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Upgradeable smart contracts are bringing flexibility to the otherwise immutable code. Many companies, such as Compound Finance and OpenSea widely adopt them as the future of smart contract development. However, security problems are also emerging. Critics say upgradeability weakens blockchain's immutability, while supporters believe it enhances safety by addressing bugs and preventing exploits. Let’s break it down.



<h2 class="wp-block-heading">What Are Upgradeable Smart Contracts?</h2>



Typically, smart contracts are unchangeable once deployed. This immutability builds trust among DeFi parties since even the contract's creator can't alter it. However, this also means they can't be updated, posing risks if security or other issues arise.



Upgradeable Smart Contracts (USC) solve these issues by allowing updates without the need to migrate all activity to a new address.



The earliest and most intuitive method of updating smart contracts with no state migrations is the data-separation pattern. Here, we separate a smart contract into logic and storage contracts, storing and changing the state respectively. The problem with this method is evident: constant calls between logic and storage require gas.



<figure class="wp-block-image size-large"><img src="https://wp.hacken.io/wp-content/uploads/2023/10/blog_image_2-1024x405.jpg" alt="" class="wp-image-20790"/></figure>



That’s why modern USCs rely on proxies. A fixed proxy contract stores the system's state and a changeable logic address. Unlike normal contracts, users communicate with the proxy, which forwards their calls to the business logic contract. In proxy-based upgradeability, logic contracts don’t store any user data. Hence, the upgrade is easy: a new logic contract is deployed, and the only call needed is to replace the old address in the proxy contract.



<figure class="wp-block-image size-large"><img src="https://wp.hacken.io/wp-content/uploads/2023/10/blog_image_1-1024x782.jpg" alt="" class="wp-image-20789"/><figcaption class="wp-element-caption">Learn more: Bodell et al. (2023). “<a href="https://www.usenix.org/system/files/usenixsecurity23-bodell.pdf">Proxy Contracts</a>”</figcaption></figure>



<h3 class="wp-block-heading">Benefits Of Upgradeable Smart Contracts</h3>



<ul>
<li>Enhanced Security: Developers can fix undetected <a href="https://hacken.io/discover/smart-contract-vulnerabilities/">smart contract vulnerabilities</a> within the same contract.</li>



<li>Feature Addition: Teams can introduce new features or adapt without creating a new contract.</li>



<li>Cost Efficiency: Upgrades can save on gas fees compared to deploying new contracts.</li>



<li>Data Consistency: Data, like user balances, remains unchanged during upgrades, eliminating migration hassles.</li>



<li>User-Friendly: The contract address remains constant, making interactions simpler.</li>



<li>Less Fragmentation: A single contract address minimizes confusion.</li>
</ul>



<h2 class="wp-block-heading">Mechanics Of Upgradeable Smart Contracts</h2>



<h3 class="wp-block-heading">Transparent Proxy</h3>



Transparent proxies handle access control and upgradability within the proxy. Both admins and users are limited to logic within their access range.



<figure class="wp-block-table is-style-stripes"><table><tbody><tr><td>Pros</td><td>Cons</td></tr><tr><td>Simple and easy to understand.</td><td>More expensive in terms of gas cost due to storage layout requirements.</td></tr><tr><td>Most tools and libraries support it.</td><td>Contains specific storage slots that are reserved, which can lead to confusion.</td></tr></tbody></table><figcaption class="wp-element-caption">Pros and cons of transparent proxy pattern</figcaption></figure>



Transparent Proxy Pattern is a prevalent design for upgradeable smart contracts. At its core, it utilizes `delegatecall` to delegate the execution of function calls to an implementation contract.



 The mechanism involves two contracts: Proxy and Implementation. When you send a transaction to Proxy Contract, it forwards it to Implementation Contract using `delegatecal`, thereby preserving the context (e.g., msg.sender and msg.value) of the calling transaction.



