How to Ensure Your ERC-20 Token Smart Contract is Secure: An Audit Checklist

ERC-20 tokens are a standard for creating tokens on the Ethereum blockchain. These tokens follow a set of rules that ensure compatibility with the Ethereum network. They are essential for various decentralized applications (dApps), Initial Coin Offerings (ICOs), and decentralized finance (DeFi) projects. The ERC-20 standard allows tokens to be traded, transferred, and used seamlessly across a wide range of platforms.

The Importance of Securing ERC-20 Tokens

ERC-20 tokens are pivotal in the blockchain ecosystem, but securing these tokens is crucial. A vulnerability in the smart contract can lead to loss of funds, disruption of project activities, or a breach of trust with users. Proper security measures protect the integrity of the token and the Ethereum ecosystem at large.

Why ERC-20 Token Security Matters

The risks associated with unsecured ERC-20 tokens are significant and multifaceted:

• Financial Loss: A compromised token smart contract can lead to the theft of user funds, which directly impacts both investors and the project team.
• Reputational Damage: A hack or security breach erodes trust and can permanently damage the reputation of a project.
• Regulatory Scrutiny: Token projects are increasingly subject to regulations. A breach may attract legal actions or regulatory penalties.

Preparing for the ERC-20 Token Audit: Foundation for Success

Before diving into the audit process, proper preparation is essential for success.

Defining the Scope of Your Token

The first step is understanding the core features and functionalities of your ERC-20 token. Establish what your token is meant to do and how it fits within the broader ecosystem. Whether it’s used in an ICO, a dApp, or DeFi project, understanding the token’s purpose will help guide the audit and ensure critical aspects are reviewed.

• Core Features: Does your token have basic ERC-20 functions such as transfer(), approve(), and transferFrom()? Are there additional features like minting or burning capabilities?
• Tokenomics: What is the total supply? Is there a specific distribution model? Are there mechanisms like staking or rewards?
• Usage and Integration: How is the token used within your platform or product? Does it interact with other smart contracts or external systems?

Choosing the Right Audit Team

An effective audit requires the right team. Choose an auditor with a strong background in smart contract security and ERC-20 token protocols. Look for auditors with the following qualifications:

• Experience: The audit team should have a history of successful ERC-20 audits and knowledge of blockchain security.
• Reputation: Read reviews and ask for references to ensure the audit firm is trustworthy.
• Methodology: Ensure the auditing team uses a combination of manual code review, automated tools, and gas efficiency checks. Comprehensive testing will identify both known and unknown vulnerabilities.

Preparing Documentation and Code

Documentation is critical for an effective audit. Without clear documentation, auditors may miss key aspects of your token’s functionality, leading to incomplete analysis.

• Whitepaper: Provide a clear and concise whitepaper that describes the purpose, features, and utility of the token.
• Technical Specifications: Include detailed documentation on the smart contract’s design, including function definitions, expected outcomes, and the token’s role in your ecosystem.
• Codebase: The smart contract code should be clean, well-commented, and modular. Properly structured code makes the audit process easier and faster.

Manual Code Review: The Heart of the Audit Process

When it comes to auditing your ERC-20 token smart contract, the manual code review is where the most critical work happens. This is the stage where you go through your smart contract line by line, ensuring everything is in place, functions as expected, and is secure.

Code Structure and Organization

Think of your smart contract as the foundation of a house. If the foundation isn’t solid, everything else can crumble. Similarly, clean, modular code is essential for maintaining a smart contract that is both secure and scalable.

• Why Structure Matters: A well-organized contract is easier to review and modify. It reduces the chances of overlooked errors that could become security risks. Breaking the contract into logical, reusable modules makes it easier to understand and maintain over time.
• Security and Maintainability: Clean code not only makes it easier to spot vulnerabilities but also ensures that developers can make future updates or improvements without introducing new bugs.
• Readability: Commenting the code and using consistent naming conventions can also help auditors identify potential risks faster. It speeds up the auditing process and reduces the chance of missing critical vulnerabilities.

Ensuring Proper Access Control

Access control is like locking your house doors and only giving the key to trusted individuals. Restricting access to critical functions is one of the cornerstones of securing your smart contract.

• Critical Functions: Functions like minting, pausing, and transferring tokens must be protected from unauthorized access. Without proper access controls, attackers could gain the ability to steal tokens or manipulate the contract’s state.
• How to Review: Make sure that functions with sensitive operations use the onlyOwner modifier or similar access control mechanisms. It’s essential to restrict the ability to mint new tokens or pause transactions to a trusted set of users.
• Example: If anyone can call the function that changes the token’s total supply, that’s a red flag. Only the contract owner or a trusted administrator should be able to do that.

