Most blockchain, including the Ethereum virtual machine, can run smart contracts as custom logic codes.

Several applications now use smart contracts, including supply chain management, ICOs, decentralized finance projects (Defi), and more.

It is important to note, however, that the risks are increasing as the ecosystem grows rapidly.

There are still many unknowns in the smart contract space, making developers vulnerable to attacks, unexpected bugs, and mistakes in codes that can cost businesses millions of dollars and damage their reputations.

The Ethereum blockchain is the most popular and has witnessed its fair share of attacks. Smart contract bugs have cost millions of dollars in recent attacks, including the hack on decentralized autonomous organizations and the Parity wallet attack.

Prerequisites

You should have an understanding of the fundamentals of smart contracts.

What is smart contract security?

Smart contracts are immutable codes that are deployed on the blockchain and are capable of controlling large amounts of value and data. They are built on a trust-free, decentralized ecosystem that has many advantages.

In a 1996 whitepaper, Nick Szabo, the inventor of smart contracts, described the concept as follows:

“A smart contract is a computerized transaction protocol that executes the terms of a contract.

A smart contract must satisfy some common contractual obligations (such as payment terms, confidentiality, and even enforcement), minimize the need for trusted intermediaries, and minimize the risk of malicious or accidental exceptions.”

When creating or interacting with smart contracts, developers, users, and exchanges must adhere to certain security practices.

In the last few years, blockchain technology has grown into a billion-dollar Industry.

Malicious actors often seek vulnerabilities in smart contracts to make a quick buck. These vulnerabilities may lead to all of the funds being drained from a smart contract wallet.

To avoid misbehaviour and costly additional costs, smart contracts should be inspected before deployment.

During the development stage of smart contracts, auditors. test the codes and are responsible for ensuring their security.

What are smart contract vulnerabilities?

Using smart contracts, we can store large amounts of tokens (almost always over $1B) and run immutable logic based on the logic that has been pre-deployed for previously deployed smart contracts.

This has created a vibrant and creative ecosystem of smart contracts that are interconnected and trustless. However, attackers are also well poised to take advantage of smart contract vulnerabilities and unexpected behaviour to profit.

Smart contract codes are immutable, and funds stolen from smart contracts cannot be recovered. On the Ethereum blockchain, over $10 billion in value was stolen due to an error in coding the smart contracts.

Such attacks on the Ethereum blockchain include:

DAO hack

Parity multi-sig wallet hack

Parity frozen wallet issue

Let’s look at some security flaws:

Reentrancy

The reentrancy attack is a common smart contract vulnerability and one of the most important security issues to look out for when developing a smart contract. Re-entrancy attacks were made known due to the famous 2016 DAO hack on the Ethereum blockchain.

Reentrancy involves two contracts and occurs when an attacker calls a function repeatedly at runtime before the end of the first invocation. Because of this vulnerability, they can withdraw balances multiple times before the balances get to 0.

2. Over/Under Flows

Overflows and underflows occur when the numbers of an integer are not used correctly. The Ethereum Virtual Machine operates with fixed-size data for all integers; that is, it stores a variable that is between 0–255.

Thus, if there is an increase or decrease in the allowed storage, it creates an imbalanced flow, a vulnerability that creates an opening for attacks.

3. Front-running

A front-running attack is one of the common vulnerabilities on the Ethereum blockchain. Since transactions are added to blocks and are visible to all, attackers take advantage of this and increase gas fees to ensure their transactions are processed before anyone else’s.

Occasionally, they duplicate other smart contracts and pay a higher gas fee, cheating the original owners on their smart contracts.

4. Incorrect calculation

Since the smart contract is concerned with figures and a large sum of money and tokens, it is important to make sure all calculations are correct. A mistake in calculation can result in funds being locked up or a loss. How can we improve the security of a smart contract?

Ensure that smart contract auditing is carried out appropriately. Auditors most often find errors that went unnoticed during development.

Examine your smart contract rigorously to find bugs and vulnerabilities.

An independent auditor can cross-check and analyze your code to find its security weaknesses and flaws.

Use a programming language that is specifically designed for blockchain development practices.

Make sure you use blockchain best practices.

Conclusion

Smart contracts come with a lot of benefits and solutions: they permit trusted transactions and security without being compromised and are more reliable than traditional legal contracts.

Like any software, it has its limitations and is prone to errors and vulnerabilities. Malicious actors are constantly looking for loopholes and security defaults on the blockchain.

Therefore, developers and auditors must ensure proper testing and blockchain best practices are carried out before release.