What are smart contract wallets?
What are smart contract wallets?
Smart contract wallets are self-executing scripted agreements that automatically enforce the terms of the agreement, giving users more power and security than traditional wallets.
Smart contract wallets are decentralized applications (DApps) that are built on the blockchain and allow users to manage their digital assets using smart contract technology. These wallets provide users with a means to keep crypto assets in their own custody. In addition, they facilitate functions such as bundled transactions, the ability to pay gas bills with a different token, customizable redemption options, and more.
The benefits of modern contract bags include:
Better security
Smart contract wallets use encryption methods and blockchain technology to prevent asset theft or unauthorized access. The wallet securely stores and encrypts the user's private key, making it very difficult for hackers to access the user's funds.
Clarity
All transactions and modern contract codes will live on the blockchain, which will bring transparency. For example, a user can view their transaction history on BlockBrowser to verify the integrity of their wallet records if they suspect fraudulent behavior.
Decentralized administration
Thanks to its decentralized operation, smart contract wallets reduce their vulnerability to censorship and single points of failure.
Customizable features
Smart contracts empower users with customizable features such as spending limits, multi-signature transactions and programmable rules, tailoring control of digital assets to individual needs.
What are the use cases of smart contract wallets?
Modern contract wallets improve the functionality of the Web3 ecosystem in several ways, such as access to DeFi services, decentralized identity, asset management, voting systems, and more.
Smart contract wallets can be used for a variety of purposes, including instant payments, loans, tokens, liquidity provision, interaction with DApps, and decentralized currency exchange. Here are a few use cases of smart contract wallets
Access to DeFi services
The integration feature in the smart contract wallet allows users to access various decentralized finance (DeFi) platforms from their wallets. Based on regular financial institutions, users can participate in DeFi activities such as loans and asset lending. Moreover, users can interact with DeFi services by connecting their smart contract wallets to these platforms.
Decentralized identity
Smart contract wallets can become an integral part of decentralized identity systems. By keeping their data in a smart contract, people have more control over what they can do with it and how accessible it is, protecting privacy and reducing the chance of identity theft.
Safe asset management
Features such as multisig and configurable access controls make smart contract wallets the solution for people and organizations to securely manage their digital assets. For example, a business can improve the security of its digital assets by using a smart contract wallet that only authorized personnel can use.
Joint decision making
Organizations or groups can use smart contract wallets to ensure that spending decisions are made collectively. A non-profit organization, for example, could use a multi-sig smart contract wallet to release funds. The wallet requires the approval of multiple board members before releasing cash, making the process (and downstream stakeholders) more accountable.
Voting systems
Using smart contract wallets makes the selection process more transparent and efficient. Each smart contract reflects a vote. Tracking the voting process on a distributed ledger helps maintain the integrity of the election and thwart attempts at fraud.
What is the role of multi-signature smart contracts in Web3?
Multisig wallets require the approval of multiple people to perform an action. With the consent of the majority of signatories, they ensure that actions are taken.
A multi-sig, or multi-signature smart contract wallet, requires consent from multiple signatories to proceed with a transaction. The wallet uses the principle of “m-of-n” signatures, which means that for a transaction to be approved, there must be out of the n number of signatories assigned. The use of multi-signature methods adds an additional layer of security to the wallet, strengthening its resistance to hacking.
The value n represents the total number of selected signers. Each signature has its own private key. The higher the value of n, the more decentralized and secure the wallet becomes. The value m indicates the minimum number of signatures required to authorize a transaction.
An example will help us better understand how a multi-sig wallet works. In a 3 by 4 multi-sig wallet there will be four signers (n = 4) and the execution of the transaction requires the approval of at least three (m = 3).
How does ERC-4337 improve the performance of smart contract wallets?
ERC-4337 brings an abstract approach to tags that eliminates communication of external ownership tags (EOAs) and facilitates more creative and user-friendly designs.
Before ERC-4337, smart contract wallets often faced limitations. They sometimes deal with EOA, which still involves private key management and may require centralized intermediaries to execute transactions. Blockchain relayers are third-party services that help move and communicate information across different blockchain networks. This reliance on external entities has been a concern for projects seeking to achieve full decentralization.
ERC-4337 is an abstract approach to authentication that allows one to use smart contracts as their primary identifier and avoids centralized relays, EOAs, or private keys. Thanks to ERC-4337, wallets can adopt more creative and user-friendly designs. It allows developers to integrate wallets with advanced features such as automatic payments, unique wallet acquisition techniques, and multi-factor authentication. These wallets are more secure, user-friendly and more versatile.
Modern contract bags with regular wallets
The difference between a regular wallet and a smart contract wallet lies in their functionality and purpose.
A regular or external Ethereum wallet allows users to store, manage and interact with their digital assets on the Ethereum blockchain. These digital assets may include Ether (ETH), Ethereum's native cryptocurrency, and other ERC-20 tokens. Each wallet generates a unique public address and corresponding private key or pedigree to allow users to access and manage their funds. With these wallets, one can perform essential functions like sending and receiving Ethereum Virtual Machine (EVM) compatible tokens and tracking transaction history.
A smart contract wallet, on the other hand, is a programmable wallet that facilitates more automation and complex interactions. Allows users to implement two-factor authentication (2FA) (add additional protection for funds) sign transactions over the phone, set monthly spending limits, generate session keys (temporary cryptographic keys used for a single session or transaction) play blockchain games without permanent transaction approvals, invoice Automate payments, decentralized wallet access and more.
What are the risks and considerations associated with smart contract wallets?
Developing smart contract wallets requires one to have advanced technical knowledge. They also need to be careful of human error resulting in an irreversible transaction to the wrong address.
Like all technologies, smart contract wallets also have their share of potential drawbacks:
Program complexity
Developing and maintaining modern contract wallets is a complex task, requiring developers to have advanced technical knowledge. Any loopholes on the back end give bad actors room to sneak in.
Irrevocable transactions
Although automation is the main feature of smart contract wallets, vulnerabilities or errors in the program can lead to unexpected losses or transfers, which are irreversible.
Primary technology
The technology behind smart contract wallets is still developing. To use modern contract wallets effectively, one needs to be on top of the latest developments.
Human error
Advanced smart contract wallets require proper programming. There is always the possibility of human error, which causes vulnerability.
