Smart-Contract Auditing

Technologies in the modern world are developing relentlessly. Now we are witnessing the formation of a new era, the so-called transition from Web2 to Web3, where control over all processes belongs to the users themselves, rather than to global structures and corporations.

This new era is marked by the transition from the ordinary Internet of Things to a new global business system that includes financial, legal, technological, educational and many other aspects of people’s lives. We live in a truly unique time when bitcoin has emerged and new blockchains have developed extensively. For example, the number two blockchain is Etherium, which has made it possible to use smart contracts for a wide variety of purposes, essentially replacing paper and agreements with “ironclad” fulfillment of one’s obligations. Each person can be assured that by fulfilling their obligations under the contract, they will receive what is programmed into the contract itself. By transferring token 1 to the specified address, thus fulfilling my obligations, I know for sure that I will receive token 2, and my obligations to me will be fulfilled.

But like any new technology, any new financial and technological tool in the initial stages of its development, this technology is not perfect at the moment and is subject to all the risks that were with other technologies. Just as in the early days of web2 online banking there were many frauds, thefts of money from accounts and credit cards, so now the “hackers” of the modern world are looking for vulnerabilities and opportunities to break the technology and steal money, deceive users and enrich themselves. In current realities, the problem is very acute: every year the new, emerging web3 industry loses huge amounts of money, measurable in billions of dollars. What is only worth the latest case of stealing money from the smart contract of the cryptocurrency exchange Bybit by the Lazarus Group hacker group of etherrium for the amount of 1.4 billion dollars. That’s not to mention the usual scams spreading massively in current times through meme-coins and pyramid schemes.

The current state of Web3 security is not perfect and needs to be thoroughly investigated and a call to action for more people and professionals, technical experts, examining smart contracts for vulnerabilities! I created this resource with the goal of taking an in-depth look at security, financial and technical literacy and helping people with the education, tools and knowledge needed in today’s web3 world.

Let’s take a look at where we are and what needs to be done to improve security in the industry.

Shocking Reality: Billions Lost Due to Smart-Contract Hacks

Did you know that in 2022 alone, a staggering $3.1 billion dollars was stolen as a result of crypto hacks? And 2023-2025 doesn’t look much better. This is a call to arms for all of us in the Web3 space!

The DeFi Dilemma: Imagine this – about 7% of the total value of DeFi is stolen by hackers. That’s like saying, “Hey, put your money here, but there’s a scary chance it could disappear!”

There are many Attack Models:

Manipulating price oracles
Manipulating rewards
Tolen private keys
Reentrancy
Integer Overflow/Underflow

These are just some of the common attack vectors we have seen recently. We will not dwell on all of them in detail now, but will discuss them in our BLOG instead.

What is a Smart Сontract?

A smart contract is self-executing software code running on a blockchain that automatically fulfills the terms of an agreement between parties when certain events occur. The concept was proposed by Nick Szabo in 1994, but was only realized with the advent of the Ethereum blockchain in 2015, which provided a platform for creating and executing smart contracts.

The development of smart contracts can be described as follows:

Beginning (1994-2015): Nick Szabo’s theoretical concept.
Realization (2015-2020): Ethereum became the first platform for smart contracts, leading to the explosive growth of decentralized applications (dApps).
Modernity (2020-2023): Development of multichain ecosystems (Polkadot, Solana, Binance Smart Chain), improving scalability and security.
Future: Integration with artificial intelligence, increased automation, development of security and auditing standards.

Main Areas of Development:

Regulation: Formation of a legal framework for smart contracts.
Scalability: Implement Layer 2 and sharding solutions.
Security: Creation of code auditing tools (e.g. MythX, CertiK).
Interoperability: Development of cross-chain technologies (Cosmos, Polkadot).

Authoritative Sources and Personalities:

Nick Szabo is the author of the concept of smart contracts. Official blog.
Vitalik Buterin – co-founder of Ethereum. x.com.
Gavin Wood – co-founder of Ethereum and creator of Polkadot. Blog.
CertiK – smart contract auditing platform. Website.
Consensys – a company developing the Ethereum ecosystem. Website.
OpenZeppelin – a library for secure smart contract development. Website.

Tools and Resources:

Ethereum Foundation – ethereum.org.
Solidity – a programming language for smart contracts. Documentation.
MythX – A tool for analyzing the security of smart contracts. Website.

Regulation of Smart-Contracts

The legal state of the smart contract field in the world, what are the trends and the most progressive countries in the field of legislation.

UNITED STATES

Regulators: SEC, CFTC, FinCEN.
Status: Cryptocurrencies are property, tokens are often considered securities. Wyoming leads the way in liberal regulation.
Trends: Bills for clear regulations (e.g., DAMS).

England

Regulator: FCA.
Status: Cryptoassets fall into three categories. Smart contracts are legally valid.
Trends: Plans to become a global cryptocurrency center.

Europe

Regulator: MiCA (effective 2024).
Status: Unification of rules for cryptoassets and stablecoins.
Trends: DeFi and CBDC development.

Russia

Regulator: Central Bank of Russia.
Status: Cryptocurrencies are partially legal, but with restrictions. Smart contracts with no clear status.
Trends: Development of a digital ruble.

Liberal Countries

Switzerland: Cryptoassets are regulated as financial instruments. Zug is a “Cryptodolin”.
Singapore: Support for innovation, clear rules from MAS.
UAE (Dubai): Zero taxes, cryptohubs.

Global Trends in the Regulation of Smart Contracts:

Unification of rules (e.g. MiCA).
Tightening of AML/CFT.
Development of CBDC and DeFi.

References:

SEC: https://www.sec.gov/
FCA: https://www.fca.org.uk/
MiCA: https://ec.europa.eu/
CENTRAL BANK OF RUSSIA: https://www.cbr.ru/
FINMA: https://www.finma.ch/
MAS: https://www.mas.gov.sg/

What is the Future of Smart Contracts?

The interoperability of different blockchains and the comprehensive development of this area is an important opportunity – interoperability between different blockchain networks so that smart contracts and data can work across multiple chains. This allows assets and applications to move freely between blockchains such as Ethereum, Polkadot, Binance Smart Chain and others.

Why Do Smart-Contracts Need Interoperability Between Blockchains?

Scalability: Addresses network congestion.
Flexibility: Taking advantage of different blockchains (e.g., Solana’s speed and Ethereum’s security).
Accessibility: Simplification for users and developers.

How Does it Work The Interaction of Smart Contracts Between Blockchains?

Bridge: Technology for transferring data and assets between blockchains.
Cross-chain protocols: For example, Cosmos (Inter-Blockchain Communication) and Polkadot (Parachains).
Oracles: Third-party services that provide data from the outside world for smart contracts.

Examples of Cross-Interaction Interactions in Smart-Contracts:

Polkadot: Allows the creation of interoperable blockchains (parachains).
Cosmos: Uses IBC to communicate between blockchains.
Chainlink: Oracles to integrate external data.

Trends:

Development of universal standards (e.g., ERC-20 for tokens).
Increasing number of cross-chain applications (DeFi, NFT).

Interoperability is key to creating a unified blockchain ecosystem where smart contracts can operate without boundaries.