Example of transparent proxy smart contracts:&nbsp;



<pre class="wp-block-syntaxhighlighter-code">// SPDX-License-Identifier: MIT
pragma solidity ^0.8.0;

// Proxy contract
contract TransparentProxy {
 address public implementation;
 address public admin;

 constructor(address _implementation, address _admin) {
 implementation = _implementation;
 admin = _admin;
 }

 fallback() external payable {
 address _impl = implementation;
 require(_impl != address(0));
 assembly {
 let ptr := mload(0x40)
 calldatacopy(ptr, 0, calldatasize())
 let result := delegatecall(gas(), _impl, ptr, calldatasize(), 0, 0)
 let size := returndatasize()
 returndatacopy(ptr, 0, size)
 switch result
 case 0 { revert(ptr, size) }
 default { return(ptr, size) }
 }
 }
}

// Sample implementation contract
contract MyContract {
 uint public value;

 function setValue(uint _value) external {
 value = _value;
 }
}</pre>



<h3 class="wp-block-heading">Universal Upgrade Proxy Standard (UUPS)</h3>



<figure class="wp-block-table is-style-stripes"><table><tbody><tr><td>Pros</td><td>Cons</td></tr><tr><td>More gas-efficient for upgrades.</td><td>Requires strict storage management to avoid storage clashes.</td></tr><tr><td>Allows for more flexibility in contract design.</td><td>Not as common as the transparent proxy, but gaining traction.</td></tr></tbody></table><figcaption class="wp-element-caption">Pros and cons of UUPS</figcaption></figure>



UUPS is a more gas-efficient way of achieving upgradability. Instead of defining storage in the proxy contract, it uses the same storage layout as its implementation contract. This design makes the upgrade cheaper but requires more care in terms of not rearranging the storage layout in upgraded contracts.



Nowadays, smart contract developers opt for UUPS. They offer the same versatility as transparent proxies but are more cost-effective to launch because the upgrade logic isn't housed in the proxy.



Example of UUPS:



<pre class="wp-block-syntaxhighlighter-code">// SPDX-License-Identifier: MIT
pragma solidity ^0.8.0;

// UUPS Proxy contract
contract UUPSProxy {
 address public implementation;
 address public admin;

 constructor(address _implementation, address _admin) {
 implementation = _implementation;
 admin = _admin;
 }

 function _delegate(address _impl) internal {
 assembly {
 calldatacopy(0, 0, calldatasize())
 let result := delegatecall(gas(), _impl, 0, calldatasize(), 0, 0)
 returndatacopy(0, 0, returndatasize())
 switch result
 case 0 { revert(0, returndatasize()) }
 default { return(0, returndatasize()) }
 }
 }

 fallback() external payable {
 _delegate(implementation);
 }
}

// Sample implementation contract
contract MyContract {
 uint public value;

 function setValue(uint _value) external {
 value = _value;
 }
}</pre>



<h3 class="wp-block-heading">Diamonds</h3>



Diamonds introduce a cascade mechanism that directs function requests to their corresponding implementation contracts through a mapping system. This system breaks down logic, including the upgrade interface, into specialized implementation contracts, known as facets, each having its unique address recorded in the mapping.



Overall, diamonds reduce potential pitfalls associated with the UUPS upgrade approach:



<ol>
<li>Diamond Cut Functionality: Post-upgrade, an external function call can be executed, separating the initialization logic from both the proxy and implementation contracts.&nbsp;</li>



<li>Single Transaction Execution: Diamond Cut encapsulates both upgrade execution and initialization into one transaction, ensuring that new state variables are initialized and secure.</li>



<li>Isolated Initialization Logic: Diamond separates its initialization logic from both the proxy and implementation contracts, safeguarding against potential external threats to either.</li>



<li>DiamondMultiInit: Streamlines the upgrade process, allowing for multiple initializations of all state variables.</li>
</ol>



In essence, the Diamond structure offers a comprehensive, flexible, and secure upgrade mechanism, enhancing the overall solidity and efficiency. But this is the least tried and tested method because of its novelty.



