Smart Contracts on Blockchain: A Double-Edged Sword of Efficiency and Vulnerability

Posted in Crypto Asset Compliance on May 27, 2024
Smart Contracts On Blockchain

Smart contracts on blockchain are transforming the landscape of digital transactions by providing an efficient, transparent, and secure mechanism for automated self-executing agreements, yet their potential vulnerabilities call for increased focus on the security and resilience of their coding and governance protocols.

A smart contract is a programmable and self-executing agreement deployed on a blockchain. In other words, smart contracts execute transactions and activities based on sets of predefined rules and conditions. 

For example, using a smart contract, a digital art creator can program terms and conditions that would govern interactions with buyers and determine the validity of purchases on the blockchain. The smart contract can be designed such that the digital art is only released to the buyer once payment is made. As an extra caveat, the digital artist can introduce royalty clauses to the smart contract so that a fixed percentage of the secondary sales of the artwork goes to its original creator. 

In this scenario, the digital artist does not have to worry about validating transactions manually nor about tracking future changes in ownership to enforce royalty fees. Instead, the smart contract self-executes the terms and conditions originally set by the artist. 

As such, the need for a third party is eliminated. Where there are no third parties, the process is generally faster, cheaper, more efficient, and more transparent. This, coupled with the immutability of the blockchain, makes smart contract-enhanced solutions even more attractive. Not only does a smart contract reduce counterparty risks but it also eliminates the possibility of data tampering.

Smart Contracts On Blockchain

Smart Contracts on Blockchain

The implementation of smart contract-enabled blockchain applications is a crucial talking point in several other industries, including the health sector, the art world, and the supply chain industry.

More often than not, the high-profile incidents of security in the DeFi sector are enabled by the vulnerabilities in smart contracts rather than by the exceptional programming skills of hackers. In the year 2020, more than 100 million worth of tokens were reported as stolen from the DeFi sector. These hacks accounted for about 50% of all the security mishaps in the crypto industry. It highlights that smart contract protocols are increasingly singled out as a potential inroad by criminals.

It would not be appropriate to ignore the vulnerabilities or risks that come with autonomous programs when they are tasked with managing the funds of users. The benefits of self-executing agreements sound, they are programmed by humans and are susceptible to errors. The resilience of a smart contract depends heavily depends on the coding of developers. 

The coding of smart contracts requires a strong level of knowledge that blockchain developers usually lack. Because DeFi is open-source, any developer can repackage an existing coding protocol, make a flashy name and start selling the tokens to users. The developers do not go the extra mile to confirm that their programming codes are free from bugs and errors. 

Unfortunately, once such protocols are launched, it is almost impossible to fix the errors because the governance protocols usually require users to vote before any change is made. To identify the problem and propose a viable solution, it may be too late, therefore, whenever users subject their funds to such protocols, they risk losing the funds because of associated security vulnerabilities. 

Smart Contracts On Blockchain

Final Thoughts

As we continue to embrace the digital revolution, smart contracts, powered by blockchain technology, have emerged as a powerful tool, streamlining transactions, and eliminating the need for third-party intermediaries. Their adoption across various sectors, from the art world to healthcare and supply chain, is a testament to their efficiency, cost-effectiveness, and transparency. However, it’s important to tread with caution, as these automated and autonomous agreements are not without their flaws.

They are as perfect or as flawed as the humans who program them, and their open-source nature can expose potential vulnerabilities, often exploited by malevolent actors. While smart contracts bear the potential to revolutionize various sectors, their security and resilience should be of paramount concern, urging us to invest more in robust programming and stringent governance protocols.