I have developed a software piece (with C and Python) which I want to protect with dongle so that copying and reverse engineering becomes hard enough. My dongle device comes wit
Crackers will crack by sniffing the traffic between your app and the dongle and either disabling any code that tests for dongle presence or writing code to emulate the dongle (e.g. by replaying recorded traffic), whichever looks easier.
Obfuscation of the testing code, and many scattered pieces of code that perform tests in different ways, as well as separating spatially and temporally the effect of the test (disabling/degrading functionality, displaying a warning etc.) from the test itself make the former method harder.
Mutating the content of the dongle with each test based on some random nonce created each run or possibly even preserved between runs, so that naively recording and replaying the traffic does not work, will make the latter method harder.
However, with the system as described, it is still straightforward to emulate the dongle, so sooner or later someone will do it.
If you have the ability to execute code inside the dongle, you could move code that performs functions critical to your application there, which would mean that the crackers must either rederive the code or break the dongle's physical security - a much more expensive proposal (though still feasible; realise that there is no such thing as perfect security).
First of all, realize that the dongle will only provide a little bit of an obstacle. Someone who knows what they're doing will just remove the call to the dongle and put in a 'true' for whatever result that was called. Everyone will tell you this. But there are roadblocks you can add!
I would find a key portion of your code, something that's difficult or hard to know, something that requires domain knowledge. Then put that knowledge onto the key. One example of this would be shader routines. Shader routines are text files that are sent to a graphics card to achieve particular effects; a very simple brightness/contrast filter would take less than 500 characters to implement, and you can store that in the user space on most dongles. Then you put that information on the key, and only use information from the key in order to show images. That way, if someone tries to just simply remove your dongle, all the images in your program will be blacked out. It would take someone either having a copy of your program, grabbing the text file from the key, and then modifying your program to include that text file, and then knowing that that particular file will be the 'right' way to display images. Particulars of implementation depend on your deployment platform. If you're running a program in WPF, for instance, you might be able to store a directx routine onto your key, and then load that routine from the key and apply the effect to all the images in your app. The cracker then has to be able to intercept that directx routine and apply it properly.
Another possibility is to use the key's random number generation routines to develop UIDs. As soon as someone removes the dongle functionality, all generated UIDs will be zeroed.
The best thing to do, though, is to put a domain specific function onto the dongle (such as the entire UID generation routine). Different manufacturers will have different capabilities in this regard.
How much of a roadblock will these clevernesses get you? Realistically, it depends on the popularity of your program. The more popular your program, the more likely someone will want to crack it, and will devote their time to doing so. In that scenario, you might have a few days if you're particularly good at dongle coding. If your program is not that popular (only a few hundred customers, say), then just the presence of a dongle could be deterrent enough without having to do anything clever.
Ironically, the thing you want to discourage is not piracy by users, but theft by vendors. The internet has become such a lawless place that vendors can steal and resell your software at will. You have legal recourse in some cases, and not in others.
Nothing is fool-proof, as previously stated. Also, the more complex your security is, the more likely it is to cause headaches or problems for legitimate users.
I'd say the most secure application is always the one tied closest to the server. Sadly, then users worry about it being spyware.
If you make a lot of different calls to your dongle, then maybe the cracker will just emulate your dongle -- or find a single point of failure (quite common to change one or two bytes and all your calls are useless). It is a no-win situation.
As the author of PECompact, I always tell customers that they can not rely on anything to protect their software -- as it can and will be cracked if a dedicated cracker goes after it. The harder you make it, the more of a challenge (fun) it is to them.
I personally use very minimal protection techniques on my software, knowing these facts.
You can implement many check points in your application.
I don't know if you use HASP, but unfortunatelly, dongles can be emulated.
Use smartcard + encrypt/decrypt working files through secret function stored in card. Then software can be pirated, but it will not able to open properly encrypted working files.
I would say that if someone wants to crack your software protection, they will do so. When you say 'hard enough' - how should 'enough' be interpreted?
A dongle will perhaps prevent your average user from copying your software - so in that sense it is already 'enough'. But anyone who feels the need and is able to circumvent the dongle will likely be able to get past any other scheme that you engineer.