<h2 class="wp-block-heading">Implementing Upgradeable Smart Contracts</h2>



There’s no single standard for implementing USCs as many EIPs and 3rd-party libraries exist. We have collected relevant documentation for each standard.&nbsp;



<h3 class="wp-block-heading">EIPs</h3>



<ul>
<li><a href="http://eips.ethereum.org/EIPS/eip-1538">EIP-1538</a>: Transparent contract standard</li>



<li><a href="https://eips.ethereum.org/EIPS/%20eip-1822">EIP-1822</a>: Universal upgradeable proxy standard (UUPS)</li>



<li><a href="https://eips.ethereum.org/EIPS/eip-1967/">EIP-1967</a>: Proxy storage slots</li>



<li><a href="https://eips.ethereum.org/EIPS/eip-2535">EIP-2535</a>: Diamonds, multi-facet proxy.</li>
</ul>



<h3 class="wp-block-heading">Third-party library</h3>



OpenZeppelin’s Upgrade Plugins is a good solution that supports both Transparent Proxy and UUPS patterns.



Pros



<ul>
<li>Auto-checks storage layout for upgrades</li>



<li>Seamlessly works with Truffle &amp; Hardhat.</li>



<li>Regularly updated and audited by the OpenZeppelin team</li>
</ul>



Cons:



<ul>
<li>Requires understanding of OpenZeppelin's approach</li>



<li>Adds dependencies and tooling to the dev environment.</li>
</ul>



Implementation instructions:



<ul>
<li>For Hardhat: <a href="https://github.com/OpenZeppelin/openzeppelin-upgrades/blob/master/packages/plugin-hardhat/README.md">@openzeppelin/hardhat-upgrades</a></li>



<li>For Truffle: <a href="https://github.com/OpenZeppelin/openzeppelin-upgrades/blob/master/packages/plugin-truffle/README.md">@openzeppelin/truffle-upgrades</a></li>
</ul>



Example of OpenZeppelin Upgrade:



<pre class="wp-block-syntaxhighlighter-code">const { deployProxy, upgradeProxy } = require('@openzeppelin/hardhat-upgrades');

async function main() {
 const MyContract = await ethers.getContractFactory('MyContract');
 const instance = await deployProxy(MyContract, [/* constructor arguments */]);
 console.log('Deployed at:', instance.address);
 
 // ... later ...

 const MyContractV2 = await ethers.getContractFactory('MyContractV2');
 const upgradedInstance = await upgradeProxy(instance.address, MyContractV2);
 console.log('Upgraded to:', upgradedInstance.address);
}

main();</pre>



<h2 class="wp-block-heading">Potential Security Risks&nbsp;</h2>



There’s no single standard for implementing upgradeable smart contracts correctly, which increases the risks of producing serious security weaknesses.



Missing Call: There’s a big risk of a missing call to initialize a contract and its dependencies. Normally, the constructor is run on deployment to initialize the contract and dependencies like Ownable. But it’s not the case in USCs. Developers may forget to initialize a contract and dependencies, leading to serious consequences, as in the case of <a href="https://medium.com/immunefi/wormhole-uninitialized-proxy-bugfix-review-90250c41a43a">Wormhole’s uninitialized proxy</a>.



Storage Collisions: Modifying the storage layout during an upgrade might lead to storage collisions between implementation versions. Storage collision is when two distinct variables point to the same storage location, leading to unexpected and unintended results. This is one of the most important security issues.



Unauthorized Upgrades: The mechanism that allows the contract to be upgraded must be well-protected. If malicious actors gain control, they could replace the contract with a malicious version, compromising user funds or data.



Denial of Service (DoS) After Upgrade: If an upgrade is not properly tested, it might introduce vulnerabilities that could be exploited for DoS attacks.



Unprotected Initialization: Initialization functions should be protected so they can't be called multiple times. If they aren't, attackers could reset the contract state.



Initializable Implementations: Some implementations can be initialized more than once, allowing attackers to seize control or reset them.



If unchecked, those vulnerabilities can snowball into costly exploits. We strongly recommend undergoing a <a href="https://hacken.io/services/blockchain-security/smart-contract-security-audit/">smart contract audit</a> to ensure your USCs don’t contain any errors.



<div id="blog-request-quote-container"></div>



<h2 class="wp-block-heading">Conclusions</h2>



Technically speaking, upgradeability doesn't alter the immutability of smart contracts; it simply introduces a new contract to replace the old one. However, there are different methods of implementing USCs.



