- Introduction of innovative smart contract wallets for managing crypto assets.
- Smart wallets have their share of merits and demerits.
Smart contract wallets are becoming a beacon of hope for simplifying the complex world of decentralized finance (DeFi). As the name suggests, these next-generation wallets are powered by the technique of smart contracts. Security, flexibility, speed, and convenience are some attributes that are making these wallets popular across different crypto ecosystems (e.g. Ethereum, Solana).
What are Smart Contract Wallets?
For cryptocurrency users, Web3 wallets work as a key to entering the world of blockchain. From storing digital assets (like NFTs) to interacting with decentralized applications (dApps), users can perform a lot of functions using these wallets.
Smart contract wallets are a type of non-custodial Web3 wallet that, unlike their traditional counterparts, operates on the technology of smart contracts (self-executing computer codes) to help users manage their digital assets.
Among the many smart contract wallets that are at the disposal of users in the crypto ecosystem, the most popular ones include Safe, Argent, Castle, Unipass, and Soul Wallet.
By programming different logical parameters in the smart contracts, these wallets can be bestowed with features of social recovery, advanced customization (signless transactions, account freezing/ locking, transfer limits), bundled transactions, and multi-factor authentication.
Based on encryption protocols and blockchain technology, smart contract wallets keep the users’ assets safe from the attacks of hackers. Additionally, by leveraging the power of decentralization, these wallets elude the risks of censorship and a single point of failure.
Many smart wallets employ a ‘multi-signature (multisig) security strategy’ which allows the users to add trusted third parties (e.g., friends, family, or even a secondary wallet) as ‘co-signers’ or ‘guardians.’ Guardians typically help the users recover their wallets. When they are co-signers, users require at least two signatures to execute a multisig transaction.
How Does a Smart Contract Wallet Work?
Externally owned accounts (EOAs) and smart contract accounts constitute the two main types of accounts on the Ethereum blockchain which are digital addresses entrusted with the tasks of sending, receiving, and storing Ether tokens.
The major distinction between these accounts arises from the fact that users interacting with the blockchain via EOAs can manage their funds through a private key signing function. Most traditional crypto wallets on the Ethereum blockchain (e.g. MetaMask) are EOAs.
Although they have been widely adopted, EOAs have certain limitations such as their sole dependency on the private keys along with the requirement of users to sign every transaction. Smart contract accounts, by contrast, are controlled by an embedded logic or code rather than a private key.
Since smart contract accounts cannot be generated using a public-private key pair, they are unable to initiate a transaction like EOAs. Hence, these contract accounts still depend on an EOA for prompting the smart contracts to perform necessary functions.
To execute a transaction from the smart contract wallet, the first step involves using an EOA to initiate the transaction. Although a smart wallet gets a hexadecimal address of its own, they don’t exhibit a private key and so an EAO is linked to it as the “parent“ wallet or admin by default. The smart contracts identify a request from an admin EOA resulting in a user executing the transaction using the wallet interface.
Pros and Cons of Smart Contract Wallets
Smart contract wallet introduces transparency to the system because all the smart contract codes and transactions are publicly available on the blockchain. This boosts the trust and confidence of the community as the information is easily accessible and verifiable by any node.
Everything has its share of pros and cons including that of smart contract wallets. Smart contract wallets are safe to use but they come with their share of demerits. The programmed code used in the wallet is not deemed to be reliable. Apart from that, the design features of the EVM are not very advanced and may not appeal to the masses. Both the merits and the demerits should be kept in mind before investing your time, money, and energy in smart contract wallets.