There's no hesitation in accepting that smart contracts are the lifeline of blockchain-enabled dapps. The self-executing codes that automatically come into action when the predetermined conditions are met have given a whole new meaning to building decentralized processes. Blockchain, which was confined to peer-to-peer transfer of digital assets with Bitcoin, actually means a lot more with the 2nd generation led by Ethereum.
Even though it has been a great decade building dapps, smart contracts are too plagued with security threats. There have been several moments in history when significant losses have occurred due to smart contract code errors.
One of the most significant smart contract blunders was when Parity Technologies lost $150 million worth of ETH due to weak Ethereum Smart contracts in 2017. A year before that, around $50 million worth of ETH was stolen from Genesis DAO's crowdfunding investors. But one of the biggest and most recent blunders happened in 2021 when $630 million worth of digital currency was stolen from Poly Network Corporation by hackers.
All these instances raise concerns about why smart contracts are so vulnerable and what are the risks associated with them. To find the answers, we will understand the workings of smart contracts and the challenges associated with their security.
How do Smart Contracts work?
Smart Contracts are self-executing codes or contracts that become functional when predetermined conditions are met; they operate by following the "if/when…Then.." Statements.
In simplest terms, the actions that smart contracts are supposed to perform on the blockchain are automatically executed when the predetermined conditions are met and verified. These actions are generally like releasing the funds to the parties involved, sending notifications, registering a vehicle, issuing tickets, etc.
Once the action is completed, it is recorded on the blockchain, which can not be altered and can only be seen by the parties authorized on the blockchain. A smart contract could contain a number of stipulations in order to satisfy the participants and ensure that the task will be completed appropriately.
In the case of a public blockchain, any developer could build a smart contract and easily deploy it on the blockchain. One of the best examples of smart contracts is DAOs, which could have smart contracts for several independent parties that neither know nor trust each other. Smart contracts could even be coded to define how to interact with it, who can interact with it, what time they can interact with it, and what kind of input will have what kind of output. One of the best things about smart contacts is that they can't be deleted by default, and being on the blockchain, the interaction with them cannot be reversed.
Security Challenges Associated with Smart Contracts
Over the years, we have observed that Smart Contracts are prone to several high-risk attacks from hackers, such as:
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Reentrancy Attack:
This attack is severely risky, as it may completely drain your crypto account and can easily occur by accident. Usually, this attack happens because of these two main solidity characteristics:
Frontrunning:
A major drawback of some public blockchains is that the smart contracts and the transactions become completely public on the network even when it is pending. Thus, the mempools, or memory pools, of Ethereum nodes share the details of your pending transactions with the rest of the network, which even enables the miner of a block to select your transactions.
The details of such pending transactions can be seen by a malicious actor who might be scanning the mempool. They can then copy your smart contract and submit it at a higher value. If they submit the transaction first, they can easily "front-run" your contract and take advantage of your arbitrage opportunity.
Private Key Leakage:
Often, people use insecure private keys, which is more of a human error and not a technical vulnerability. Still, it is so common that it must be mentioned here. Some hackers have become experts in stealing money from such dubious addresses.
However, this issue can be easily resolved if users could become more conscious about their private keys and save them securely at some place where only they can access them.
End note
Smart contracts have certainly revolutionized the way we make crypto payments and execute agreements. But more than anything, they have expanded the horizons of blockchain technology with the help of Dapps. Still, they have their cons and vulnerabilities. However, now that you have understood the workings of smart contracts and the challenges associated with them, you can easily mitigate the risks involved.
#blockchain #Smartcontracts #Web3