The most widely used approach is a proxy contract. This method manages state variables and refers to an implementation contract for logic, permitting upgrades without affecting data.





<hr class="wp-block-separator has-alpha-channel-opacity"/>



References:



<a href="https://www.usenix.org/system/files/usenixsecurity23-bodell.pdf">https://www.usenix.org/system/files/usenixsecurity23-bodell.pdf</a>



<a href="https://ethereum.org/en/developers/docs/smart-contracts/upgrading/">https://ethereum.org/en/developers/docs/smart-contracts/upgrading/</a> <a href="https://docs.openzeppelin.com/learn/upgrading-smart-contracts">https://docs.openzeppelin.com/learn/upgrading-smart-contracts</a>



<a href="https://www.quicknode.com/guides/ethereum-development/smart-contracts/an-introduction-to-upgradeable-smart-contracts">https://www.quicknode.com/guides/ethereum-development/smart-contracts/an-introduction-to-upgradeable-smart-contracts</a>

Upgradeable Smart Contracts (USCs): Exploring The Concept And Security Risks

Smart Contract Security: Ensuring Safety At Each Development Stage

Flash loans have become an increasingly popular feature in decentralized finance (DeFi) ecosystems, offering individuals and businesses quick access to large amounts of capital without collateral. With flash loans, borrowers can receive funds that are immediately returned to the lending platform at the end of a single transaction block.



However, the ease of access to these loans has also led to an increase in flash loan attacks, which are a type of exploit where malicious actors can take advantage of the temporary liquidity provided by flash loans to manipulate prices or steal funds. These attacks can have devastating consequences for both individuals and DeFi platforms, causing millions of dollars in losses.



In this article, we will explore the risks associated with flash loan attacks and provide actionable steps that developers and entrepreneurs can take to protect themselves and their users. We will examine real-world examples of flash loan attacks and discuss how these attacks can be prevented through improved security measures and best practices.



<h2 class="wp-block-heading">How Do Flash Loan Attacks Work?</h2>



Flash loan attacks rely on the temporary liquidity provided by flash loans to manipulate the price of a cryptocurrency, exploit <a href="https://hacken.io/discover/smart-contract-vulnerabilities/">vulnerabilities</a> in a DeFi smart contract, or steal funds from a protocol.



To execute a flash loan attack, an attacker typically follows a three-step process:



<ol>
<li>Borrowing: The attacker takes out a flash loan from a DeFi platform and borrows a large sum of cryptocurrency without providing any collateral.</li>
</ol>



<ol start="2">
<li>Manipulating: Using the borrowed funds, the attacker manipulates the price of a targeted cryptocurrency or exploits a vulnerability in a DeFi smart contract.</li>
</ol>



<ol start="3">
<li>Repaying: The attacker repays the flash loan, usually within the same transaction block, and returns the borrowed funds to the lending platform.</li>
</ol>







The key to the success of a flash loan attack is the ability to repay the loan within the same transaction block. This allows the attacker to take advantage of temporary liquidity without providing any collateral, which makes it difficult for lending platforms to protect themselves against these types of attacks.



<div class="wp-block-cover"><div class="wp-block-cover__inner-container">
<h3 class="wp-block-heading">Simple Flash Loan Example</h3>



<figure class="wp-block-image size-full"><img src="https://wp.hacken.io/wp-content/uploads/2023/05/Infographic-3.jpg" alt="" class="wp-image-19556"/></figure>



Let's say an attacker wants to exploit a vulnerability in a DeFi smart contract to steal funds. The attacker first takes out a flash loan of 1000 ETH (worth around $1.8 million at the time of writing) from a lending platform. The attacker then uses 500 ETH to buy a cryptocurrency that is undervalued on one exchange and overvalued on another exchange.



For example, let's say that the cryptocurrency XYZ is undervalued on exchange A, where it is trading at 1 ETH = 10 XYZ, and overvalued on exchange B, where it is trading at 1 ETH = 12 XYZ. The attacker uses the 500 ETH to buy 5000 XYZ on exchange A, where it is undervalued, and then immediately sells the 5000 XYZ on exchange B, where it is overvalued, for 600 ETH.



