercussions if these rules aren’t met – to ensure that the agreement is fully satisfied.
In fact, when it comes to reversing smart contracts, despite its rigid nature that ensures strict compliance from all associated parties, there are indirect ways of correcting the code for incorporating updates.
- First, you’ll need to create an intermediary contract which must include details such as the transaction address included in the previous contract. After this, you can use the intermediary contract for consequent transactions, which will be redirected to the active contract.
- Next, the intermediary contract should be programmed after importing the previous contract’s codes, transaction data, and other conditions.
- The existing contract’s logic code stored in the library should be used to recall the logic code of the previous contract and then used to retrieve the pre-existing transaction data and its terms and rules mentioned in the previous agreement.
Types of Smart Contracts
There are different kinds of smart contracts applicable for each situation:
Decentralised Autonomous Organizations
This involves blockchain-based communities tied together by specific rules in the form of code on the basis of the blockchain contracts and associated governance mechanisms. The implication is that all actions taken by community members are replaced by self-enforcing codes.
Smart Legal Contracts
These are entirely enforceable through legal mechanisms and parties are expected to follow through with a designated set of duties as mentioned in the contract. Any delays or failure of action will be met with legal repercussions against the offending party.
Application Logic Contracts
Application-based coding is used in these contracts for remaining integrated with other blockchain contracts. This helps in setting up communication across different devices and merging other technologies (such as IoT) with blockchain technology.
Maintaining Smart Contracts Security
If you’re able to understand the blockchain security issues, developers can work towards detecting the vulnerabilities in smart contracts and reduce the possibility of malicious attacks. It could be important yet frequently ignored aspects such as errors in programming and compiling, bugs, and other attacks on the network. Here are a couple of other aspects that may also affect smart contract security:
- Source code – Different programming languages are used on different blockchain platforms such as Ethereum, EOS, Stellar, etc for the consensus algorithm and tokens, which could hide the vulnerabilities in the smart contracts. Such security risks have caused platforms like that of Ethereum to lose millions of tokens – the reentrancy vulnerability led the platform to a monetary loss of around USD 50 million.
- Integer and Numerical Overflow – Overflowing happens when values are stored beyond the predefined limits. Bugs related to integer overflow were targeted during the bath overflow hack of the ERC coins where hackers exploited the smart contracts and used them to generate many tokens. Numerical overflows happen during arithmetic operations if the contract doesn’t check for boundaries, which eventually leads to the loss of users’ assets.
- RAM Exploits – These usually happen on the EOS network, where the RAM is considered a valuable asset in conducting transactions across the network. Here, the RAM is attacked in a way to overwhelm its services through malicious smart contracts placed by hackers so that future transactions are canceled.
- Callback Authorization Bypass Attack – This is used in the Tezos network where hackers target the infrastructure used for sending messages since it prevents the reading of return values of any external calls. The callback function may cause access problems in this context since there are mitigation measures set in place.
These are a few of the general ideas to be kept in mind when dealing with smart contracts. Ensuring smart contract security must be done with adequate research and with the help of trained professionals or in-house teams.