State Variables and Function Visibility

Another key aspect of a smart contract audit is ensuring that state variables and functions are properly declared. Improper visibility settings can expose critical data and functions to unauthorized parties, resulting in a potential security breach.

• State Variable Visibility: State variables in an ERC-20 contract can be public, private, or internal. It’s crucial to ensure that only variables that need to be accessed externally are public.
• Risks of Improper Settings: Making a variable public when it doesn’t need to be can expose sensitive data to the public. This could potentially be exploited by malicious actors.
• Function Visibility: Functions should be properly categorized as public, external, internal, or private, depending on their intended use. Misconfigured functions can allow attackers to interact with the contract in ways that were not intended.

Validating Core Token Functions

The next step in the manual review process is to make sure that the core token functions—such as transfer(), approve(), and transferFrom()—are working as expected. These functions are the backbone of any ERC-20 token, so they need to be error-free and secure.

• Transfer Function: The transfer() function is the most basic and most used in token contracts. It should allow users to send tokens from their account to another without allowing malicious actors to exploit the function.
• Approval Mechanisms: Similarly, the approve() and transferFrom() functions should be carefully examined to ensure they don’t leave room for exploits like double-spending or reentrancy attacks.
• Exploits to Watch Out For: Look for any issues that could allow users to circumvent the normal flow, such as race conditions or the potential for reentrancy attacks.

Ensuring Proper Event Emission

Events are vital in any smart contract as they allow off-chain applications to track on-chain actions. Missing or improperly configured events can significantly undermine the contract’s auditability and transparency.

• Event Emission: Make sure that every important action (like transferring tokens, approval of funds, or changes in the contract’s state) triggers the correct event. This ensures that users, auditors, and dApp interfaces can track these changes in real-time.
• Why Events Matter: Without proper events, it becomes harder to prove that the contract is functioning as expected. Lack of event logging can also make the contract harder to debug in the future.

Using Automated Tools: Enhancing Your Audit with Technology

Automated tools have revolutionized the way audits are conducted. While a manual review is thorough, tools can catch vulnerabilities faster, giving you an extra layer of assurance.

Static Analysis Tools

Automated tools like Slither, MythX, and Oyente are essential in detecting vulnerabilities that may not be immediately obvious during manual review.

• Reentrancy: Tools like MythX can flag reentrancy vulnerabilities, which are a common attack vector in smart contracts.
• Overflow: Static analysis tools also detect issues like integer overflow or underflow that could cause unpredictable behavior in token functions.
• Handling Vulnerabilities: These tools provide instant feedback, which helps you address vulnerabilities quickly. They identify potential issues related to code structure, logic, and security.

Automated Vulnerability Detection

While manual reviews are necessary, automated tools provide scalable, quick, and effective vulnerability detection, which is critical as smart contracts grow more complex.

• Types of Vulnerabilities Detected: These tools excel at detecting common issues like reentrancy, gas inefficiency, and incorrect modifier usage—all of which can be exploited by malicious actors.
• Fast and Scalable: Automated tools work faster than manual methods and can scan large chunks of code, catching vulnerabilities that might otherwise be missed.

Integrating Static Analysis in CI/CD Pipelines

Incorporating automated static analysis into your development workflow through Continuous Integration and Continuous Deployment (CI/CD) pipelines is a best practice for ongoing smart contract security.

• Benefits of CI/CD: By integrating static analysis early in the development process, you ensure that vulnerabilities are detected as soon as they are introduced. This helps prevent security issues from snowballing into larger problems later on.
• How It Works: Use CI/CD tools like GitHub Actions or Travis CI to automatically run static analysis tools on every code commit. This enables real-time vulnerability detection, helping teams address issues immediately.

Gas Optimization: Enhancing Performance and Cost-Efficiency

High gas fees are a major concern in the Ethereum ecosystem. Optimizing your token contract can reduce costs and improve overall performance for your users.

Why Gas Optimization Matters

• High Gas Fees Deter Users: Excessive gas fees can discourage users from interacting with your smart contract, especially in token transfers. The more complex the contract, the higher the gas costs will be.
• Ethereum Network Impact: Gas inefficiency not only affects individual users but can also contribute to congestion on the Ethereum network, slowing down transactions for everyone.

Optimizing Token Functions

Certain areas of your ERC-20 contract can be optimized to minimize gas consumption, such as state variable updates, storage accesses, and loops.

• State Variables: Optimize how state variables are updated in your smart contract to reduce the gas cost of each transaction.
• Loops: Avoid loops that can cause high gas usage, especially when interacting with large data sets or multiple token holders.

