Smart contracts are changing the way people transact on the blockchain, but they are not failproof. If you are dealing with digital assets or developing dApps, it is important to recognize where the risks lie. This is where a smart contract audit service is used to help you eliminate issues before they become major financial losses.
What are smart contracts, and why do they matter in cryptocurrencies?
Smart contracts are programs stored on a blockchain that run automatically when certain conditions are met. They can automatically execute when preset conditions are fulfilled, which means no intermediary is required. Smart contracts are the backbone of many dApps, DeFi protocols, NFTs, and more.
In today’s ever-evolving cryptocurrency landscape, smart contracts allow us to create more trust among parties involved in these contracts, lower overhead costs, and allow for quicker transaction times. Similar to the level of trust and autonomy that smart contracts provide, there are also inherent risks that come with implementing smart contracts that must be adhered to during build and testing.
Key points to understand:
- Smart contracts eliminate the need for intermediaries
- They are widely used in DeFi apps, NFT marketplaces, DAO governance, and crypto exchanges
- A code bug or logic error can create a significant financial loss or security breach
- Smart contracts, once deployed, cannot be easily changed, making code errors expensive
Smart Contract Risk Categorization
Smart contract risks are not always technical issues. Risks can emerge from code, regulatory obligations, and usage in practice.
Technical or code-related vulnerabilities
- Reentrancy: This is when a malicious contract calls a function multiple times before the initial call is finished or completed
- Integer over/underflows: These occur when the proper handling of mathematics can inform an attacker that they may alter balances
- Logic errors: Logic can be flawed even if the code is executed correctly and has unintended consequences
- Unvalidated external calls: Calling other smart contracts without the option of due diligence can be exploited
Legal & Regulatory Risks
- Undefined legal status: If contested, smart contracts might not be recognized in a court of law
- Jurisdictional challenges: Different countries recognize crypto and digital agreements due to different standards
- Federal regulations: Failing to follow KYC/AML policies may result in consequences or the cessation of operations
Operational & Financial Risks
In some cases, the code is not the risk, but how the contract is utilized or misused.
- Poor governance: In the case that a DAO has flawed logic with its voting mechanism, it could be strongly influenced by a malicious actor
- Price manipulation: Oracles feeding in bad or manipulated data can lead to contracts triggering in response to faulty data
- Lack of transparency: Users who do not understand how the contract works can be misled
Smart contracts are a powerful form of automation, but they can also have risky consequences if not treated with due diligence. From technical bugs to legal gray areas, understanding these risks is the first step toward building better blockchain projects. Hire Hashlock for a professional and reliable smart contract audit that assists you in identifying and resolving risks before you pay for them.