Now the attacker has 1100 ETH: the original 500 ETH plus the 600 ETH profit from the arbitrage trade. The attacker repays the flash loan of 1000 ETH, plus any fees and interest, and keeps the remaining 100 ETH profit.



This is an example of a flash loan arbitrage attack. This attack takes advantage of price discrepancies between different exchanges to generate profit. Arbitrage is not inherently malicious; many traders use flash loans for legitimate purposes. However, it becomes malicious when used to steal funds from the protocol by exacerbating a vulnerability in a DeFi Smart contract.
</div></div>







<h3 class="wp-block-heading">Flash Loan Attack Types</h3>



It's worth noting that this is just one example. A real-world flash loan attack could take many different forms depending on the specific vulnerability or manipulation tactic being used.



Price manipulation: Attackers can use flash loans to manipulate the price of a cryptocurrency by artificially inflating or deflating its value. This can cause significant losses for traders who have placed orders based on manipulated prices.



Arbitrage: Attackers can exploit price discrepancies between separate decentralized exchanges (DEXs) by using flash loans to execute arbitrage trades. While this attack is not necessarily malicious, it can still cause losses for legitimate traders.



Smart contract exploits: Attackers can use flash loans to take advantage of vulnerabilities in DeFi smart contracts, such as <a href="https://hacken.io/discover/reentrancy-attacks/">reentrancy bugs</a> or integer overflow errors. This can allow them to steal funds from the protocol or execute other attacks. It's essential to highlight that flash loans, in most cases, are not vulnerabilities in and of themselves. Attackers leverage them to quickly acquire substantial sums of money, which can consequently cause significant alterations to the impacted systems.



<h2 class="wp-block-heading">Real-World Cases Of Flash Loan Attacks</h2>



<h3 class="wp-block-heading">Euler Finance: $197m (March 2023)</h3>



One of the latest and, at the same time, the <a href="/discover/crypto-hacks/">biggest hacks</a>. The hacker exploited an error in the rate calculation within the platform itself. Vulnerability explanation: Euler Finance platform users borrow and lend using two main types of tokens: eTokens (representing collateral) and dTokens (representing debt). A hacker exploited a flaw in the platform's eToken function, which caused an incorrect conversion of borrowed assets to collateralized assets. The hacker involved two primary on-chain entities: a <a href="https://hacken.io/discover/front-running/">front-running</a> bot and their personal wallet. They received initial funding from Tornado Cash, a sanctioned mixer, for gas fees and to create the necessary contracts.



Attack explanation: The hacker took a flash loan of about $30 million in DAI from the DeFi protocol Aave. They deposited $20 million of the DAI into Euler's platform and received a similar amount in eDAI tokens. By leveraging the platform's borrowing capabilities, the hacker borrowed 10 times the original deposited amount. They used the remaining $10 million in DAI to repay part of the acquired debt and continued borrowing until the flash loan was closed. Conclusion: As a result of the attack, <a href="/discover/euler-finance-hack/">Euler lost around $197 million</a> worth of cryptocurrency across DAI, wBTC, stETH, and USDC. Euler's native token, EUL, also experienced a decline of more than 45%. P.S. Not long after the attack, the hacker restored the funds to the platform. 



<h3 class="wp-block-heading">Cream Finance: $130m (October 2021)</h3>



In October 2021, CREAM Finance suffered one of the largest&nbsp; DeFi hacks in history, with losses exceeding $130 million. Vulnerability explanation: The vulnerability exploited in this attack was related to CREAM's yUSDVault. The attacker's goal was to mint a significant number of crYUSD tokens and exploit a flaw in the vault to double the perceived value of these shares.



Attack explanation: During the attack, two accounts took out flash loans from MakerDAO and AAVE. The DAI from MakerDAO was deposited into Curve's yPool to create yDAI, which was used to mint yUSD. The ETH from AAVE served as collateral to borrow additional yUSD. The second address transferred approximately $500 million in yUSDVault tokens to the first address.



