The smart contract is an important technology that helps most decentralized applications (dApps) run. It is the innovation that enables products like non-fungible tokens (NFT), decentralized finance (DeFi), and the metaverse to work in a safe manner. In this article, we will explain what smart contracts are and highlight the concept of security in the industry.
What is a smart contract?
A contract is simply an agreement between two or more people to fulfill a certain task. For example, a company lets its employees sign a contract that details the obligations of the two sides. In this case, the employee will be paid for performing a certain task. These days, many contracts are signed virtually, using tools like Docusign and HelloSign.
The concept behind smart contracts is the same, only that they deal with software. A simple way to explain what they are is that they are simply programs stored in a blockchain that only operate when certain conditions are met. By so doing, a large group of people can see the outcome of a deal instantly.
Smart contracts use the simple concepts of “if/when..then”, which lets the programs execute actions when these conditions are met. A simple type of query in such a deal will be “accept a deal if the amount is greater than 10.”
There are several benefits of using smart contracts in the blockchain industry. First, they are significantly faster than ordinary contracts since an outcome depends on just if the conditions are met. Second, they lead to more trust and efficiency. Further, they are typically more secure than other types of contracts. And, they are cheaper since they remove the need for intermediaries.
Today, most blockchain projects that you know have smart contract features. For example, the main reason why developers are able to build projects using platforms like Solana, Ethereum, and Terra is that they have these features.
What is smart contract security?
The blockchain industry has grown rapidly in the past few years. For example, in 2021, the volume of NFT transactions was valued at over $25 billion, and analysts believe that the best days are ahead of it.
At the same time, the metaverse industry was estimated to be worth $35 billion in 2021 and is expected to reach $678 billion by 2030.
Additionally, the total value locked (TVL) of the decentralized finance industry soared to over $250 billion in 2021.
Therefore, as the industry sees this significant growth, the need for security features has become significant. Besides, a small breach in security features could lead to losses worth billions of dollars.
This is the main reason why developers of key projects have announced large bug bounties. These funds are used to pay developers who identify bugs in the system.
In the past few years, we have seen significant breaches that have cost investors a lot of money. In August 2021, hackers managed to steal $600 million from Poly Network, a DeFi platform built using the Binance Smart Chain technology.
In 2022, hackers managed to break into Wormhole, a bridge that connects Solana to other blockchains like Binance and Ethereum. They managed to steal Ether worth over $320 million, although they managed to return it. Other hackers stole $80 million from Quibi Finance.
In total, over $1.3 billion was lost in DeFi in 2021. Therefore, the concept of smart contract security is incredibly important as the industry grows.
Two sides of smart contract security
Smart contract security has two key sides. First, there is the side of the building block of the technology. This refers to the fact that the smart contract platform that developers use to build needs to be incredibly secure. Some of the top platforms in this class are Ethereum, Solana, Terra, and Polygon. Fortunately, in the past few years, most vulnerabilities have not happened from this layer.
The second layer of this security is from the apps themselves. It means that developers like those in the DeFi and NFT industry need to ensure that their platforms are secure. Sadly, this is where most vulnerabilities happen and are the main reason why developers have launched multiple bug bounties.
There are several ways that developers can improve the security of their networks. First, it is always important to take the platform through a testnet. This is a period where potential users take time to test the app before it is taken public.
Second, bug bounties are an important part since they allow experienced hackers to look at all areas to identify potential vulnerabilities.
Finally, as we will explain below, it is always important to use smart contract security audits, which look at all key security features in the platforms.
What is a smart contract security audit?
A smart contract security audit, as the name suggests, is the process of examining the code of a platform’s code in a bid to find potential loopholes. While such an audit does not provide all the protection, it goes a long way to ensure that safety is promoted.
There are four important parts of an audit. First, the developer needs to find a good company that does audits. Second, they provide the code to the team for analysis. After a few weeks or months, the team will present its findings and recommendations.
Some of the most common smart contract audit methods are gas efficiency, contract vulnerabilities, and platform security flows.
Certik is one of the leading smart contract audit companies. The chart below shows the smart contract scores of the leading smart contract platforms.
Other companies that are well-known for providing this type of audit are Consensys, Crystal Blockchain, and CipherTrace.
Smart contracts have literally changed the world by creating platforms that are disrupting how business works. For example, they are used in the DeFi industry to change how people access various types of financial services. Similarly, it has changed the art market through products like NFTs and the gaming sector using play-to-earn platforms. Therefore, investing in quality smart contract security will go a long way in reducing risks.