What Are Smart Contract Wallets, and How Can They Benefit DeFi Users?

May 28, 2021

There are several types of Ethereum wallets, and each is designed for a specific purpose. “Hot” crypto wallets, such as MetaMask (browser-based) and the Coinbase Wallet mobile app (not to be confused with the Coinbase.com app), are always connected to the web, allowing users to make transactions quickly and easily. “Cold” hardware wallets, like Ledger and Trezor, are only connected to the internet when in use. While cold wallets offer improved security because their private keys are never exposed to the web, they are a little less user-friendly. Smart contract wallets, or “smart wallets,” aren’t new to the scene and aren’t supported by all exchanges and dapps, yet they are starting to capture more attention thanks to their unique combination of security, flexibility, and convenience over the more conventional wallet solutions.  

A smart wallet is an Ethereum wallet managed by a smart contract instead of a private key. This enables users to enjoy advanced features such as multi-sig transactions, daily transfer limits, emergency account freezing, and more secure account recovery.

How Do Smart Contract Wallets Work?

Funds in smart wallets are accessed and controlled through smart contract code, which allows almost unlimited functionality, gives users more control over their assets, and spurs greater confidence in DeFi. 

The Ethereum platform supports two types of accounts: Externally Owned Accounts (EOAs), which are accessed using a private key or seed phrase, and Contract Accounts, which are controlled by smart contract code.1https://ethereum.org/en/developers/docs/accounts/ Today, Ethereum wallets are based on one or the other, but they will be merged with the launch of Ethereum 2.0.

Smart wallets take advantage of Ethereum Contract Account functionality.

Most Ethereum wallets manage EOA accounts and, therefore, have limited functionality. Smart wallets, however, take advantage of Contract Account functionality—they manage funds via coded instructions that establish who can access them, under what conditions, and more.

How Do Smart Contract Wallets Benefit Users and the DeFi Sector?

Thanks to the versatility of smart contracts, in addition to breaking user reliance on private keys, smart wallets offer advantageous new features and provide a user experience similar to traditional financial (TradFi) service apps. Some features provided by different smart wallets include:

  • Multi-signature authorization. Two or more users can approve a transaction for improved security. Smart wallets can also enable multi-sig transactions to be authorized offline to save users time.
  • Emergency account freezing. In the event of a lost or stolen device, an account can be locked, or access to the account from the compromised device can be deactivated.
  • Daily transaction amount limit. A transaction amount limit can be set to help reduce the chance of an expensive user error and to help prevent an attacker from emptying a wallet in one transaction.
  • Multi-factor authentication. Smart wallets can provide an extra layer of security via authenticator apps and/or native wallet solutions.
  • Whitelisting. Users can specify that transfers be made only to known addresses.
  • Trusted Guardians. Argent smart wallet users, for example, can keep their accounts more secure by appointing “Guardians” to approve certain actions, such as: 
    • Transaction amounts over a daily limit.
    • Transfers to addresses not included in a whitelist.
    • Seedless” account recovery (Guardians can unlock frozen accounts or approve new devices).
  • Bundled transactions. For speed and convenience, some smart contract wallets also approve the exact amount of tokens required for use with a dapp (rather than approving an unlimited amount), and execute the call to interact with the dapp in one “bundled” transaction.
  • Paid gas fees. Authereum enables dapp developers to pay the gas fees for transactions that use their infrastructure, preventing users from having to maintain an ETH balance and greatly improving the transaction experience.  

Advanced Smart Wallets

In addition to focusing on features typical consumers need, some smart wallets also integrate functionality aimed at more sophisticated users. 

DeFiSaver’s smart wallet enables bundled transactions via “pre-made recipes.” Users can also create their own recipes to move funds within and between DeFi protocols efficiently.

DeFiSaver is one type of advanced smart wallet.
DeFiSaver’s “recipes” enable users to bundle transactions for complex DeFi operations.

DeFiSaver also offers Vault Automation—automated liquidation monitoring of Maker Vaults. When switched on, if the Collateral Ratio (CR) of the Vault falls below a user-defined threshold, part of the Vault’s collateral is instantly swapped for Dai, which is used to pay back the Dai generated to increase the Vault’s CR to a specified level.2https://help.defisaver.com/makerdao/how-does-cdp-automation-work

Smart Wallets Help Simplify DeFi

By providing unique features and more familiar functionality, smart wallets enable streamlined access to decentralized protocols and apps, thereby helping to onboard a new generation of global DeFi users. 

To increase your knowledge of DeFi services, smart contracts, and crypto wallets, discover the many other posts in the MakerDAO blog.

May 28, 2021