
<p>Many cryptocurrency users often face a dilemma when choosing options to store funds: use a custodial or non-custodial wallet? Custodial wallets (issued and controlled by centralized exchanges) promise ease of use but require trusting a third party. Non-custodial wallets offer security and reduce trust assumptions, but are difficult to use for average users.</p>



<p>But what if there was another means of storing cryptocurrencies that provides ease of use <em>and</em> security? Smart contract wallets are designed for this purpose. This article will explore smart contract wallets in detail: how they work and what benefits and drawbacks users should expect.&nbsp;</p>



<h2>How do smart contract wallets work?</h2>



<p>A smart contract wallet is a wallet managed by a contract account instead of an EOA (Externally Owned Account). A brief refresher on the types of Ethereum accounts:</p>



<p><strong>Contract Account</strong>: A contract account is controlled by logic programmed into the code. It has no associated private key and cannot initiate transactions, but it can execute operations (eg. calling another contract or transferring funds) after receiving transactions from an EOA.&nbsp;</p>



<p><strong>Externally Owned Account (EOA)</strong>: An Externally Owned Account (EOA) is controlled by an associated private key. The key holder can initiate transactions with an EOA or contract account as the recipient. EOAs are limited to basic functionalities (e.g., transfers) since no code is stored in the account&#8217;s state.&nbsp;</p>



<p>Many wallets today are managed by EOAs, which is how users can transfer Ether (ETH) and other tokens from a wallet by signing transactions with a private key. In contrast, smart contract wallets (also called smart wallets) are controlled by contract code instead of a private key.&nbsp;</p>



<p>The contract code defines how funds can be accessed, by whom, and under what conditions. Moreover, as smart contracts are programmable, smart wallets are often designed with more advanced features than traditional wallets.&nbsp;</p>



<p>While smart contract wallets work differently, most share a similar workflow to the process described below:</p>



<p>1. After signing up with a smart contract wallet provider such as Argent or Instadapp, a new wallet contract is deployed on the Ethereum network. Note that the user needs to sign up for the service with their regular EOA.&nbsp;</p>



<p>2. The user&#8217;s original EOA is set as the owner or admin of the contract account tied to the smart wallet. Thus, to access funds stored in the wallet, users initiate a regular transaction, and sign with their private key, with the wallet contract as the target. Since the smart contract stores the user&#8217;s wallet address, it can easily verify if a new request comes from the owner.&nbsp;</p>



<p>3. Many smart contract wallets offer users the option to skip paying gas (denominated in ETH) for transactions. This is possible through <a href="https://github.com/ethereum/EIPs/blob/master/EIPS/eip-1077.md">meta-transactions</a> in which a user signs a transaction off-chain, while a third-party (called a relayer) broadcasts it on-chain for execution. Typically, users can refund the relayer in ETH or tokens (automatically deducted from the smart contract wallet).&nbsp;</p>



<h2>Benefits of smart contract wallets&nbsp;</h2>



<h3>Ease of use</h3>



<p>Smart contract wallets require less effort to use than traditional wallets. For example, smart wallets like Argent can be recovered without a seed phrase. This process, described as social recovery, works by letting users set some trusted parties (e.g., friends and family) as &#8220;Guardians&#8221;.&nbsp;</p>



<p>If a user&#8217;s phone is lost or stolen, a new operation changing the ownership of a smart contract wallet can be initiated and signed by a quorum of guardians. This way, users don&#8217;t need to memorize long mnemonic phrases or take great pains to store seed phrases in a safe place.&nbsp;</p>



<h3>Advanced security features</h3>



<p>The programmable nature of smart contract wallets lets developers design complex safety features to protect user funds. In comparison, the safety of an EOA-controlled wallet relies solely on the security of the private key—if the key is lost or stolen, users have no way of accessing funds.&nbsp;</p>



<p>For instance, some smart contract wallets allow users to set daily limits on transfers, limiting the possibility of attackers stealing all funds in one transaction (i.e., after stealing a user&#8217;s private key). Other security features available on smart wallets include:</p>



<ul>
<li>Requiring trusted parties to approve transactions</li>



<li>Allowing a trusted party to lock the smart wallet if the owner&#8217;s device is misplaced or compromised</li>



