Golden Encyclopedia | What is a smart contract wallet?

Author: Dilip Kumar Patairya, CoinTelegraph; Compiler: Baishui, Golden Finance

1. What is a smart contract wallet?

Smart contract wallets are automatically executed scripted agreements that can automatically execute the terms of the agreement and provide users with more functionality and security than traditional wallets.

Smart contract wallets are considered decentralized applications (DApps) because they are built on the blockchain and enable users to manage their digital assets using smart contract technology. These wallets provide users with a way to self-custody their crypto assets. Additionally, they facilitate bundled transactions, the ability to pay gas fees in different tokens, customizable recovery options, and more.

The advantages brought by smart contract wallets include:

Better security

< p>To protect assets from theft or unauthorized access, smart contract wallets use encryption methods and blockchain technology. The wallet securely stores and encrypts the user's private keys, making it more difficult for hackers to access the user's funds.

Transparency

All transaction and smart contract code exists on the blockchain, allowing for transparency. For example, if a user suspects fraud, they can view their transaction history on a block explorer to verify the accuracy of their wallet records.

Decentralization

Due to decentralization, smart contract wallets reduce the risk of censorship and single points of failure sensitivity.

Customizable features

Smart contracts provide users with customizable features, such as spending limits, Multi-signature transactions and programmable rules to tailor the control of digital assets to individual needs.

2. What are the use cases of smart contract wallets?

Smart contract wallets enhance the capabilities of the Web3 ecosystem in a variety of 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 fast payments, lending, trading tokens, providing liquidity, interacting with DApps, and integrating with decentralized exchanges. Here are some use cases for smart contract wallets:

Get DeFi services

Integrated features in smart contract wallets Enables users to access various decentralized finance (DeFi) platforms directly from their wallets. Users can conduct DeFi activities such as asset lending without relying on traditional financial institutions. Additionally, users can interact with DeFi services by connecting smart contract wallets to these platforms.

Decentralized Identity

Smart contract wallets can become an integral part of decentralized identity systems . By keeping data in smart contracts, people have more control over what they can do with the data and how they access it, reducing the potential for identity theft while retaining privacy.

Secure Asset Management

Features such as multi-signature and configurable access control make smart contract wallets a solution for individuals and organizations to securely manage digital assets. For example, businesses can increase the security of their digital assets by using smart contract wallets to limit access to only authorized employees.

Collaborative decision-making

Organizations or groups can use smart contract wallets to ensure that spending decisions are made collectively. For example, a non-profit organization might use a multi-signature smart contract wallet to release cash. The wallet requires the approval of several board members before releasing cash, making the process (and underlying stakeholders) more accountable.

Voting System

Using smart contract wallets can make the voting process more transparent and efficient. Each smart contract reflects a vote. Tracking the voting process on a distributed ledger helps maintain the integrity of elections and thwart manipulation attempts.

3. What is the role of multi-signature smart contracts in Web3?

Multi-signature wallets require approval from multiple people to perform operations. They ensure that actions taken are agreed upon by a majority of signatories.

Multi-signature or multi-signature smart contract wallets require the approval of multiple signers to conduct transactions. The wallet uses an “m-of-n” signing principle, which means that to approve a transaction, m of the specified n signers need to agree. The use of a multi-signature method adds an extra layer of security to the wallet, increasing its resistance to hacker attacks.

The n value represents the total number of selected signers. Each signature has its own unique private key. As the value of n increases, wallets become more decentralized and more secure. The m value represents the minimum signature required to authorize the transaction.

An example will help us better understand the functionality of a multi-signature wallet. In a 3-of-4 multi-signature wallet, there will be four signers (n = 4), and the execution of the transaction will require the approval of at least three of these signers (m = 3).

4. How does ERC-4337 enhance the functions of smart contract wallets?

ERC-4337 brings an approach to account abstraction that eliminates links to external accounts (EOA) and promotes more creative and user-friendly designs.

Prior to ERC-4337, smart contract wallets often faced limitations. They sometimes interact with EOAs, which still involve private key management and may require centralized relays to execute transactions. Blockchain relays are third-party services that help data move and communicate between various blockchain networks. This dependence on external entities is a concern for projects striving for full decentralization.

ERC-4337 is an account abstraction method that allows people to use smart contracts as their primary accounts and eliminate centralized relays, EOAs, or private keys. Thanks to ERC-4337, wallets can adopt more creative and user-friendly designs. It enables developers to integrate wallets with advanced features such as automated payments, unique wallet recovery technology, and multi-factor authentication. These wallets are more secure, user-friendly, and versatile.

5. Smart contract wallets vs. ordinary wallets

The difference between ordinary wallets and smart contract wallets lies in their functions and goals.

Regular or external Ethereum wallets enable users to store, manage and interact with their digital assets on the Ethereum blockchain. These digital assets may include Ethereum (ETH), Ethereum’s native cryptocurrency, and other ERC-20 tokens. To allow users to access and manage their funds, each wallet generates a unique public address and corresponding private key or seed phrase. Using these wallets, people can perform basic tasks such as 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. It enables users to implement two-factor authentication (2FA) (adding an extra layer of protection for funds), sign transactions on their phone, set monthly spending limits, generate session keys (temporary encryption keys for a single session or transaction ) Play blockchain games without ongoing transaction approvals, automated bill payments, decentralized wallet recovery, and more.

6. Smart Contract What are the risks and considerations for wallets?

Developing smart contract wallets requires advanced technical knowledge. They must also be wary of human errors that can lead to irreversible transactions being sent to the wrong address.

As with all technologies, smart contract wallets have their potential drawbacks:

Programming Complexity

Developing and maintaining smart contract wallets is a complex task , requiring developers to have advanced technical knowledge. Any vulnerability in the backend gives criminals room to sneak in.

Irreversible Transactions

Although automation is a core feature of smart contract wallets, loopholes or errors in the program may lead to unexpected losses or transfers that are irreversible.

Early Technology

The technology behind smart contract wallets is still evolving. In order to be able to use smart contract wallets effectively, people need to be aware of the latest developments.

Human Error

Complex smart contract wallets require precise programming. There is always the possibility that human error can lead to vulnerabilities.