How We Secure Tokenized Stocks: A Guide to Smart Contract Risk
Learn how smart contracts work and the primary sources of risk, including code vulnerabilities and economic flaws. Discover the multi-layered security measures we use to protect tokenized stock assets.
How We Secure Tokenized Stocks: A Guide to Smart Contract Risk
Tokenized stocks exist as entries on a blockchain, governed by code known as smart contracts. This code automates everything from issuance and trading to the handling of dividends. The integrity of that code is therefore fundamental to the security of the asset. Smart contract risk is the potential for financial loss due to flaws, bugs, or vulnerabilities in the software that manages these on-chain assets. Given that exploits in decentralized finance resulted in losses exceeding $1.2 billion in just the last two years, according to data from ImmuneFi, this is not a theoretical concern.
Understanding this risk is the first step toward managing it. At GM Markets, we believe transparency about these vulnerabilities and the measures we take to mitigate them is essential for building a secure and trustworthy platform. This guide explains the primary sources of smart contract risk and details the specific, multi-layered security processes we use to protect user assets.
The Primary Sources of Smart Contract Risk
Smart contract vulnerabilities can arise from several areas, ranging from simple coding errors to complex economic design flaws. The consequences can be severe, as demonstrated by several high-profile incidents in the digital asset space. A comprehensive security strategy must account for each of these potential failure points.
Code and Logic Vulnerabilities
These are direct flaws in the contract’s programming. Even a single misplaced line of code can create an opening for an attacker. Common examples include:
- Reentrancy: This attack occurs when a contract makes an external call to another, untrusted contract. If the untrusted contract is malicious, it can call back into the original one before the first function has finished its execution. This allows the attacker to repeatedly withdraw funds because the contract's state (like the user's balance) has not yet been updated. A well-known example involved several Curve Finance pools in July 2023, where a bug in the Vyper programming language compiler led to a malfunctioning reentrancy guard, resulting in tens of millions in losses.
- Integer Overflow and Underflow: Smart contracts perform calculations using fixed-size integer types. If a calculation results in a number larger than the maximum value the variable can hold (an overflow) or smaller than the minimum (an underflow), the value can wrap around. An attacker could exploit this to, for example, turn a very large withdrawal into a very small one, or vice versa, manipulating balances and draining funds.
- Access Control Errors: These happen when functions that should be restricted, such as those for minting new tokens or changing critical parameters, are left open for anyone to call. Proper access control ensures that only authorized addresses, like a designated administrator, can perform sensitive operations. A failure here could allow an unauthorized party to seize control of the contract.
Economic and Design Flaws
Even if the code is technically correct, the economic logic it implements can be flawed or exploited in unforeseen ways. The March 2023 exploit of Euler Finance, which resulted in a loss of nearly $200 million, was due to a logic flaw in a donation function that lacked a critical health check on the user's account. This allowed an attacker to create fake debt and trigger a liquidation against their own position for a massive profit. Similarly, the KyberSwap exploit in November 2023 stemmed from a subtle precision error in a liquidity calculation, which an attacker used to trick the contract into double-counting their liquidity and draining pools.
External Dependencies and Upgrades
Few smart contracts operate in complete isolation. They often interact with external data sources (oracles) for pricing information or connect with other protocols. If these external dependencies are compromised, they can pose a risk to the contract itself. Additionally, many contracts are designed to be upgradeable to fix bugs or add features. This process, typically managed through a proxy pattern, introduces its own risks. If the upgrade mechanism is not secured properly, an attacker could deploy malicious code and take over the contract and its assets.
How We Mitigate Smart Contract Risk at GM Markets
Securing smart contracts requires a continuous, full-lifecycle process, a principle advocated by industry bodies like the Enterprise Ethereum Alliance (EEA). Our approach at GM Markets is built on a defense-in-depth strategy that combines independent audits, community vigilance, and the use of established, secure components.
Independent, Third-Party Audits
Before any code is deployed, it undergoes rigorous examination by multiple, independent security firms. We work with leading auditors in the space, including Sherlock, Halborn, Cantina, and Cyfrin. Each firm applies a hybrid methodology, combining automated scanning tools with in-depth manual code review to identify complex logic flaws. This multi-auditor approach provides diverse perspectives on our codebase. While full audit reports contain sensitive security information and are provided to partners under a Non-Disclosure Agreement, we are committed to transparency. For instance, public case studies from our auditors, like Halborn, have detailed the discovery and resolution of potential vulnerabilities, demonstrating the rigor of the process. This practice aligns with guidance from regulators like the UK's Financial Conduct Authority (FCA), which recommends that smart contracts in financial operations be audited regularly.
