How Can a Smart Contract Get Hacked?

Smart contracts are self-executing contracts on the blockchain. They eliminate the need for middlemen like attorneys or banks by automating the process of executing and upholding a contract’s provisions. Smart contracts can run automatically without any human involvement, are secure, and are impervious to tampering. They are appealing to people, companies, and governments looking to automate procedures and cut transaction costs because of this capability.

The capacity of smart contracts to do away with the need for middlemen can lower transaction costs, speed up transactions, and increase transparency, which is one of their main advantages. Since the data is recorded on a decentralized, impenetrable ledger, smart contracts can also offer greater security and privacy than conventional contracts.

This article dives deeper into smart contracts, explaining more about how they work and could be hacked. Readers can expect to learn the following:

• How Smart Contracts Work
• How Smart Contracts Can Get Hacked
  
  • Reentrancy Αttacks
  • Overflow/Underflow
  • Dependency on Timestamps
  • Minting and Blacklisting Tokens
  • Incorrect Calculations
  • Malicious Libraries and Dependencies
  • Front Running
• Examples of Real-world Hacks
• Prevention and Mitigation Strategies

Let’s dive right in!

How Smart Contracts Work

Smart contracts work by using coding to enforce the terms of an agreement. The contract will automatically run when the preset circumstances are satisfied once the code has been posted to the blockchain. It cannot be altered beyond that point.

For instance, if two parties agree to a smart contract for the sale of a house, once the payment is made and the blockchain verifies it, the contract will immediately transfer ownership of the house to the buyer.

Numerous industries, including finance, supply chain management, real estate, and others, might use smart contracts. Technology has the ability to change the way we conduct business and communicate with one another as it develops and is more commonly used.

How Smart Contracts Can Get Hacked

Because they can automate contractual agreements without the use of middlemen, smart contracts have been heralded as a paradigm-shifting technology. Like any technology, they are not impervious to flaws, and hackers are continuously seeking new methods to take advantage of them. The following are some of the most typical smart contract hacks:

1. Reentrancy Αttacks

Reentrancy attacks can be challenging to spot because the code seems to be operating correctly, allowing the attacker to repeatedly exploit the vulnerability until they succeed. The DAO breach, in which an attacker stole $50 million worth of ether by repeatedly taking money from the DAO contract, is one well-known instance of a reentrancy assault.

Developers can employ a variety of techniques to reduce the danger of reentrancy attacks. For example, they can create mutex locks to prohibit concurrent execution of the same contract or set gas consumption limits to stop lengthy recursive functions.

2. Overflow/Underflow 

When the outcome of a mathematical operation exceeds the bounds of a data type, integer overflow, and underflow take place. 

The consequences of integer overflow and underflow can be disastrous. For instance, a user might withdraw money and end up with a negative balance. An attacker may also create a value that is extraordinarily large in order to get around a restriction or launch a denial-of-service attack.

Developers can prevent integer overflow and underflow by utilizing data types like BigInt or uint256 that can handle huge integers. To ensure that input values are within the permitted range, they can additionally incorporate checks for boundary conditions.

3. Dependency on Τimestamps

Timestamp dependence is another issue that can result in unexpected behavior. Smart contracts can employ timestamps to validate time-sensitive circumstances, including whether a user is entitled to a payout. Attackers can take advantage of this weakness by changing the timestamp or starting a transaction at a specified moment to cause a condition to occur before it should.

Developers can confirm the validity of specific circumstances without relying on timestamps by using block numbers instead. They can also put in place time bounds to prevent contract execution beyond a certain period of time. Developers can also get precise timestamps from reliable external sources of time.

4. Minting and Blacklisting Tokens

Hackers can utilize minting and blacklisting functions in smart contracts to add, remove, or restrict user access to tokens. For instance, a hacker can produce an infinite number of tokens using a minting function, which they could then sell for a profit.

Alternatively, an attacker can utilize a blacklisting feature to deny access to particular users’ tokens, which would erode user confidence. To stop these kinds of assaults, smart contract developers must correctly construct minting and blacklisting mechanisms and rigorously test them.

5. Incorrect Calculations

In order to function properly, smart contracts depend on accurate calculations. Inaccurate estimates may have unexpected outcomes. For instance, the contract owner could lose money if a smart contract contains a calculation error that enables an attacker to get around certain restrictions or access cash they are not authorized to. Furthermore, consumers may become confused and lose trust in a smart contract if a computation error produces inaccurate token balances.

6. Malicious Libraries and Dependencies

Smart contracts frequently use libraries and dependencies from other sources. These dependencies or libraries could give an attacker access to the contract or its funds if they are malicious or compromised. An attacker could take advantage of a smart contract’s use of a library with a backdoor, for instance, in order to take over the contract. Additionally, if a library is vulnerable, the attacker can leverage the smart contract to his advantage.