<li>Creating a whitelist of addresses that can receive funds from a wallet&nbsp;</li>



<li>Using two-factor authentication (2FA) to protect against unauthorized wallet access&nbsp;</li>
</ul>



<h3>Access to complex functionalities</h3>



<p>Having a wallet built as a smart contract provides access to more complex functionalities like interacting with DeFi applications. DeFi Saver and Instadapp are two examples of smart wallets designed for advanced use cases.&nbsp;</p>



<p>Both wallets come with integration to on-chain lending and trading markets (e.g., Compound, Uniswap, and Maker) and let users perform complex interactions, and batch multiple calls, in one operation. As an example, DeFi Saver offers &#8220;recipes&#8221;—bundled actions that allow for, say, borrowing Dai from Maker or contributing liquidity to Compound Protocol.&nbsp;</p>



<p>With a regular wallet, users are limited to basic payments and must undergo a cumbersome process when interacting with DeFi applications. Smart contract wallets integrate with dApps seamlessly, making them a better option for expert users.&nbsp;</p>



<h2>Disadvantages of smart contract wallets&nbsp;&nbsp;&nbsp;</h2>



<p>While smart contract wallets certainly have many benefits, they also have a few drawbacks. The disadvantages of smart contract wallets can be grouped broadly under security risks and administrative overhead.&nbsp;</p>



<h3>Smart contract wallet security risks&nbsp;</h3>



<h4>Errors in smart contract code</h4>



<p>Smart wallets rely heavily on smart contracts, which increases the attack surface for users. For example, a bug in the wallet contract might leave users unable to access funds, while a vulnerability in contract code can lead to attackers stealing funds from the wallet.&nbsp;</p>



<p>Private-key wallets are much simpler and less susceptible to various security issues that can affect a smart contract&#8217;s operation. As long as the private key remains safe, no one can transfer funds out of the wallet without the user&#8217;s approval. This is true, even if the underlying blockchain suffers a <a href="https://halborn.com/what-is-a-51-percent-attack/">51% attack</a>.&nbsp;</p>



<h4>Malicious counterparties&nbsp;</h4>



<p>Unlike an EOA wallet exclusively controlled by a single user, smart contract wallets rely in part on other (trusted) third parties to work properly. This may include accounts participating in <a href="https://halborn.com/what-is-a-multisig-wallet-and-how-do-i-create-one/">multisignature validation</a> and account recovery/locking as well as transaction relayers. While this setup is crucial for smart wallet operations, it can introduce counterparty risk—especially if those parties act maliciously.&nbsp;</p>



<p><strong>Malicious relayer</strong>: A malicious relayer can censor a user&#8217;s transaction by (a) refusing to execute transactions and (b) <a href="https://github.com/KadenZipfel/smart-contract-attack-vectors/blob/master/attacks/insufficient-gas-griefing.md">griefing users</a> by using a small amount of gas such that some part of the call, but not all, executes. In the latter case, the transaction would revert on-chain, but users would still be required to pay for gas used.&nbsp;</p>



<p><strong>Malicious guardians</strong>: Argent pioneered the use of guardians—trusted parties that can validate transactions and control access to a user&#8217;s account. This can, however, cause problems if one or more guardians are malicious. A set of malicious guardians can take some or all of the following actions:</p>



<ul>
<li>Refuse to approve transactions that require a threshold of signatures to execute&nbsp;</li>



<li>Refuse to participate in account recovery and deny users access to funds&nbsp;&nbsp;</li>



<li>Collude to transfer ownership of the wallet to another account (which is not controlled by the user) and authorize illegal withdrawals/transfers&nbsp;</li>
</ul>



<h3>Administrative overhead&nbsp;</h3>



<p>Using smart contract wallets involves a steeper learning curve than regular wallets. Users must get used to performing actions like requiring approval for transactions, granting and revoking access to trusted accounts, using relayers, and so on.&nbsp;</p>



<p>Furthermore, using a smart contract wallet often requires users to pay more gas when executing transactions. Transactions from contract wallets have more data and trigger more complex computation in the EVM. Storage and compute resources are expensive, which explains the high costs associated with using smart contract wallets.&nbsp;</p>