Using Gas Analysis Tools

GasTracker and similar tools allow you to track gas consumption and optimize smart contracts based on the results.

• Assess Gas Consumption: These tools provide a breakdown of where gas is spent during each function call, so you can identify areas for improvement.
• Optimize for Efficiency: Use the insights provided by gas analysis tools to optimize your functions, making them cheaper to execute and improving the user experience.

Best Practices for Token Security: Safeguarding Against Attacks

Adopting SafeMath and Other Libraries

In earlier versions of Solidity, integer overflow and underflow were common vulnerabilities. For instance, subtracting 1 from 0 would result in the maximum value of the unit type, leading to potential exploits. To mitigate this, developers used the SafeMath library, which provides functions like add(), sub(), and mul() that revert transactions on overflow or underflow.

However, starting from Solidity version 0.8.0, overflow and underflow checks are built into the language, making SafeMath redundant. Despite this, some developers continue to use SafeMath for consistency or to ensure compatibility with older codebases. 

Preventing Reentrancy Attacks

Reentrancy attacks occur when a contract calls an external contract, and that external contract makes a recursive call back into the original contract before the initial execution is complete. This can lead to unexpected behavior, such as draining funds.

Checks-Effects-Interactions Pattern: To prevent reentrancy attacks, follow the Checks-Effects-Interactions pattern:

1. Checks: Validate all conditions and inputs before proceeding with any state changes.
2. Effects: Modify state variables only after validating inputs to ensure consistency.
3. Interactions: Interact with external contracts or send Ether only after updating the state.

Limiting Transaction Risks

Certain functions, like fallback functions, can introduce risks if not properly managed. Fallback functions are executed when a contract receives Ether without data, and they can be exploited if they perform complex logic or make external calls.

Best Practices:

• Restrict Fallback Functions: Limit the functionality of fallback functions to prevent unintended behavior.
• Avoid Complex Logic: Do not include complex logic or state-changing operations in fallback functions.
• Use Modifiers: Implement modifiers to restrict access to sensitive functions.

Securing Token Transfers

Token transfer functions are critical components of ERC-20 tokens. Ensuring their security is paramount to prevent unauthorized transfers and potential loss of funds.

Best Practices:

• Return Values: Ensure that transfer functions return a boolean value to indicate success. This allows calling contracts to handle failures appropriately.
• Approval Checks: Before transferring tokens on behalf of another address, verify that the spender has been approved and that the allowance is sufficient.
• Reentrancy Guards: Implement reentrancy guards to prevent recursive calls during transfers.

Formal Verification: Enhancing Contract Certainty

What is Formal Verification?

Formal verification is the process of mathematically proving that a smart contract behaves as intended under all possible conditions. Unlike traditional testing methods that check for specific scenarios, formal verification exhaustively analyzes all possible states and transitions of the contract.

Benefits:

• Comprehensive Analysis: Identifies potential vulnerabilities that may not be covered by traditional testing.
• Mathematical Assurance: Provides a higher level of confidence in the contract’s correctness.
• Regulatory Compliance: May assist in meeting regulatory requirements for critical applications.

Implementing formal verification can significantly enhance the security and reliability of your ERC-20 token smart contract.

Tools for Formal Verification

Several tools are available to assist in the formal verification of smart contracts:

• Certora Prover: A tool that compares your smart contract bytecode against a rule detailing how you expect your code to behave.
• Solidity SMTChecker: A built-in model checker based on SMT (Satisfiability Modulo Theories) and Horn solving.
• solc-verify: An extended version of the Solidity compiler that can perform automated formal verification on Solidity code using annotations and modular program verification.

These tools can help verify that your smart contract adheres to its specifications and behaves correctly under all conditions.

Limitations of Formal Verification

While formal verification offers numerous benefits, it also has limitations:

• Complexity: Developing formal specifications can be challenging and time-consuming.
• Resource Intensive: The verification process can be computationally expensive.
• Scope: Formal verification may not cover all aspects of a smart contract, such as interactions with external systems.

Testing Your ERC-20 Token: Ensuring Reliability Before Launch

Once your ERC-20 token’s code is ready and reviewed, it’s time to test its functionality to ensure everything works as expected. Testing is a critical step to identify any flaws before going live. It’s like taking a car for a test drive before hitting the road—you want to be sure everything runs smoothly.

Unit Testing

Unit testing focuses on verifying the smallest units of functionality in your smart contract. The idea here is to ensure each function or method behaves exactly as expected in isolation. For instance, testing a simple transfer() function ensures that when a user attempts to transfer tokens, the correct amount is deducted from their balance and added to the recipient’s balance.

