Welcome to our Smart Contract Security article! We created this blog post for the EU-funded project “V2B: Creating NFT Opportunities on Metaverse for Art VET Trainees”, and our project reference number is 2022-1-DE02-KA210-VET-000080828. Coordinated by L4Y Learning for Youth GmbH in collaboration with Adana Cukurova Guzel Sanatlar and EMC Services Ltd, “Digital Asset Security Strategies” is prepared related to the training framework in the introduction post.
Smart contracts have brought about a revolution in how agreements are executed and transactions are carried out in the digital age. As we delve into the intricate world of blockchain technology and its applications, understanding the concept of smart contract security becomes paramount. These self-executing contracts, encoded with predefined conditions, offer unparalleled transparency and efficiency, yet they also introduce a new realm of challenges and vulnerabilities. In this article, we will explore the multifaceted landscape of smart contract security, delving into the risks involved, the design principles for safeguarding these contracts, and the arsenal of tools available to mitigate potential threats. Join us on this journey as we unravel the complexities of securing the digital agreements that power our decentralized future.
Learning Objectives
By the end of this module, learners will be able to:
- Describe what a smart contract is and its historical background.
- Define the historical development of contracts and their significance in different eras.
- Explain the core elements that make a contract valid.
- List the features and advantages of smart contracts in blockchain technology.
- Identify key security considerations for smart contracts.
- Understand the role of design principles in smart contract security.
- Recognize trusted platforms for smart contract development and their unique features.
What Is A Contract And How Has Its Historical Development Been
A contract is a document that sets out the terms of an agreement and defines the rights and obligations of the parties once they reach an agreement. The history of contracts is as old as human history. The first contracts were made when people exchanged their goods. It is known that the first written contract was in 2100 BC.
The needs of people and changes in the social structure have shaped the development of contracts. For instance, in Roman law, contracts primarily served to regulate debt relations. During the Middle Ages, contracts found predominant use in regulating relations between landowners and peasants.After the Industrial Revolution, contracts started to cover issues such as labour rights and the responsibilities of employers.
Today, contracts find use in almost every field. For instance, diverse areas such as employment, leasing, insurance, and licensing commonly use contracts like employment contracts, lease agreements, insurance contracts, and license agreements.
The security of contracts is very important because errors in these documents can cause serious financial losses. Therefore, it is necessary to be careful in the contract preparation process.
The Elements Of The Contract
The elements of a contract are the elements that must be present for a contract to be considered valid. The elements of a contract are as follows:
-Firstly, Parties:The contract is concluded between at least two parties.
– Secondly, Subject matter: The subject matter of the contract must be a specific thing or service.
– Thirdly, Reciprocity: There must be mutual rights and obligations between the parties in the contract.
– Fourthly, Legality: The contract must comply with the law.
– Finally, Voluntariness: The parties must have made the contract with their will.
The contract’s elements are the components that need to be present for the contract to be deemed valid. When all of these elements are satisfied, the contract is regarded as valid.
What Is A Smart Contract? When And Why Did It Emerge?
A smart contract is a software program that runs on a blockchain network and automatically executes when the parties reach an agreement and fulfill the terms of that agreement. The history of smart contracts dates back to the early 1990s. The first smart contract was developed by lawyer and cryptologist Nick Szabo. Szabo was interested in creating a digital system to enforce and fulfil the terms of a contract without a third-party intermediary, such as a bank or legal system.
Smart contracts automatically enforce the contractual terms embedded in blockchains of an agreement, eliminating the need for intervention by a trusted third party. Bitcoin was the first cryptocurrency and therefore the first example of a simple smart contract. However, due to its structure, bitcoin is only used for money transfer purposes. Ethereum smart contracts differ from Bitcoin at this point. Ethereum has been a pioneer in developing smart contracts that can serve many purposes by following a different algorithmic path on the blockchain.
Smart Contract Security: The Features And Advantages
Operating on a blockchain network, smart contracts are software programs that execute automatically when parties agree and fulfill contract terms.
Addressing trust issues among parties, these contracts remove a significant concern.
Granting users full control, smart contracts eradicate the requirement for intermediaries or individuals.
These contracts function independently, devoid of central authorities, legal systems, or external enforcement mechanisms.
Since smart contracts work using blockchain technology, they show some differences in legal regulations.
Software algorithms encrypt smart contracts, enhancing their security, and distributed ledgers store them.
Moreover, smart contracts accelerate transaction speeds for institutions or companies and operate in a decentralized manner.
The legal status of smart contracts is different from the contracts we know in the classical sense. However, it is likely that smart contracts, which also have qualifications in accordance with contract law, will be accepted as a contractual relationship in law.
Security Elements Of Smart Contracts
Security aspects of smart contracts are very important. The security of smart contracts should be considered at every stage of the software development process. In this process, there are many different steps from designing, coding, testing, and finally publishing the smart contract. Some points to be considered for the security of smart contracts are as follows:
-When designing the smart contract, it’s imperative to account for all possible scenarios.
