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Ethereum Machine (EVM) architecture and security challenges of smart contracts in DeFi

Smart Contracts, as the backbone of the decentralized ecosystem (Web3), are perhaps the most important invention after Bitcoin itself. These self-executing applications that run on the blockchain enable transactions without intermediaries. But behind the curtain of these magic codes, there is a complex architecture called Ethereum Virtual Machine (EVM), which is mandatory for every blockchain developer to understand. In this article, we will take a closer look at EVM architecture and the most dangerous security challenge, namely Reentrancy Attacks.

What are smart contracts?

A smart contract is actually a computer protocol designed to automatically execute a contract digitally. These contracts write the terms agreed upon between the buyer and the seller directly in lines of code. Unlike traditional contracts that require a lawyer or intermediary, smart contracts are immutable and irreversible after being written on the blockchain.

Although this immutability feature ensures security, if the code has a bug from the beginning, it is almost impossible to modify it, and it has led to billions of hacks in the DeFi field.

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Architecture of Ethereum Virtual Machine (EVM)

To understand how contracts are executed, we need to get acquainted with the Ethereum Virtual Machine. EVM is a sandboxed computing environment that runs on all nodes of the Ethereum network.

1. Isolated environment and sandbox

EVM acts as a virtual machine that is completely isolated from the host operating system and other network processes. This isolation ensures that the execution of a malicious smart contract cannot disrupt the operation of the entire Ethereum network or other contracts.

2. Account-based Model

Unlike Bitcoin which uses the UTXO model, EVM is based on Accounts. Each account has a balance, transaction count (Nonce), contract code (Code) and storage space (Storage). This model makes the development of complex contracts much simpler.

3. Gas and cost of implementation

Every instruction executed in the EVM consumes energy. This energy is measured with the unit Gas. Users have to pay gas to perform contract functions. This mechanism prevents denial of service (DoS) attacks and infinite loops. If the gas is not enough, the execution of the contract is stopped, but the state changes are not applied.

4. Bytecode and Opcodes

High-level programming languages such as Solidity or Vyper must be translated into the EVM machine language. The output of this translation is bytecode, which is a set of low-level instructions called Opcode. EVM executes these opcodes one by one to change the state of the network.

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Security challenges in DeFi development

Decentralized financial protocols (DeFi) are based on smart contracts and deal with valuable assets. This has made hackers look for security bugs with a high motivation. Some of the most common challenges include:

• Reentrancy Attacks: Perhaps the most famous attack in Ethereum history.
• Integer Overflow/Underflow: Although new versions of Solidity have solved this problem, it is still dangerous in old contracts.
• Unauthorized access (Access Control): Errors that allow a hacker to execute administrative functions.
• Front-running: Front-running in transactions by MEV miners or farms.

In the following, we will examine the most dangerous of them.

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What is Reentrancy attack?

A reentrancy attack is a type of vulnerability where a malicious contract calls functions that retrieve assets before updating the internal state of the victim contract.

Reentrancy attack performance mechanism

To better understand, consider the scenario of a DeFi bank:

1. User (malicious contract) requests to withdraw 100 Ether.
2. Bank contract checks the balance of the user (for example, he has 100 Ether).
3. Bank contract sends 100 Ether to the user's address.
4. KEY NOTE: In Ethereum, when sending ether to a contract, if that contract has a function called ``fallback'', it will be executed automatically.
5. The malicious contract calls the withdrawal function again in its `fallback' function.
6. Bank contract because it has not yet reduced the balance of the user in its database (this step is usually done after sending), it allows the withdrawal again.
7. This loop repeats until the gas runs out or the bank balance is empty.

Vulnerable code sample (Solidity)

// This code is for training purposes only and is vulnerable
function withdraw(uint amount) public {
    require(balances[msg.sender] >= amount);

// send Ether before inventory update (dangerous!)
    (bool sent, ) = msg.sender.call{value: amount}("");
    require(sent, "Failed to send Ether");

    // update inventory after sending (causing reentrancy attack)
    balances[msg.sender] -= amount;
}

Solutions to deal with Reentrancy

To prevent these attacks, developers should follow the Checks-Effects-Interactions pattern:

1. Checks: First, check the conditions.
2. Effects: Update the internal status of the contract (reduce the balance).
3. Interactions: Finally interact with the outside world (send money).

Also, using the nonReentrant modifier in the OpenZeppelin library is the gold standard to prevent these attacks.

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Conclusion: Security is the first priority in blockchain development

The development of smart contracts on the Ethereum Virtual Machine (EVM) has provided unique opportunities for creating decentralized applications. But the complex architecture of the EVM and the immutable nature of the blockchain reduce the margin of error to zero.

Attacks like Reentrancy have shown that even one wrong line of code can lead to the loss of millions of dollars in assets. To succeed in the DeFi ecosystem, developers must prioritize security principles, use standard libraries such as OpenZeppelin, and subject their contracts to rigorous auditing.

Frequently Asked Questions (Smart Contracts and Ethereum Machine (EVM))

Is Ethereum Virtual Machine (EVM) only for Ethereum?
no Many other blockchains such as Binance Smart Chain (BSC), Polkadata (Moonbeam) and Avalanche (Avalanche C-Chain) use an Ethereum-compatible virtual machine so that developers can easily port their dApps.

How was the Reentrancy attack discovered?
The most famous example of this attack was the DAO hack in 2016, which led to the split of Ethereum into ETH and ETC. Recently, decentralized exchange Uniswap version 2 was the target of this type of attack.

How can I make sure a smart contract is secure?
Before interacting with any contract, it's a good idea to check its source code on sites like Etherscan. Also look for Audit Badges from reputable blockchain security companies.

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