• Why It Matters: Unit tests ensure that your contract’s basic operations work flawlessly. It’s essential to test functions like transfer(), approve(), and transferFrom() to verify they are secure and error-free.
• Best Practice: Focus on edge cases. What happens when a user tries to transfer more tokens than they hold? What if they send tokens to an invalid address? These scenarios should be tested to avoid unexpected behavior later.

Integration Testing

While unit tests ensure individual functions work, integration testing checks how these functions work together. It’s like making sure different components of an engine work well together to keep the car running smoothly.

• What It Tests: Integration testing focuses on how different smart contract functions interact with each other and with external systems (like oracles or other smart contracts). For example, testing how the approve() function interacts with transferFrom() to ensure that token allowances are properly handled.
• Importance: These tests help identify issues that may not surface during unit tests, especially those involving interactions between multiple components or external systems.

Testnet Deployment

Deploying on a testnet is the final step in testing before going live on the Ethereum mainnet. Testnets like Rinkeby or Goerli allow you to deploy your ERC-20 token in a live environment without risking real funds.

• Why It’s Essential: Testnets simulate the Ethereum network, providing a risk-free environment for testing your contract’s behavior under real-world conditions. It’s the perfect way to catch any unforeseen issues that only arise in a live scenario.
• How It Works: You deploy your contract on the testnet, perform transactions, and interact with other dApps. This step helps ensure the smart contract will function as expected when it is finally deployed on the Ethereum mainnet.

Post-Audit Actions: Final Steps Before Deployment

After a successful audit and testing phase, it’s time to prepare for deployment. However, the work doesn’t stop here. Properly addressing the findings of the audit and continuing to monitor your contract post-launch are essential for ensuring the ongoing security of your ERC-20 token.

Addressing Audit Findings

Once the audit is completed, you will receive a detailed report of any vulnerabilities, weaknesses, or improvement suggestions. It’s critical to address these findings as soon as possible.

• Prioritizing Issues: Not all issues are equal. Some vulnerabilities are critical (such as reentrancy attacks or integer overflows), while others may be minor or cosmetic. Prioritize addressing the high-severity issues first.
• Fixing the Bugs: After addressing the issues, the next step is patching them in the code and re-testing the contract to ensure the issues have been resolved. It’s essential to fix vulnerabilities before deploying the token on the mainnet to avoid security breaches.

Re-Audit for Major Changes

If you make significant changes to your ERC-20 token’s smart contract after the initial audit (such as adding new features or altering its logic), a re-audit is highly recommended.

• Why It’s Important: A re-audit ensures that the new code does not introduce any new vulnerabilities or security flaws. Even minor changes could affect the contract’s behavior, so getting a fresh review is crucial to maintain security.
• When to Re-Audit: After implementing major code changes or introducing new functions, always re-audit to confirm that everything is still secure.

Ongoing Monitoring and Security Post-Launch

Even after launching your ERC-20 token, security is an ongoing responsibility. Smart contract vulnerabilities can be discovered months after deployment, so proactive monitoring is key to keeping your token safe.

• Real-Time Monitoring Tools: Use tools like Forta or Tenderly to keep an eye on your contract’s performance in real time. These tools can help detect unusual activity or vulnerabilities in the contract once it’s live.
  • Forta: Offers real-time monitoring and alerts for security incidents, helping you detect and respond quickly to potential issues.
  • Tenderly: Provides insights into contract performance and transaction history, making it easier to track contract behavior and identify any problems early.
• Why It’s Necessary: Monitoring tools help you identify attacks, abnormal transactions, or operational issues promptly, allowing you to respond before any significant damage is done.

Building Trust Through Transparency

Once your ERC-20 token is secure and ready for deployment, maintaining transparency is crucial for building long-term trust with your users and investors.

• Sharing Audit Reports: After the audit, share the findings and the steps you’ve taken to address any issues. This transparency builds trust and shows your commitment to security.
• Engaging the Community: Communicate openly with your token holders about the audit process and any improvements made. By keeping them informed, you foster a sense of community and confidence in your token.

Conclusion

Securing your ERC-20 token is a critical and ongoing process that involves thorough auditing, testing, and post-launch monitoring to ensure the safety and reliability of your token. By following the outlined steps—defining the scope, choosing the right audit team, conducting unit and integration tests, addressing audit findings, and ensuring continuous security monitoring—you can safeguard your project from potential vulnerabilities. Blockchain App Factory provides expert ERC-20 token development solutions, offering tailored services to ensure your token is secure, efficient, and ready for deployment, while also helping you maintain long-term trust and transparency with your users.