Smart wallets are non-custodial wallets controlled through smart contracts that allow for an ecosystem of asset management features to be built on top, such as transaction batching, signing in with a Web3 identity, a multi-signature option, and recovery without a seed phrase, to name a few.
But before we get into specific smart wallet features, let's define what smart contracts are.
What Are Smart Contracts?
A smart contract is an immutable self-executing contract between two parties defined by a computer program where the terms are written into lines of code. The execution results in a money exchange or service delivery, and is processed on the blockchain without the need for a trusted intermediary. If the predetermined conditions are not met, the contracts are not executed. As smart contracts are commonly associated with cryptocurrencies, Ethereum's smart contracts are widely regarded as a vital building block for decentralized finance (DeFi) and NFT applications.
The Benefits of Smart Wallets
Crypto is no longer just about securely storing but also putting assets to use in a new economy. As more and more individuals turn to self-custodial solutions, richer functionalities, easy-to-use interfaces, and absolute control are becoming the norm. Here’s how smart wallets respond to that demand.
- On-Chain Accountability
On-chain signature authorization policies and aggregation make it explicit which keys are used to sign a transaction, making operations more transparent and straightforward to audit in case something goes wrong.
- Decentralized Identity
Smart contracts enable a new identity management framework based entirely on-chain. This ensures that the user retains complete control over their personal data and its use.
- Transaction Batching
This feature can save costs. For example, “batching” common actions like token approvals and swaps into one transaction.
The logic defined by the smart contract allows multi-signature authorization. It requires the use of different keys, rather than just one, to authorize a transaction, thus significantly enhancing security.
- Programmable Recovery
Wallets can offer several options to recover funds into the smart contract itself. For example, if you lose your seed phrase, you could regain access to the wallet by asking a previously set of trusted individuals (also called “guardians”) to approve the recovery.
Thanks to the modularity of smart contracts, wallet developers can create an ecosystem of modules that users can opt to add to their wallets. This, in turn, creates an app store for new features like NFT lending frameworks, DAO voting modules, and non-custodial asset management services.