Smart Contract Wallets Explained
Even experienced users label DeFi complicated. A wide selection of different DeFi protocols and tools makes it even worse for newbies. But smart contract wallets offer a glimmer of hope. This article sheds light on next-gen wallets designed to simplify the DeFi experience and beyond for the masses.
- A smart contract wallet is a type of Web3 wallet powered by smart contracts. It enables additional security, batch transaction, and recovery features for users.
- Smart contract wallets require no seed phrases or passwords because you decide who and under what conditions can have access. Smart contracts back up such wallets and ensure safety.
- Users can utilize smart wallets for complex DeFi experiences, such as automated collateral management, combined strategies across DeFi protocols, batch actions to save gas, and more, all within an Intuitive interface
What Is a Smart Wallet: Under the Hood
A smart wallet is a wallet type requiring no private keys or seed phrases. Smart wallets rely on smart contracts to make the user experience safer and easier. Unlike common Web3 wallets, smart wallets use no private keys or seed phrases to access your account. Instead, you set who and under what conditions may access the wallet via smart contracts.
Let’s recall the basics of the Ethereum blockchain architecture to understand the concept of a smart wallet (we use Ethereum as a primer because it’s the most popular smart contract development platform)
Think of a bank account with some USD balance you can use to send transactions. Similarly, the Ethereum account holds ether (ETH) instead. Such an account can either be user-controlled (most wallets) or deployed as smart contracts.
- User-controlled wallets require private keys and seed phrases because users interact with the wallet manually.
- Smart wallets interact with smart contract accounts. Think of a layer of automation on top of the user-controlled accounts. Smart contracts make wallets safer and easier to use.
How Do Smart Wallets Work?
Accounts are a central component of the Ethereum protocol playing a role in every transaction and contract. Ethereum has two types of accounts:
- Externally Owned Accounts. They can carry multiple functions. The most renowned one is being a wallet or simply a private key/address pair. The majority of popular non-custodial wallets leverage externally owned accounts.
- Contract Accounts. Such an account comes without a private key but has an address, code, and storage. Contract-based wallets, also known as smart contract wallets, rely on contract accounts to store and run the code.
Whenever you connect your smart contract wallet to a dApp, you get the smart account address for the wallet. In essence, this is a multi-signature wallet combined with multiple keys to authorize operations instead of smart contract accounts.
The Ethereum contract wallets interact with several components such as DApps, third-party & contract libraries, APIs, key management applications, smart contract accounts, and user accounts (Ethereum). Here’s a simplified visual model of the structure in works.
Alt: smart contract wallets interaction
The wallet contracts utilize oracle interfaces to call any external library, accounts, and third-party web services. DApps use these wallet contracts to govern transactions and manage keys.
When verifying messages from signatures of popular wallets (externally owned accounts), you’d expect to get a public key and address in return. Smart contract wallets, on the other hand, use alternative methods. For example, a popular smart contract wallet Argent leans on the concept of meta transcription — a specific type of transaction signed by one or more key pairs and then submitted by a relayer.
Why Use Smart Wallets?
Smart wallets merge decentralization with intuitive interfaces and powerful feature sets, thus making user experience more efficient. Specifically, you can benefit from optimized transaction efficiency, improved security features, and flexible interaction with protocols.
Let’s dive in.
Optimized Transaction Efficiency & Batch Transactions
Combine multiple transactions into a single transaction easily, for the following advantages:
- Save on gas fees
- Make multiple transactions at once
Improved Security Features
Most smart wallets support the social recovery feature. Social recovery allows you to recover a wallet without seed phrases/passwords. Specific recovery steps may vary across wallets, but the idea is the same — you nominate a trusted person to recover your wallet access in an emergency. Here’s a specific example of wallet recovery for a popular Argent wallet.
Argent wallets differentiate two types of keys: signature and guardian. A signature key is the master key used to approve transactions and manage guardian keys if required. Guardians are supplementary keys used to recover the signature key.
Once you create a wallet, you get a signature key and create three guardian keys. The guardian keys can alter the wallet’s signature key if they cooperate. If all three guardian keys approve a new signature key, it’s switched to a new one. In other words, you nominate three trusted persons who can recover your access in case of loss/theft.
Learn more about smart contract wallet recovery.
Some of the other security features include the following.
- Multi-signature transactions. Secure your transactions with multiple signatures. Smart wallets support offline authorization
- Emergency account management. Freeze your account or deactivate a trusted device in case of loss, theft, and more.
- Transaction amount limit. Set a transaction limit to reduce the damage in case of a mistaken transaction or theft.
- Advanced authentication. Connect your wallet to authenticator apps/other wallets for extra protection
- Whitelisting/Blacklisting. Set a list of approved addresses, block other wallets to never allow transactions and more.
Flexible Interaction with DeFi Protocols
Smart contract wallets allow easier access to DeFi due to optimized interaction across protocols and their features. Imagine you could manage your assets across multiple DeFi protocols from one single dashboard. Smart wallets fused with specific platforms simplify complex DeFi actions by grouping or sorting them into a one-click effort.
