The crypto borrowing and lending platform Nexo recently provided transparency into exactly how its business makes money. Its lengthy breakdown follows the collapse of numerous high-profile crypto lending firms that were overexposed to defunct projects and businesses. Nexo’s Business Model As Nexo explained in a Twitter thread on Monday, Nexo’s primary business strategy is to facilitate collateralized credit. Its core services include crypto collateralized loans, interest-bearing crypto accounts, and spot, futures, and options trading. Through its Earn product (crypto interest…
Smart contracts are the innovation that propelled blockchain technology to where it is today. This invention fulfills the agreement between all the parties in a deal without the need for intermediaries. As a result, it boosts the security and immutability of a blockchain network, allowing numerous and diverse applications to develop.
Unfortunately, smart contracts are not flawless and could lead to million-dollar losses if hackers can exploit their tinniest loopholes. For example, some famous attacks on smart contract code glitches include:
- Crypto exchange KuCoin lost $280 million in September 2020
- DeFi project Harvest Finance losing $20 million.
- Pickle Finance lost more than $19 million to hackers.
- Stablecoin Origin Dollar lost over $7 million.
- The DeFi protocol dForce lost almost $25 million.
- Ronin Bridge loses $600 million to a hack.
These are only a few examples of the damage a hacker can make when exploiting a critical vulnerability in smart contracts. The good news is that such financial catastrophes are avoidable thanks to smart contract auditing. In fact, if you decide to back a DeFi protocol nowadays, you may want to check first if it has a smart contract audit report.
What is a Smart Contract Audit?
A smart contract audit is a complex testing process aiming to ensure the viability of a project’s smart contract code.
Generally, a development team works on the code for a protocol before asking a third-party auditor to determine its feasibility. Next, the auditing team presents its findings to the project’s developers, who make the necessary changes and repairs. This process repeats until the auditor confirms the code is 100% bug-free. Lastly, the audit team releases a final report, which provides the project with an industry standard of verified security.
Many crypto users rely on smart contract audits from reputable auditors to determine if investing in a specific project is worth it. For example, audit & KYC companies like SolidProof, Certik, PeckShield, or OpenZeppelin set a high-security standard and help DeFi projects solve code vulnerabilities.
How Does Smart Contract Auditing Work?
Generally, auditors practice manual auditing, although some companies offer auto-auditing tools, allowing project developers to have a more hands-on approach to the process.
While every company may approach a new project differently, smart contract auditing usually takes place as follows:
- The developers provide the auditor with project specifications, code information, and the overall architecture. These details help the audit team determine the purpose of the smart contract audit and, subsequently, a quote for the necessary work.
- After agreeing on terms, the auditors run manual and automated tests on the smart contract code. Depending on the code’s purpose, these tests may differ in nature and method.
- The auditing team provides the developers with a first draft of the audit report containing the errors they found. Also, they include feedback and potential solutions.
- The developers use the draft to repair the code before resending it to the auditors.
- Auditing continues until the code is free of potential vulnerabilities or bugs. Lastly, the auditor publishes the final report, including additional feedback.
The Benefits of Smart Contract Auditing
Developing a DeFi protocol has significantly evolved from humble beginnings when a part-time programmer would design one just for fun. Businesses invest money, time, and resources to create advanced, bug-free smart contracts. Therefore, they cannot afford the risk of promoting a faulty project.
A vulnerable smart contract means more than just a failed attempt at programming. It can stain a developer’s reputation and permanently destroy projects that took months or years to launch. As a result, smart contract auditing has become one of the first development stages for any up-and-coming project. Moreover, it comes with exceptional benefits, such as:
- Enhanced protection against hackers.
- Avoid costly smart contract code flaws.
- Safer decentralized finance products on the market.
- Enhanced trust for the whole industry
- Higher credibility in an increasingly competitive sector.
Above all, a smart contract audit is an expert review of a DeFi project. Thanks to this tool, developers can produce better and more sustainable work, which leads to safer applications. Furthermore, investors and users can rely on the audit report as a seal of approval from a third-party professional on a new project.
Fundamentally, smart contract auditing is the ideal method of guaranteeing a project launches without critical vulnerabilities or flaws. Thanks to reputable and expert auditors, the process becomes easier and more accessible to rookie developers and new projects. In the long-term, this should contribute to a safer and more reliable DeFi industry.