Importance of Smart Contract Audits

As it is recommended to carry out necessary fundamental and technical analysis of a project before choosing to invest in it, it is also essential that one must look for security audits of a project or its smart contract as it ensures the project is legit and doesn’t have any loopholes or vulnerabilities which can be exploited later by the hackers.

Following the popularity and increasing applications of blockchain technology, many new decentralized projects are being developed that heavily rely on smart contracts to provide permissionless and decentralized financial services to the users. Experienced traders and investors make their investment decisions by taking into consideration the smart contract security audit of these new projects or DeFi platforms.

Understanding smart contract security audit:

Smart Contract Audit simply refers to the evaluation of any project’s code or the backend program used for providing any service to the users and then compiling a report which identifies any risks and highlights the shortcomings of these projects. In the crypto and blockchain space, almost every project uses a smart contract which is actually the code stored on the blockchain and runs automatically after certain conditions are met. Smart Contracts are an essential aspect in DeFi applications like Lending, borrowing, liquidity pools, insurance, and staking platforms. Anyone lending some crypto assets is actually carrying out the deal through that smart contract and it is important that the smart contract is highly secure, doesn’t have any loopholes or space for vulnerabilities and audit helps to keep these boxes checked.

There are multiple dedicated blockchain security companies that offer third-party and independent smart contract auditing and security verification services for the new and already operational projects in the blockchain space. These companies carry out their analysis, notify the project team regarding any major or minor issues with the code and after considering any changes, they publicly publish audit reports so the users and investors have easy access to review any project’s audit. Smart Contract Audit is a similar activity as any financial audit in the traditional market. Major public companies publish their financial audits on a yearly or quarterly basis to gain confidence among their investors and stakeholders. Therefore, smart contract audits are now taken as a standard, and not only investors but the project itself look forward to conducting audits and displaying them on their websites.

The need for a smart contract audit arises mainly because of the importance of smart contracts. Every single second, thousands of transactions are processed through these smart contracts and millions of dollars are locked in them, users heavily trust and rely on them for the safety and security of their funds. And therefore they are a lucrative target for malicious entities including hackers and cyber attackers who launch targeted attacks on these smart contracts. Multiple incidents in the past involving Ethereum blockchain, Axie Infinity, Solana, Terra, and many other projects have resulted in the loss of billions of dollars in crypto assets mainly because of a small error in the source code of the smart contract. As the transactions conducted on the blockchain are highly secure and cannot be reversed, so unlike traditional market incidents, the funds lost or stolen on the blockchain cannot be recovered at all.

Some of the Popular Smart Contract Audit Companies:

As it is essential to review the audit reports of every project you are choosing to invest in, you should visit auditing websites that display these reports and the results of audits conducted of NFT projects, blockchain games, and DeFi platforms. Some popular and leading blockchain security and verification companies in this field include CertiK, Slowmist, Quantstamp, OpenZeppelin, and Trail of Bits. A user should visit their website to review any project and make their investment decisions.

These auditors not only publish the reports but also highlight important points and factors to consider. A simple example of the smart contract audit conducted by CertiK of the BNB Chain is shown below. It highlights the security risk of the smart contracts, shows the social sentiment, and market standing of the project too. It also enlists the important key features of the project like details on the bug bounties, market cap, decentralization, and the current trading price point of the project’s token.

Apart from CertiK, other auditors also highlight their analysis and review of the DeFi applications and other crypto projects. So anyone who is conducting fundamental and technical analysis should also take a look at the audit reports and results to analyze the project’s security before choosing to lock their money in the project’s smart contract.