You can buy, sell, leverage, and manage DeFi positions within a few clicks. It’s rather a digital asset management experience, but with improved cost-efficiency, automation, and flexibility.
A prime example would be InstaDapp with its combined transactions (to save on gas fees), debt migration, asset lending, and liquidity services across popular DeFi protocols. Depending on the platform, you can access the following.
- Access loan refinancing tools. Put your collateral management on autopilot, and protect your position from liquidation
- Combine various DeFi actions. Mix actions across protocols and create unique protocol interactions
- Execute batches. Merge your combined strategies in a single transaction to save gas (flash loans, protocols, swaps, and beyond)
- Leverage. Create/close leveraged longs and shorts in one transaction, and manage them more efficiently.
Smart Wallets: Pros and Cons
Let’s take a second to unpack our reasoning and explain the core pros and cons of sticking with a smart contract wallet.
Smart Wallets: Pros
Think of a traditional banking app with all the features it has. Smart contract wallets tend to cover as much while keeping things decentralized. It’s the next milestone toward unwavering user experience crossed with impeccable security.
- Multi-sig wallet support
- Two-factor authentication (2FA)
- Social & multi-sig recovery
- Whitelisted & blacklisted addresses
- Rate-limited withdraws and associated triggers
- Advanced alerts, emergency lock
Smart Wallets: Cons
Although automation brought by smart contracts play on hand of user experience, it may also imply risks associated with internal and external infrastructure.
- Smart contract-based wallets rely on code. However perfect it may be, the industry has already seen many exploits, with even more yet to come. Most issues of this frame are tied to language design, EVM, and programming reliability.
- Smart contract wallets have external linkages, which may cause security issues related to library contracts, API calls, 3rd party calls, and any links to external accounts & web services.
Other notable cons include a temporary lack of support (many exchanges do not support transfers received to and from smart contract wallets) and cross-chain closure.
Smart Wallet Examples
Let’s briefly unpack some of the smart wallets and middleware protocols you can explore.
The InstaDApp platform allows DeFi interaction across protocols. Simply put, it aggregates multiple DeFi protocols into one smart contract layer.
You can use the Metamask wallet to access the platform. It’ll further use smart accounts to take your input and turn it into complex actions.
Alt: how instadapp works
Alternatively, you can create a DeFi Smart Account.
Alt: defi smart account
The platform currently supports Ethereum, Arbitrum, Polygon, Fantom, Optimism, and Avalanche.
Here’s what you can access.
- Borrowing/lending (Compound). Cross-chain borrowing and lending.
- Swapping assets (Uniswap). Cross-chain swaps of positions
- Leveraging assets. Unlock collateralized debt positions management (MakerDAO), and refinance your DeFi positions across protocols
- Advanced flash loan routing. Expand the capacity and asset availability by utilizing lending protocols to access additional liquidity.
- Assembly Dashboard. The open-source dashboard for the InstaDapp Protocol developers.
If you’re looking for a detailed explanation of how DeFi Smart Accounts work, check out the InstaDapp docs. You can use the following installation guide and how to interact with the platform on the smart contract level.
DeFi Saver helps you manage assets across MakerDAO, Compound, AAVE, dYdX, Fulcrum, and beyond. The platform facilitates creating, managing, and tracking leveraged positions with its automated management and liquidation features (MakerDAO CDPs).
Here’s what you can access.
- Custom DeFi Receipts. Merge flash loans, swaps, and DeFi protocol interactions into a single transaction to save on gas. Access the DeFi recipe library or create your own from scratch.
- Liquidation protection. Set protection or leverage increases at specific prices/ratios. Automated stop loss and take profit, target ETH threshold, and more.
- Loan shifter. Unlock a powerful refinancing tool to change collateral/debt assets and shift across protocols
- Smart savings feature. Track the best APY, estimate earnings, and withdraw stablecoins)
- Demo mode. Test any DeFi strategies safely
Argent is a smart contract wallet focusing on low gas fees. It also provides you with a free ENS address to replace a generic long one.
- Batched transactions. Save on gas by combining transactions
- ENS address. Get a free ENS address for free
- Compound interest. Easy access to lending/borrowing
- Mobile wallet. Available on the go (mobile wallet)
- Argent Guardians. Trusted contacts, lists, and sessions
Learn more about Argent smart wallet.
The smart wallet concept perfectly aligns with the long-term term vision of the DeCommas protocol — it’s a smart, secure, and intuitive way to interact with DeFi.
Although the DeCommas DeFi automation platform hasn’t introduced a smart wallet interface, it intends to do so in the future. This way, users will replicate (subscribe) to the strategies through smart wallets instead of normal mutual vaults.
Smart contract wallets offer users flexibility beyond a regular wallet, which means that users can access various DeFI features easier. If you’re looking for an automated and intuitive DeFi experience, smart wallets might cover your needs.