Repeating this process multiple times, the first address accumulated roughly $1.5 billion in crYUSD and $500 million in yUSDVault. The attacker redeemed the $500 million yUSDVault for yUSD, reducing the total supply of yUSDVault tokens in the vault to around $8 million. The attacker then deposited approximately $8 million in yUSD into the vault, effectively doubling its overall value.



CREAM's PriceOracleProxy for yUSDVault tokens determined their value by dividing the vault's total value by the total supply of yUSDVault tokens. By reducing the total supply of yUSDVault to around $8 million and depositing $8 million in yUSD into the vault, the attacker essentially doubled the perceived value of yUSDVault shares (crYUSD). 



Conclusion: The first attacker address possessed $1.5 billion in crYUSD, which the vault now valued at $3 billion. The attacker used $2 billion and the previously withdrawn $500 million to repay their flash loans. The remaining $1 billion in crYUSD allowed the attacker to drain CREAM's $130 million in available assets.



<h3 class="wp-block-heading">bZx: $1m (November 2021)</h3>



The hack was quite sophisticated, involving two distinct attacks. After targeting the first vulnerability, the hacker swiftly executed a second attack using a different method. Vulnerability explanation: The core vulnerability in the first attack was BZx's reliance on a single oracle for price determination, which allowed the attacker to manipulate the collateral pool using a flash loan. In the second attack, the vulnerability was BZx's usage of the Uniswap spot price as an oracle, which was manipulated to inflate the value of the collateral. Attack explanation: In the first attack, the hacker borrowed $10 million in ETH through a flash loan and used it to manipulate the collateral pool by taking a 5x short position on the ETH-wBTC trading pair, causing significant slippage. In the second attack, the attacker used a flash loan to inflate the Uniswap Synthetix USD price to $2, then deposited sUSD into BZx as collateral to borrow more ETH than they should have been allowed. Conclusion: These attacks on BZx exposed the platform's vulnerabilities, particularly its reliance on a single oracle and the susceptibility of its collateral pool to manipulation. The attacks resulted in losses of over $985K, highlighting the need for robust security measures and the importance of using multiple trusted oracles for price determination.



<h2 class="wp-block-heading">How To Prevent Flash Loan Attacks?</h2>



Considering the earlier examples, we can compile a list of key methods to safeguard against flash loan attacks.



<ul>
<li>Use reentrancy guards to prevent unexpected contract calls. Use proper access control mechanisms, such as OpenZeppelin's Ownable, to limit critical functions. Use well-tested libraries and frameworks like OpenZeppelin for contract development.</li>



<li>As these attacks originate from external smart contracts, it's prudent to validate the addresses allowed to utilize flash loan functionalities. Ensure that external contract calls are authentic and secure and limit interactions exclusively to trusted contracts.</li>



<li>Employing thorough <a href="https://hacken.io/services/blockchain-security/smart-contract-security-audit/">third-party smart contract auditing</a> and validation is always a valuable security measure. Conduct comprehensive testing to identify potential vulnerabilities and collaborate with reputable auditing firms to review your contracts.</li>



<li>Utilize a variety of oracles to obtain the most precise and safe price information, considering that some <a href="https://hacken.io/discover/blockchain-oracles/">oracles</a> might be vulnerable. Implement time-weighted average price (TWAP) mechanisms to minimize the risks tied to price manipulation.</li>



<li>Regularly review and stay current with <a href="https://hacken.io/discover/defi-security/">DeFi security</a> best practices and vulnerability reports.</li>
</ul>



<div id="blog-request-quote-container"></div>



<h2 class="wp-block-heading">Final Thoughts</h2>



Flash loan attacks are a significant threat to DeFi protocols, as they can allow attackers to exploit vulnerabilities in smart contracts and steal funds. However, by implementing best practices such as reentrancy guards, access control mechanisms, and third-party auditing, developers and entrepreneurs can mitigate the risks of theft.



It's also important to stay current with the latest security best practices and vulnerability reports, as the DeFi landscape is constantly evolving. By remaining vigilant and proactive in addressing potential threats, we can help to build a safer and more secure decentralized financial system for everyone.

Flash Loan Attacks: Risks & Prevention

How To Create A Smart Contract With Ethereum & Solidity

Roman Palamarchuk

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