<h2>Conclusion&nbsp;</h2>



<p>Smart contract wallets represent a breakthrough in wallet technology—one that combines ease of use and efficiency with security. Importantly, smart wallets decrease the difficulty of self-custody for new cryptocurrency users and reduce the complexity of interacting with DeFi protocols.&nbsp;</p>



<p>Nevertheless, smart wallets still have their drawbacks as in the article. From counterparty risk to flaws in contract code to administrative overhead, smart contract wallets are riskier than simple EOA-controlled wallets. Smart wallet owners are also not immune to classic attacks like <a href="https://halborn.com/what-is-phishing-attack-techniques-and-examples/">phishing</a> or <a href="https://halborn.com/stolen-keys-3-ways-you-can-keep-your-private-keys-safe/">private key theft</a> that can result in lost funds.&nbsp;Some of these risks can be mitigated—for example, by using trusted relayers and ensuring that wallet contracts have been <a href="https://halborn.com/smart-contract-audits-5-reasons-your-blockchain-project-needs-one/">extensively audited</a>. Moreso, you can avoid counterparty risk by using another account (e.g., a Ledger/Trezor wallet or MetaMask account) as a trusted party instead of another human. Finally, the same <a href="https://halborn.com/4-ways-to-protect-your-cryptocurrency-wallet-from-hacks/">best practices for protecting traditional wallets</a> (e.g., keeping private keys safe) apply to smart contract wallets.</p>


Web3 security firm Halborn explores smart contract wallets in detail: how they work and what benefits and drawbacks users should expect. 

What Is a Smart Contract Wallet?


<p>Smart contracts lie at the heart of DeFi and other blockchain-based solutions.  The massive amounts of value that these contracts control means that the impact of programming errors and vulnerabilities can be significant.</p>



<p>Smart contracts can contain a number of different types of vulnerabilities.  One concept that Solidity developers commonly struggle with is how to properly handle errors in smart contracts hosted on the Ethereum network.</p>



<h2>Handling Failed Calls in Solidity</h2>



<p>Smart contracts are programs, and, like in any program, errors can occur.  This makes error handling code an essential part of any smart contract.</p>



<p><strong>One of the challenges of error handling in Solidity is that developers have two ways of implementing it. </strong> When writing code that integrates with other smart contract functions, it is important to know if they are using reversion or return values to manage error cases.</p>



<ol>
<li><strong>Reversion</strong></li>
</ol>



<p>One option for a failed function call in Solidity is to revert.  A reversion essentially signals that the code suffered from an unrecoverable error.</p>



<p>If a function reverts in Solidity, the entire execution state of the transaction is rolled up.  This makes it as if the transaction containing the call to the failed function never happens.  However, the account performing the transaction still forfeits their transaction fees because the nodes in the blockchain network still expended resources trying to run it.</p>



<p>Reversion is probably the safer of the two options for error handling.  If a function reverts, there is no opportunity for the calling function to “recover” from the error.  This reduces the probability that a smart contract will end up in an invalid state where the called function failed without the calling function noticing.</p>



<ol start="2">
<li><strong>Returning False</strong></li>
</ol>



<p>The other option for error handling in Solidity is to use function return values.  A function can return a value of <strong>true</strong> if it succeeds, or <strong>false</strong> if it does not.</p>



<p>This approach to error handling provides a more stable and usable system.  Depending on the error that the called function experiences, it may be possible for the calling function to recover.  If not, the calling function may be able to fail gracefully, preserving any previous, successful actions that were not impacted by the failure of the called function.</p>



<h2>Best Practices for Solidity Error Handling</h2>



<p>Solidity has two methods of handling errors for a reason.  Both of them are valid and have their advantages and disadvantages.  The right choice for a particular smart contract can depend on its function and norms within the space.  </p>



<p>For example, the use of reversion is the more common option for ERC20 tokens because that is how OpenZeppelin implemented its ERC20 token.</p>



<p>However, even if a smart contract has selected a standard for implementing error handling (i.e. always reverting or always returning false), it is best practice to always perform checks on return values for function calls.</p>



<p>Even if error handling code triggered by a return value of false should never be reached, it’s better to have it and not use it than to not have it if something goes wrong.  Assuming that a called function will revert on failure has enabled a number of smart contract hacks, including that of the <a href="https://halborn.com/explained-the-forcedao-hack-april-2021/">ForceDAO DeFi aggregator</a>.</p>