-Transitioning to the coding phase, adherence to best practices is essential to ensure the smart contract’s security.
-In the testing phase, the smart contract should be tested under all scenarios.
-As the release phase approaches, taking every necessary precaution becomes paramount to safeguard the security of the smart contract.
The security of smart contracts is very important because errors in these contracts can cause serious financial losses. For example, errors in smart contracts have caused the loss of millions of dollars in the past.
Trusted Platforms Used In Smart Contract Design And Their Features
Smart contracts are programming models based on the principle of accuracy and certainty, i.e. immutability, by reducing workloads in different areas as well as saving time, money, and personnel in a business order.
They aim to eliminate procedures, intermediaries, and disruptions in a business area. You can create ‘Smart Contract’ models written for this purpose on many platforms. In the Blockchain Consultancy training on smart contracts, you will learn about the platforms where you can write smart contracts.
ERC20 Standards
ERC-20 is based on Ethereum-based work ERC-20 is one of the most reliable standards. Although there are different ERC standards, Ethereum has preferred to use ERC-20 Standards. The ERC-20 Smart Contract standard structure, not recommended for use in critical areas, offers multiple options in many different areas when you use it.
Features
– Installation is free of charge. Contract transactions are collected as gas.
In Ethereum, “gas” is the unit that measures the amount of computing expenditure required to execute certain transactions on the network. The gas price is the amount of ether you agree to pay for each unit of gas. By setting the gas price and limit, you can determine how fast and how costly your transaction will be.
– Used as Ethereum Token standard or ERC-20
A token is a type of cryptocurrency that represents an asset or a specific use and exists on blockchains. Developers create tokens by integrating them into existing blockchains, instead of building them on independent blockchains. They work with codes and databases called smart contracts. Investors can use tokens for investment purposes, to store value, or to make purchases.
– Uses its own smart contract programming language Solidity
– Clear guidelines are available for developers
– The development community continuously searches for vulnerabilities
– Support interview environment is widespread / helpful
– Smart contract developers almost always have experience and develop using Ethereum.
Hyperledger Fabric
First on the list of Ethereum’s competitors is Hyperledger Fabric. The Linux Foundation founded the Hyperledger project, which started in December 2015. It is an open-source project that aims to support the development of blockchain-based distributed ledgers.
IBM has a strong backing for the Hyperledger framework, which it primarily uses as a foundation. IBM uses Hyperledger in almost every business model that depends on smart contracts for Blockchain Solutions. It seriously supports hyperledger studies and plays a leading role in their development.
Features
– Open Source and free to use
– Supports Special Permission membership system
Hyperledger Fabric is a blockchain platform that works with a special permission membership system. Using this feature, it becomes possible to restrict network access to only specific users. These users can interact with other members of the network and execute smart contracts.
Thanks to this feature, developers can create a private blockchain network that only certain users can access. This allows businesses to make their businesses more secure by creating a private blockchain network.
– Supported by IBM
– Enables coding of contracts in various languages
– Reliable performance
– Supports plug-in components
A “plug-in” is a small computer program that adds a specific feature to a computer program. When programs support plug-ins, they allow customisation. For example, you can use a plug-in to quickly search an e-mail box and connect with contacts. You can use plug-ins to support virus scanning, file compression, and file encryption software.
Nem
Nem was released on March 31, 2015. It is preferred by some developers because Java is one of the most widely used programming languages in the world.
This has some features that make it super accessible as programmers don’t need to learn platform specific programming languages like Solidity etc. A second thing that stands out is that Java is much more advanced and therefore has fewer vulnerabilities than newer platform-specific languages such as Solidity.
Features
– Very easy to design in Java
– No platform-specific programming language
– Scalability
– Excellent performance
Disadvantages
– Smaller development community than other platforms
– Fewer vehicles are available
– It uses its own coding language, Mijin, instead of Solidity, a programming language used for writing smart contracts. Therefore, its decentralisation is not as strong as other smart contract platforms using Solidity.
Stellar
Founded in 2014, Stellar holds the distinction of being the oldest smart contract platform on this list. The Stellar Development Foundation manages Stellar and consistently receives recognition as one of the most promising blockchain startups.
Stellar has managed to convince powerful companies that their existing infrastructure is similar to systems such as Ripple, and to convince powerful companies on the micropayments network. For this reason, Stellar has a dense network of contacts and different experiences in line with its working principles.
When it comes to the best platform for smart contracts, Stellar is simpler and easier to use than Ethereum, but perhaps not as easy as Nem. However, its design successfully facilitates simple smart contracts, such as ICOs.
ICO is an abbreviation of the English term “Initial Coin Offering” and stands for cryptocurrency offering. It describes the process of offering a newly produced token or crypto asset for sale in exchange for popular cryptocurrencies such as Bitcoin and Ethereum in order to raise funds for projects. ICOs are defined as a fundraising method initiated by a company that wants to raise money to create a new token, coin, application or service. With ICO, investors can buy the local crypto unit of the project cheaper before it hits the market.
Today, an intermediary organization usually conducts most ICOs.
