Why Are Security Audits So Important?

What Are Smart Contract Audits, And How Do They Work?

Over the years, the crypto market has seen tremendous growth, and if you ignore the minor market crashes, you can consider it to be in a constant state of bull run. It has helped people achieve the financial freedom they have always dreamed of. But as is the case with any technology, the crypto space is not free from its flaws.

The space is full of hacks, scams, buggy smart contracts and worse – hackers trying to pull out money from healthy DeFi protocols. And that’s only to be expected of new and experimental technology. But with the growing number of attacks on the DeFi ecosystem, there has also been a parallel increase in DeFi project security, and the tools/services that protect Dapps. 

Lately, we have also seen the term, smart contract audit making rounds. But what’s an Audit, and how does it work? Let’s understand together.

A Brief Overview of An Audit

An Audit is a security focused review of code, it is used to discover bugs, vulnerabilities and potential of future failures. But the key thing to remember is that an audit is not a guarantee of complete safety of the smart contract; instead, it is a best effort approach to find bugs and security issues.

But then it leaves us with the question, what’s the point of an audit if it does not guarantee security? The answer is simple. Blockchain ecosystem is very new, there are unaddressed architectural issues which can surface up from time to time. Sometimes, the hacks might have to do nothing with the way you write your code.

And sometimes even the auditors aren’t able to pick up all the vulnerabilities. This makes it important for any DeFi project to be audited through several independent third-party auditors, to ensure its maximum effectiveness.

How Does A Smart Contract Audit Work?

Typically, auditors will examine the code of smart contracts, produce a report, and provide it to the project for them to work with. A final report is then released, detailing any outstanding errors and the work already done to address performance or security issues. Note that these steps are not necessarily in the same order as different industries have different methods.

Executing Tests

The auditors run tests to check if the smart contract passes them; if even one of the tests fail, the contract is sent back to the developers. Consider this as a preliminary round. Unit tests are conducted by developers to test the functionality of the smart contract.

If the unit tests fail, it indicates problems with the functionality of smart contract – which must be dealt with, before they are passed onto the auditors for security analysis. At Lapits, we recommend a test coverage of at least 95%.

Understanding Business Logic

The next step in auditing a smart contract is understanding business logic. For this, the auditors need to get in touch with the developers and project managers. Understanding business logic is key to conducting an audit, as the auditors will know the “whys and hows” of different functions in the code.

Automated Analysis

The smart contracts are passed through several security analysis tools, to ensure the highest degree of safety. Some of the most popular tools are slither, mythril, manticore and echidna. MythX is also a popular security auditing API used to detect vulnerabilities in a smart contract.

The Importance of An Audit

Over the years, we’ve seen many exploits. These exploits stem from unaudited smart projects which result in either sweeping liquidations, or worse – locking of funds in the smart contract forever, making them inaccessible. It is estimated that a total of $1.3 billion worth of funds have been exploited from the DeFi space in 2021 itself, and in the current year 2022, it has amounted to $1.6 billion. 

Here’s what a lack of an audit has done to some famous defi projects.

And as we have repeated several times before, flawless code can still be exploited. This can happen through price manipulations because of low liquidity, bad sequence of operations and a lot more. Cryptocurrency space is very fragmented, and the in-fighting amongst the different protocols continues. This makes it very hard for projects to recover and gain back the trust of its users, if they have been hacked before. And whether you are a defi business owner, or a retail investor, it’s important for you to have smart contract security in your mind before you do anything.

For Retail Investors

If you are an individual who is looking for DeFi projects, or tokens to invest in, you have to be wary of the rugged DeFi space. There are several thousand projects that launch but only a fraction of them succeed. Furthermore, the attacks on newer protocols are more common.

Before you invest in any protocol, it is important to do a background check on the project. The smart contracts are usually available to the public, and if they’re not – it’s a red sign, and for you, a definite no.

For DeFi Business Owners

Hackers are always trying to harm your business, to make profitable greedy returns. Your business is always at a risk, therefore the steps you take to protect your business are directly related to the success of your project.

It’s important that you get your code audited through multiple auditing agencies over the course of time. At Lapits, we ensure the highest level of security, through our multi-layered auditing process.

For Developers

If you’re building your app or project on any existing DeFi project, you need to be extra vigilant. Your code can be flawless, but if there’s an architecture flaw, everything can crumble down like a house of cards. To ensure the architecture you are working on is safe, you can either audit them yourself or through an external agency.

Closing Thoughts

Audits have become a norm in the DeFi world. The Crypto industry has been learning from its mistakes, and the arms race for cybersecurity continues. And whether you are a regular user, developer, or a business owner; smart contract audits are important, for each and every level of user. Stay tuned to our blog to find out how you need to approach web3 security

Contact Lapits Technologies

Get your Dapps secured and tested at Lapits today. 

An audit is a security focused code review with aim to identify issues in the code. Our process primarily includes 5 steps to conclude a smart contract audit:

  1. Read specs/docs
  2. Run Tests
  3. Automated Analysis
  4. Manual Review
  5. Prepare Report

Here are a few points that you must follow to get your smart contract ready for an audit.

  1. Add Comments in your code
  2. Document your functions
  3. Tests (must), if your tests don’t pass, don’t go for an audit
  4. Transparent Communication
  5. Ready to share your time with Auditors

If any of the above points is missing that means your code is not ready for an audit.

Know More about the process.

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