How the Euler Finance Hack Occurred and Why Smart Contract Audit is Necessary?

Have you heard of a huge flash loan attack that hit a DeFi lending platform, Euler Finance, on 13 March 2023, just recently? It is estimated that $200 million were lost. This proves not only the gaps that could have been associated with the DeFi protocols but also the need for smart contract audits with even greater thoroughness.

Now, let’s speak about the conditions that made the hack possible and the necessity of contacting a smart contract audit company for the security of blockchain applications.

Understanding Euler Finance

Euler Finance is an on-custody, permission-less lending protocol through which users can lend and borrow any variety of major cryptocurrencies. Key to the protocol is that when a user deposits assets into the protocol, in return, they receive tokens that represent their rail and debt. This protocol is architected in such a way that while it makes lending and borrowing efficient, it does introduce many complications that create vulnerabilities in the absence of a smart contract security audit expert. 

The Mechanics of the Hack

The attack was carried out using a flash loan, an uncollateralized loan that must be paid back within a single transaction. For this particular incident, a flash loan of around 30 million DAI originated from Aave, one of the most popular decentralized lending systems.

Here’s a step-by-step breakdown of how the hack unfolded:

1. Flash Loan: Attacker called a 30 million DAI flash loan from Aave, which allowed him to borrow such a high value without any collateral.
2. Smart Contract Deployment: The attacker deployed several smart contracts to complete the attack. Among these was the primary contract, the Violator, which perpetrated the attack, and the Liquidator contract to liquidate the account of the Violator.
3. Front-run and Steal: Now, the attacker placed 20 million DAI into Euler Finance and exchanged these standard tokens into eDAI tokens. Unluckily, the donateToReserve function was exposed and did not contain checks that took into account liquidity; therefore, the attacker could have built some method of bypassing coverage of his debt. This gave the attacker a method to donate tokens while not holding debt coverage high enough.
4. Liquidation and Withdrawal: The attacker was able to leverage withdrawals through the health score mechanism meant to maintain solvency in accounts as a conduit for large assets siphoning out of the protocol. This resulted in almost $200 million of a loss of value across a wide spectrum of cryptocurrencies, including staked Ether (stETH), wrapped Bitcoin (wBTC), and USD Coin (USDC).

The Aftermath

The Euler Finance hack has been a perfect example of why one needs a smart contract audit services company. A smart contract audit is an extensive review of vulnerabilities, bugs, and potential exploits in the blockchain application code. 

The attack was carried out in a string of transactions, with the hacker exploiting a bug in the protocol’s liquidation logic. Flash loans enabled an attacker to manipulate artificially the prices of assets and force unauthorized liquidations that siphoned off money from the protocol.

It just goes to point out the vast complexity that many DeFi protocols have accrued, and several risks with the vulnerability of smart contracts. Euler Finance had gone through multiple audits, but this was able to slip through; thus, the need for a periodic and intensive smart contract security audit is emphasized.

Why Performing a Smart Contract Audit Is Essential?

• Identifying Vulnerabilities

Selecting a reliable smart contract audit company will lead to the discovery of vulnerabilities that could otherwise have remained a secret to be exploited by the attackers. One of the crucial mistakes in the case of the Euler Finance project was the lack of checks for liquidity in the critical donateToReserve function, which could be caught with proper auditing.

• Ensuring Code Quality

A smart contract security audit includes not only the elimination of vulnerabilities but also an analysis of code quality concerning gas optimization, performance enhancement, and best practices.

• Building Trust

A well-done smart contract audit ensures security and transparency. A project that has undergone an audit can help build a reasonable amount of trust from its users and investors. That holds a lot of water, mostly in the DeFi field, because users are always cautious due to the potential risks that get into place.

• Compliance and Regulation

As we know, the regulatory landscape of digital currencies is evolving, a seasoned smart contract audit services company can position a project to be compliant with the law. This is especially true for projects operating in some highly regulated sectors.

• Financial Loss Mitigation

Smart contract audits serve to reduce the attack surface for financial losses from hacks and exploits by finding and fixing problems ahead of deployment.

Best Practices for Smart Contract Security

Following is some of the practices that blockchain projects should consider minimizing such risks as were exposed in the Euler Finance hack:

• Engage Multiple Audit Firms

Using different services for smart contract audits allows diverse opinions and increases the chances of catching complex vulnerabilities.

• Apply Formal Verification

On top of traditional audits, formal verification techniques can mathematically prove the correctness of smart contract code, adding an extra layer of assurance.

• Gradual Feature Rollout

Deployment of new features should be done in a phase-by-phase manner, wherein testing and auditing take place at every stage to contain every risk that may arise.

• Circuit Breakers and Pause Mechanisms

The ability to pause the functionality of contracts in case anomalies are detected can help avert large-scale exploitation.

• Regular Training of the Development Team

Training the smart contract audit professionals regarding the latest best practices in security and potential attack vectors is a surefire way to write secure smart contracts from scratch.

• Thorough Test Suites

Writing thorough test suites with broad scenarios and edge cases enables the detection of issues well before they go into production.

Conclusion

The recent hack of Euler Finance and threats remain omnipresent in the blockchain space, which makes it impossible to overlook the need for a professional smart contract audit. It is no more a choice but a mandatory step to hire a reputed smart contract security audit specialist.

Antier is the leading smart contract audit company and has a team of seasoned experts, who use state-of-the-art methodology for protecting your project from a set of vulnerabilities and exploits.

Let us be your armor in a security-driven ecosystem where each new day brings a thousand new threats. Contact today!