How to Perform a Blockchain Audit?

IT project development is rather labor-intensive work that requires many human resources. There are many ways to control a project. One of them is an audit. An audit is designed to reduce risks, reduce costs, or obtain a third-party project assessment. An internal audit is carried out by a service within the development company to analyze the company’s functioning to assist management. The task of an external audit is an objective assessment and control of the management’s actions and the project itself.

One of the important functions of an external audit is a requirements audit. Requirements exist and change throughout the project. Each change must be controlled and confirmed so that there are no disagreements between the customer and the contractor on the fact of the work performed. To do this, an external person from a neutral organization-auditor is invited and certifies all actions to change the requirements. A Blockchain code audit is the systematic and structured code review of a blockchain development project which is executed manually.

Blockchain Security Audit Process

There are many ways to store data. One of them is blockchain technology. It allows you to create distributed stored data with transaction confirmation, a guarantee of stability, and, most importantly, immutable history of actions. However, in the usual sense, the blockchain is open, and all network participants are equal, which does not fit the concept of our task. But the technology is not limited to the public bitcoin blockchain or digital assets. There are wide varieties, such as the blockchain, for example. It allows you to set the rights of participants in the network and create smart contracts that make it possible to describe the interaction of users with the storage. 

One of the important features of a blockchain audit is the ability to choose consensus, that is, the choice of an algorithm by which transactions are confirmed or rejected, which makes it possible to guarantee the operation of the blockchain code audit even in extreme conditions.

Blockchain Audits Technology

Blockchain is a type of secure database that maintains a constantly growing list zap and this. Each of the records or blocks takes a link to the previous blocks. This makes them inherently resistant to modification by external sources. But are blockchain fundamental security deficiencies? What’s more, does cybersecurity improve the economy and security?

Using a distributed ledger and removing the risk of a single point of failure, blockchain provides end-to-end Confidentiality and Encryption, Ensuring Convenience for smart contracts using static code analysis tools.

One such example is Estonia, a leader in implementing e-government services. Georgia also proved itself and was one of the first countries to transfer the entire land cadastre of the country to the blockchain audit process.

The blockchain audit of today is:

• A decentralized system of mutual relations;
• Trust between participants in the whole ecosystem;
• High speed of interaction with clients and validation processes;
• Synergy effect;
• A large number of tools;
• Risks minimization for a system;
• Safety for every smart contract.
• Easy assurance process at all stages

Modern audit scope offers a different approach to storing information, making transactions, performing functions, and establishing trust, making it particularly suitable for environments with high security and security requirements and mutually unknown entities.

The foundation of a blockchain security audit is a decentralized system that has proven to be the best than a centralized one, which is vulnerable to attacks or any risks.

How are blockchains verified?

Typically, an audit company takes the following steps: 

1. Initial verification and analysis of the smart contract code; 
2. Providing a report for troubleshooting smart or finding bugs;
3. The project team makes adjustments to the smart contract code; 
4. Re-validation and report controls of the system. 

As a result, the project receives verification or rejection of the smart contract verification.

As former US Treasury Secretary Larry Summers said in one financial report, “I am confident that blockchain will change a significant part of financial practices, financial statements, and exchanges. In 40 years, blockchain audit and everything connected will occupy a more prominent place than bitcoin.”

However, smart contracts are checked not only for fraud on the part of the project developers. The project can easily be hacked if the contract code is inaccurate or vulnerable. And hackers will steal millions of dollars from users who decide to invest in a crypto project w/o any risk. That is why auditors, first of all, look for vulnerabilities to hacker attacks because blockchain transactions are irreversible. If attackers steal funds from a smart contract, the project developers will never return them. 

Blockchain as an Audit Technology

Blockchain audit could impact almost every sector of the economy in the future, but its main application currently lies within transaction-based financial services.

One of the main advantages of this service type is a high-security level. Since information about each transaction is cryptographically stored in a distributed ledger, it is almost impossible to fake any info or smart contract.

Blockchain Сlassification

At its core, a blockchain is a distributed database in which all changes are recorded in the form of a chain of blocks. At the same time, the very structure of the blockchain implies different levels of access to information. Therefore, this parameter is used as a criterion for the classification of blockchains audit, which is conditional since the principle of blockchain technology is the same. So, based on this criterion, there are several versions of the classification of blockchains, for example, Canadian and British auditing.

Сanadian Blockchain Technology

The Canadian version is based on the vision of the creator of the Ethereum blockchain platform, Canadian Vitaly Buterin. Its classification assumes the presence of 3 types of blockchain:

1. A public blockchain is a chain of blocks that can be “read” by anyone worldwide. Also, anyone can submit transactions, wait for them to be enabled if they are valid, and participate in the consensus process (the process to determine which blocks are added to the chain and what the current state of the network is). As a substitute for centralized or quasi-centralized trust, public blockchains are protected by a combination of economic incentives and cryptographic verification using mechanisms such as proof-of-work or proof-of-stake, by the principle that the degree of influence of participants in the consensus process is proportional to the number of economic resources that they can use. These blockchains are generally considered to be fully decentralized.
2. A consortium blockchain is a blockchain in which a pre-selected set of nodes controls the negotiation process. For example, imagine a consortium of 15 financial institutions, each of which operates a node, and ten must sign each block to be valid. The right to read the blockchain can be public or limited to participants. Such a blockchain can be considered “partially decentralized.”
3. A fully blockchain (completely private blockchain) is a blockchain characterized by a limited level of access to data. Confirming transactions in such networks, auditing, and database management are available to a well-defined circle of people. If we talk about the right to read data, it can be both public and completely limited.

British Blockchain Ledgers

The British version is based on a report by Mark Walport, chief scientific adviser to the UK government. In his report Distributed Ledger Technology: beyond block chain on distributed ledgers and the potential of blockchain in government, he divided the blockchain into three types:

1. Unpermissioned public blockchain ledger – open public registries.
2. Permissioned public blockchain ledger – closed public registries.
3. Permissioned private blockchain ledger – closed private ledgers.

This classification is identical to the one given by Vitaly Buterin. In it, the Public Blockchain analog in the British version is Unpermissioned public ledgers, the Consortium Blockchain analog is Permissioned general ledgers, and the Fully Blockchain analog is Permissioned private ledgers. 

Moreover, the report proposed a small test, “Classification of distributed registries’, ” which allows you to determine what type this or that auditing blockchain to independently.

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