<h2>Ensuring Smart Contract Security</h2>



<p>Smart contract platforms and languages &#8211; such as Ethereum and Solidity &#8211; are relatively new.  Many developers have not had the opportunity to learn the quirks of these tools to the same degree as they have for more established platforms.</p>



<p>As a result, smart contract vulnerabilities are common, and exploiting them can lead to significant losses.  For this reason, it is always best to undergo a comprehensive security audit before launching any smart contract on the blockchain, especially if it is designed to store and process large amounts of cryptocurrency.</p>



<p><br />To book a consultation with a Halborn blockchain security rep, get in touch at <a href="mailto:halborn@protonmail.com">halborn@protonmail.com</a>.</p>


Halborn discusses why Solidity developers struggle with how to properly handle errors in smart contracts hosted on the Ethereum network.

Understanding Error Handling Vulnerabilities in Solidity


<p>Not that long ago, when someone said “contract”, they were referring to a document written to be difficult to understand and that defined a relationship between two or more parties.  Now, depending on context, the word contract can mean something else.</p>



<p>After Satoshi Nakamoto created the blockchain with the introduction of Bitcoin, people have been building on the concept to expand its capabilities.  One of the bigger innovations built on blockchain is the <strong>smart contract platform</strong>, which implements a “world computer” that runs on top of the blockchain.</p>



<h2>How Smart Contract Platforms Work</h2>



<p>A blockchain is designed to create a distributed and decentralized digital ledger.  Unlike existing systems, the blockchain doesn’t need a centralized authority to define the “official” version of the digital ledger.  The blockchain network works together to add new data to the ledger and ensures that each node’s independent copy of the ledger is in agreement.</p>



<p>Bitcoin was designed to store financial transaction data on the ledger, but a digital ledger can store other types of information as well.  Smart contract platforms use the digital ledger to organize and store code that runs on the “<strong>world computer</strong>”.</p>



<p>Each node in the network stores a copy of the distributed ledger, meaning that, with the creation of each block on the blockchain, they get a copy of the code that it contains.  Each node in a smart contract platform also has a copy of a virtual machine (VM) designed to run this code.  If every node in the network runs the exact same code on identical VMs, they should receive the exact same result.  This makes it possible to create a “world computer” built using completely distributed and independent nodes.</p>



<h2>Blockchain and the Smart Contract</h2>



<p>Smart contract platforms make a world computer possible by ensuring that independent nodes can run code and get the same result.  <strong>Smart contracts are the programs that these nodes run.</strong></p>



<p>The details of smart contract platforms and smart contracts can vary significantly from one implementation to another.  Some, like Ethereum, have custom programming languages and virtual machines written specifically for them.  Others, like EOS.IO, use existing programming languages (like C++) to make themselves more accessible to developers.</p>



<p>Regardless of the details, smart contract platforms work similarly at a high level.  The code to be run is stored in transactions, which is run by nodes in their copies of the VM.  This makes a distributed, decentralized “world computer” possible.</p>



<h2>Blurring the Lines Between Legal and Smart Contracts</h2>



<p>Legal contracts and smart contracts are different things, but they may not necessarily stay that way.  Some blockchain projects are pursuing the concept of a <strong>Ricardian smart contract</strong>.</p>



<p>A Ricardian smart contract is a legal contract that is implemented as executable code.  This allows the contract program to be run and automatically enforced, rather than legal contracts only being enforceable in a court of law.</p>



<p>While smart contracts are currently capable of defining relationships between parties, they’re currently written solely by programmers.  Ricardian smart contracts may make these programs more accessible to lawyers and other people, expanding their adoption.</p>



<h2>Securing Smart Contracts</h2>



<p>The use of smart contracts is growing rapidly.  Smart contract platforms like Ethereum are struggling to scale to meet demand, and smart contracts are central to the decentralized finance (DeFi) movement.  These contracts encode relationships and have the ability to transfer and store massive amounts of value.</p>



<p><br />As smart contracts become more widely used and valuable, securing them grows as a priority.  The recent rash of DeFi hacks underscores the importance of security audits for smart contract security. Contact Halborn today at <a href="mailto:halborn@protonmail.com">halborn@protonmail.com</a> to inquire about our smart contract security audits.</p>


Smart contracts are central to the DeFi movement. But what are they? Cybersecurity firm Halborn explains.