7. Front Running

The act of moving ahead in the execution queue of a transaction to redeem it before a known future transaction takes place is known in the realm of blockchain and cryptocurrencies as front-running. In order to extract possible gains and cut off cash, this is frequently done by examining smart contract instructions and functions that have never been used in a smart contract previously.

When an attacker watches a swap transaction after it has been broadcast but before it has been finished, they are committing a front-running attack. They then reorder transactions to their own advantage. This is frequently achieved by a miner or bot adding their new transaction in front of the existing one right away. The malicious transaction executes before the existing transaction is finalized.

Examples of Real-World Smart Contract Hacks

Although smart contracts are designed to be secure, they have occasionally been breached or used for malicious purposes. The following are some instances of actual smart contract hacks:

• KingDice Hack 

Based on the Ethereum blockchain, KingDice is a decentralized gambling network. In August 2017, a hacker took almost $300,000 worth of Ether by taking advantage of a flaw in the smart contract code.

• Exploit of Uniswap V2

In November 2020, a hacker took advantage of a flaw in the Uniswap V2 smart contract to steal almost $300,000 worth of Bitcoin. To manipulate the price of a token and take advantage of the arbitrage opportunity, the attacker used a flash loan.

• The DAO Attack

Developed on the Ethereum blockchain, the DAO (Decentralized Autonomous Organization) was an investment fund based on smart contracts. In June 2016, a hacker stole almost $50 million worth of Ethereum from the DAO by taking advantage of a flaw in the programming. The hack caused the Ethereum blockchain to a hard fork, giving rise to Ethereum Classic.

• Parity Wallet Hack

In July 2017, a hacker took almost $30 million worth of Ethereum by taking advantage of a flaw in the Parity multi-sig wallet. Because of a bug in the smart contract programming, the hacker was able to take control of the wallet and move all of the money to another account.

Prevention and Mitigation Strategies

Developers can use the following recommended practices to create safe smart contracts:

1. Using well-established and audited libraries and dependencies. Using well-established and audited libraries and dependencies can help to lower the risk of introducing vulnerabilities into a smart contract. The usage of untested or untrusted code should be avoided, and developers should carefully check the security of any third-party code they utilize.
2. Implementing boundary condition checks. Smart contracts should implement boundary condition checks, including maximum and minimum input parameter values. By doing this, integer overflow and underflow attacks may be reduced. The effectiveness and widespread use of smart contract technologies depend on the prevention and mitigation of smart contract attacks.
3. Using well-established and audited libraries and dependencies can help to lower the risk of introducing vulnerabilities into a smart contract. The usage of untested or untrusted code should be avoided, and developers should carefully check the security of any third-party code they utilize.
4. Avoiding timestamp dependencies. To lower the chance of timestamp manipulation, developers should refrain from using timestamps as the only foundation for carrying out smart contract logic. When specific requirements are met, they can employ alternate techniques like block numbers or block hashes.
5. Comprehensive testing. Finding and repairing smart contract vulnerabilities depend on comprehensive testing. Unit and integration tests should be run by developers to confirm that the contract works as intended and to identify any potential problems early on.
6. Implementing minting and blacklisting functions correctly. Developers should take care while implementing minting and blacklisting functions in order to prevent unwanted access and manipulation.
7. Ensuring accurate calculations. The proper operation of smart contracts depends on accurate calculations. When performing difficult mathematical operations, developers should use proven libraries and make sure their calculations are accurate.
8. Security audits. Security audits are a useful technique for locating weaknesses in smart contracts. Before deploying their smart contracts, developers can hire smart contract audit companies to audit them. Such audits can help teams to find and fix any potential problems before the code goes into production.
9. Formal verification. It is a mathematical technique for confirming the accuracy of a smart contract. This method can assist in ensuring that a smart contract performs as planned and is secure.
10. Bug bounties. Security researchers are encouraged to uncover and report smart contract flaws by offering bug bounties. In order to find and fix potential problems, developers can access a vast pool of security experts by paying them to find vulnerabilities.

Conclusion

In conclusion, while smart contracts offer a revolutionary way to automate transactions on the blockchain, they are vulnerable to hacking and security breaches. Developers must adhere to recommended practices like smart contract audits and security testing to prevent smart contract hacking.

Developers can assure the long-term health of blockchain technology and create a trustworthy ecosystem for all users, free from the dangers of smart contract hacking. They can achieve such an outcome by putting in place procedures like bug bounties, formal verification, and security audits. In the end, prioritizing security is essential for the development of smart contracts and the blockchain sector.