Building on a Secure Foundation
We avoid reinventing core components wherever possible. Instead, we build upon widely used, community-vetted libraries from OpenZeppelin. These libraries are the de facto industry standard, and OpenZeppelin states their contracts secure over 88% of the total value locked across top EVM-based assets. By using this battle-tested code for standard functions like token implementation (ERC-20) and access control, we minimize novel attack surfaces and benefit from the extensive scrutiny of the global developer community.
Continuous Security and Community Vigilance
Security does not end at deployment. We maintain an ongoing bug bounty program to incentivize responsible disclosure of any potential vulnerabilities by security researchers, with rewards of up to $250,000 for critical findings. We encourage the security community to report any findings to us at security@gm.markets. Furthermore, any material upgrade to our smart contracts undergoes the same multi-firm audit process as the initial deployment. This ensures that any new feature or fix does not inadvertently introduce new risks.
Architectural Safeguards Beyond Code Audits
In addition to code-level security, our platform architecture incorporates structural safeguards designed to protect assets and ensure operational continuity.
Bankruptcy-Remote Asset Isolation
Our tokens are issued from a bankruptcy-remote Special Purpose Vehicle (SPV). This is a distinct legal entity created for the specific purpose of holding the underlying assets that back the tokens. This structure legally isolates these assets from our operational entity. In the unlikely event of a bankruptcy, creditors of GM Markets would have no claim on the assets held by the SPV, providing a critical layer of protection for token holders.
On-Chain Continuity and Redemption Path
Our system includes a designated security agent with the authority to ensure token holders can redeem their tokens for the underlying shares directly with the custodian. This is not just a legal agreement; the redemption path is enforced by the on-chain contract logic itself. This ensures that a recovery path for assets exists independently of GM Markets' ongoing operations.
Real-Time On-Chain Monitoring
We operate continuous monitoring and alerting systems that track on-chain activity for our contracts. These systems are designed to detect anomalous transactions or contract states, such as unusually large or frequent withdrawals or calls to sensitive functions from unauthorized addresses. This allows our security team to identify and respond to potential threats rapidly.
Segregated User Wallets with MPC
The embedded wallets on our platform are operated by Privy using multi-party computation (MPC). This technology splits a user's private key into multiple shares, which are stored and processed in separate locations. No single party, including GM Markets or Privy, ever has access to the full key. This architecture removes single points of failure and protects user funds even if a single system component were compromised.
Frequently Asked Questions About Smart Contract Security
Are smart contract audits a guarantee of safety?
No. Audits are a critical risk mitigation tool, not a guarantee. They significantly reduce the likelihood of vulnerabilities by subjecting code to expert scrutiny, but they cannot prove the absence of all bugs. A multi-layered approach that includes audits, secure architecture, and ongoing monitoring provides the most robust defense.
Where can I see the audit reports for GM Markets?
Our complete smart contract audit reports from firms like Sherlock, Halborn, Cantina, and Cyfrin are available to institutional partners under a mutual Non-Disclosure Agreement (NDA). This is a standard practice to protect sensitive information about our security architecture from being publicly exposed. We provide summaries and attestations of these audits on our Security page.
What is the difference between smart contract risk and market risk?
Smart contract risk refers to the potential for loss due to technical flaws in the underlying code of the platform. Market risk is the potential for loss due to changes in the market price of the asset you hold. Our security measures are designed to mitigate smart contract risk, but they do not protect against market volatility.
How does GM Markets handle upgrades to its smart contracts?
Any material upgrade to our smart contracts undergoes the same multi-firm audit process as the initial deployment. We follow a rigorous testing and phased rollout procedure to ensure that any new feature or bug fix does not inadvertently introduce new security risks to the platform.
Conclusion: A Commitment to Transparent Security
Smart contract security is not a one-time checkmark. It is an ongoing process of design, testing, auditing, monitoring, and improvement. The digital asset landscape evolves quickly, and so do the threats. Our commitment, as detailed on our about page, is to maintain a robust, multi-layered security posture that adapts to this changing environment.
We believe transparency is the foundation of trust. By openly discussing the nature of smart contract risk and the specific steps we take to mitigate it, we aim to provide you with the confidence to engage with on-chain markets. You can view our real-time asset attestations on the Proof of Reserves page and learn more on our platform at gm.markets.
It is important to understand that all on-chain activities carry inherent risk. Markets can be volatile, and smart contracts, despite rigorous auditing, can have undiscovered vulnerabilities. Please review our full risk disclosure on our legal page before trading. Our platform is not offered to users in the United States or other restricted jurisdictions.