What Is a Smart Contract?


<p>Distributed applications (DApps) are designed to take advantage of the decentralization offered by blockchain systems.&nbsp; Instead of relying on a traditional web hosting platform &#8211; with its associated concerns about centralization and resiliency &#8211; DApps host their backend code on the blockchain as smart contracts.</p>



<p>For DApp developers, security can be a significant concern.&nbsp; Blockchain’s immutable ledger means that a poorly-designed smart contract can be difficult to repair and that any successful attack against a vulnerable contract is irreversible.</p>



<p>However, many DApp developers are not doing enough to ensure the security of their applications.&nbsp; While a smart contract code audit is an important first step in securing a DApp, it is not enough to guarantee the application’s security.</p>



<h1>Smart Contract Audits Are Not Enough for DApp Security</h1>



<p>Many DApps are deployed with only a smart contract audit for security (if any security testing is performed at all).&nbsp; However, this type of security assessment misses a number of potential risks to the security of the DApp.</p>



<h2>Infrastructure Considerations</h2>



<p>Smart contract security audits are designed to identify common vulnerabilities within the DApp’s smart contract code.&nbsp; Common things that auditors look for include access control issues, integer overflows and underflows, reentrancy vulnerabilities (for Solidity smart contracts), and similar issues.&nbsp; These issues often have known patterns that can be easily identified within an application’s code.</p>



<p>However, smart contracts can also contain vulnerabilities that are not visible in the code.&nbsp; These applications run on top of a distributed ledger platform, which is a very different environment from a traditional computer.&nbsp; These differences create the potential for attacks at the platform-level that exploit assumptions made within a smart contract.</p>



<p>For example, decentralized finance (DeFi) smart contracts can be vulnerable to frontrunning attacks, where an attacker observes a transaction and creates a competing transaction that is processed first (due to a higher transaction fee or sympathetic miner).&nbsp; These attacks are possible due to the transaction-based nature of blockchain and enable an attacker to cheat the system and make a guaranteed profit.</p>



<p>Ethereum’s vulnerability to frontrunning <a href="https://cointelegraph.com/news/ethereum-vulnerable-to-frontrunners-researcher">was “discovered” in August 2020</a>.&nbsp; However, similar attacks <a href="https://hackernoon.com/front-running-bancor-in-150-lines-of-python-with-ethereum-api-d5e2bfd0d798">were performed over three years earlier</a> in the Bancor smart contract.&nbsp; This vulnerability exists because smart contracts run on Ethereum, not because of an issue in a code.&nbsp; As a result, a smart contract audit is unlikely to discover this issue even if the potential vulnerability hadn’t been “forgotten” for three years.</p>



<h2>Web Application Security</h2>



<p>DApps are implemented in two parts, just like any other web application.&nbsp; The DApp backend is implemented as a smart contract, while the frontend is implemented as a web application that makes calls to the smart contract backend.</p>



<p>Smart contract audits only assess the security of the DApp’s smart contract backend, meaning that they overlook any potential vulnerabilities in the web application code and its connections to the smart contract.&nbsp; Unless an assessment includes vulnerability testing for the frontend as well, it only covers less than half of the potential attack surface.</p>



<h1>Effectively Securing Distributed Applications</h1>



<p>Smart contract audits cover only one layer of the blockchain ecosystem and entirely ignore external applications that the contract may interface with.&nbsp; This means that they are woefully inadequate at assessing the true vulnerability of a DApp to exploitation.</p>



<p>An accurate DApp security assessment requires a comprehensive penetration test as well as a smart contract security audit.&nbsp; This enables the auditors to identify all potential attack vectors against the DApp, not just the ones that are visible in the DApp’s smart contract backend code.</p>


Distributed applications (DApps) are designed to take advantage of the decentralization offered by blockchain systems.&nbsp; Instead of relying on a traditional web hosting platform &#8211; with its associated concerns about centralization and resiliency &#8211; DApps host their backend code on the blockchain as smart contracts. For DApp developers, security can be a significant concern.&nbsp; Blockchain’s

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