– Ideal for ICOs
– Very cheap compared to Ethereum
– A simple platform
– Good performance
– Respected in the industry
Disadvantages
Not suitable for more complex smart contract development, yet its development efforts persist.
Other smart contract platforms include EOS, Corda and Ripple.
EOS
EOS.IO is a smart contract platform in the most basic form. In other words, it is a platform that will allow us to produce a dapp.
DAPP stands for Distributed Application, which stands for decentralised applications. DAPPs are applications that can run without the need for a centralised authority. Developers build these applications using blockchain technology, and they function via smart contracts. DAPPs can find utility in a wide array of domains. To illustrate, they can find applications in financial services, gaming, social media, and various other sectors. Producing DAPPs means developing these applications. To produce DAPP, you first need to choose a blockchain platform. Platforms such as Ethereum, EOS.IO and TRON are very popular among DAPP developers. Next, you need to create smart contracts. Smart contracts are the codes that make DAPPs work. You can use a programming language like Solidity to create smart contracts. Finally, you need to test and publish DAPPs. At this point, it is advisable to employ a testing network for the purpose of testing DAPPs.
There are many different applications to build on top of EOS, blockchain technology, because we have yet to discover what this technology can really do.
Features
– High performance: EOS is a blockchain platform capable of high-speed transactions.
– Scalability: EOS aims to solve scalability problems.
– Delegation: EOS uses a delegation system.
EOS uses a delegation system. In this system, stakeholders, such as EOS holders, vote to elect delegates. These elected delegates gain authorization to produce blocks. This design aims to enhance blockchain security. The delegation system verifies transactions on the blockchain and creates blocks. In this way, the blockchain becomes faster and more secure. Moreover, the delegation system ensures the accuracy of transactions within the blockchain, making it more secure.
– Transaction fees: EOS uses a system where transaction fees are not paid by users, but are covered by block producers.
– Flexibility: EOS supports different programming languages.
– Low latency: A good user experience requires reliable feedback with a delay of no more than a few seconds. Longer latencies frustrate users and make non-blockchain applications less competitive with existing non-blockchain alternatives. The platform should support low latency of transactions.
– Sequential Performance: Some applications cannot implement parallel algorithms due to their sequentially dependent steps. Applications such as stock exchanges need sufficient sequential performance to process high volumes. Therefore, the platform should support fast sequential performance.
– Parallel performance: Large-scale applications need to divide the workload between multiple CPUs and computers. Consensus Algorithm – Delegated Proof Of Stake (dPoS) EOS uses the dPoS consensus algorithm.
This algorithm means stakeholders, specifically EOS holders, vote to select delegates, granting these chosen delegates the authority to produce blocks.
Disadvantages
– EOS.IO is less popular compared to other blockchains.
– Some users claim that EOS.IO, despite being a decentralized platform, has a centralized structure.
Corda
Corda consists of the Corda platform, an open source software project. It is the leading open, permissioned distributed application platform designed for regulated markets. The Corda platform consists of a set of standards, network parameters, and associated governance processes. This allows any organisation or individual on the open network to transact directly with any other organisation or individual. The key features of Corda are:
– Scalability: Corda aims to solve scalability problems.
– Decentralised: Corda is a decentralised platform.
– Secure: Corda is compatible with existing legal structures and compliant with existing and emerging regulations such as ISO 20022 and ISDA CDM.
– Smart contracts: Corda operates using smart contracts.
– Modular: Corda is a modular development framework. It allows you to use the capabilities you need.
– Transaction fees: Corda uses a system where transaction fees are covered by block producers, not paid by users.
– Custom: Designers tailor Corda for custom transactions.
Disadvantages
– Other blockchains are more popular than CORDA.
– Some users claim CORDA lacks sufficient decentralization.
Ripple
Built on blockchain technology, it stands as a cryptocurrency. Ripple offers a range of solutions for the financial services industry. The main features of Ripple are as follows:
– Fast transaction: Ripple can process transactions quickly.
– Low fees: It keeps transaction fees low.
– Online payment can be facilitated using Ripple.
– Decentralised: Ripple is a decentralised platform.
– High security: It is a high-security platform.
– Scalability: Ripple aims to solve scalability issues.
Disadvantages
– Other blockchains enjoy more popularity than it does.
– Some users claim that it lacks sufficient decentralization.
Smart Contract Security: Conclusion
Smart contracts, a cornerstone of blockchain technology, function as automated programs with a set of predefined rules, epitomizing Smart Contract Security. They exist as automated programs on the blockchain with a foundation of rules. Smart contracts offer advantages such as transparency, traceability, and immutability. However, smart contracts also carry some security risks. These risks include faulty coding, vulnerable coding, logic errors, and others. There are some design principles and security measures for the security of smart contracts. For example, experts recommend utilizing a modular and isolated architecture when designing smart contracts. Also, using ready-made templates can increase the security of smart contracts. Many frameworks and tools are also available for the security of smart contracts.
These tools aim to identify errors and defend against attacks by enhancing the security of smart contracts.
