Smart wallets are next-generation non-custodial crypto wallets powered by Ethereum smart contracts, possessing advanced features to enhance security, accessibility, and user experience. They allow users to participate in various crypto-based activities without needing multiple approvals, batch various transactions into one, and are accessible using passkeys instead of having to store seed phrases and private keys.
In this article, we will explore what smart crypto wallets are, how they work, their pros and cons, and the technologies used in them. So, let’s get started.
What Are Crypto Smart Wallets?
A crypto smart wallet uses blockchain-based smart contract technology to abstract the many complexities typically associated with traditional crypto wallets. Unlike the latter, which primarily store private keys and sign transactions individually, these wallets are capable of executing programmable logic, allowing for complex operations and interactions with decentralized applications (DApps).
Smart wallets can automatically manage and execute tasks based on predefined rules and conditions. This enables users to perform a wide range of tasks within blockchain ecosystems, such as automating payments, participating in DeFi protocols, and ensuring secure interactions with DApps. All these actions are carried out without requiring manual approvals each time.
The main purpose of smart wallets is to simplify the user experience in the crypto ecosystem. The advantage of not having to store seed phrases and private keys ensures smooth onboarding. Furthermore, smart wallets offer users improved flexibility around managing authorization and approvals. With innovative security measures like passkeys and intuitive interfaces, these wallets are giving users a holistic solution that caters to novice and experienced cryptocurrency enthusiasts.
How Do Crypto Smart Wallets Work?
Traditional crypto wallets adopt Externally Owned Accounts (EOAs) technology, which relies on a single private key for access and transaction signing, resulting in users having to authorize every interaction with the blockchain on their account.
Whereas, at its core, smart wallets are DApps that use smart contracts on the blockchain to enable users to manage their digital assets. This provides immense flexibility and potential for new features to be integrated into the blockchain applications.
Smart wallets store the user’s assets, such as crypto and NFTs, and keep track of the account’s nonce, which is a cryptographic number used to prevent replay attacks. There is also the executable code called the Logic that governs the wallet’s behavior and defines rules for allowing multiple operations from the same user in a single transaction, authorizing who can initiate these transactions, what type of transactions are allowed, and how transaction fees (gas payment) are handled.
Ethereum Technologies Used By Smart Wallets
Here are the three foundational technologies that are being used to develop smart wallets:
- EIP-5792
This Ethereum Improvement Proposal (EIP) aims to standardize the communication between DApps and wallets, with a particular focus on smart contract wallets. It seeks to improve user experience and developer workflows by simplifying how DApps request and execute complex on-chain transactions.
- ERC-6492
A primary drawback of smart contract wallets is the inability to sign messages or transactions before they are deployed on the blockchain. This is due to the contract’s address, which is used to derive the public key for signature verification, not known until after deployment. ERC-6492 introduces a new standard for signatures that are compatible with the widely used standard signature validation method for Ethereum smart contracts.
- ERC-7677
ERC-7677 defines a standard interface for paymaster services to interact with wallets, making it easier for wallet developers to integrate gas-free functionalities and for users to benefit from them. Paymasters are services that can sponsor transaction fees (gas) on behalf of users, allowing for gasless transactions or transactions with substantially lower fees.
Pros and Cons of Crypto Smart Wallets
Smart contract wallets offer several significant benefits over traditional crypto wallets, leveraging the programmability and automation capabilities of smart contract technology for daily crypto transactions.
Let’s look at the advantages of smart contract wallets:
- Crypto smart wallets eliminate users needing to download an app or browser extension to store their crypto assets. With these smart contract-powered wallets, users can create and manage their assets within DApps, making the process seamless and user-friendly, especially when it comes to onboarding new crypto investors.
- One major caveat to using traditional crypto wallets is the management of seed phrases. Users are required to securely store a series of words that serve as a backup to their wallet. If they lose these phrases, then it means losing access to their assets. Smart wallets do away with the need for seed phrases, instead, they utilize more intuitive and secure methods for account recovery, such as passkeys and encrypted backups. Passkeys protect against unauthorized access, ensuring that only the real owner of the wallet can initiate transactions or access sensitive information contained within it.
- Due to the utilization of smart contracts, crypto smart wallets are highly flexible, allowing users to manage and spend their assets across different DApps and multiple blockchains. They can support a wide range of functionalities depending on the user’s needs, from simple transactions to complex multi-step interactions with DApps. This flexibility makes them suitable for both crypto beginners and advanced users alike. DApps also leverage this adaptability to design customized user experiences, further enhancing the wallets’ utility and appeal.
- Smart wallets integrate paymasters to sponsor transactions on behalf of the user. This feature is particularly useful for enabling gasless transactions. Users can execute transactions without worrying about fees, which are covered by the paymaster, reducing the financial barrier to using blockchain-based applications and enabling a user-friendly experience for newcomers.
- Smart wallets support batched transactions, allowing users to bundle multiple actions into a single transaction, significantly improving efficiency and reducing costs. Users can approve and execute a trade in a single, seamless transaction rather than conducting multiple actions. Batched transactions streamline the process and enhance the overall user experience by making interactions more straightforward and cost-effective.
- Magic Spend is a feature unique to Coinbase’s smart wallet, which simplifies the crypto spending process. It allows users to manage their funds directly from their Coinbase account without having to transfer them to a smart contract wallet first. This eliminates the numerous steps involved in managing balances and ensures users can quickly and easily complete transactions.
Now let’s take a look at the cons of crypto smart wallets:
- Since smart wallets rely on smart contracts for functionality, it opens the door for potential attacks from bad actors. If there is a vulnerability in the particular smart contract used by the wallet, then it would allow hackers to access users’ wallets and misuse their assets.
- Smart wallets partner with multiple third parties for transaction relying, wallet locking or recovery, and multi-signature validation. Due to this reliance, there exists a possibility that malicious guardians can negatively influence the wallet’s activities.
Popular Crypto Smart Wallets
Here are some of the leading crypto smart wallets available at the time of publication:
- Coinbase Smart Wallet
- OKX Smart Wallets
- Fuse
- Locksmith
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Final Thoughts
Smart wallets aim to solve the risk posed by traditional crypto wallet users, where they are required to write down seed phrases on paper and store them without getting damaged or lost. With a smart wallet, users only need a passkey to access and manage their funds, and they can execute multiple actions in a single transaction, removing the need to approve transactions individually.
Crypto smart wallets can play a crucial role in increasing crypto adoption as they enable seamless onboarding for newcomers and efficient usage for market veterans. However, just like every other technology in the crypto space, these wallets also come with a fair share of risks, especially their reliance on smart contracts and third-party applications, which are exposed to potential exploits from hackers and other bad actors.
Therefore, it is highly recommended that crypto users conduct thorough research and understand the functionality, advantages, and risks of smart wallets before making a final decision and depositing their assets. This article is only for informational and educational purposes, and should not be taken as financial advice.