What are smart contract wallets?
Simply put, a crypto wallet that interacts with smart contracts is called a smart contract wallet (SCW).
Crypto wallets can be broadly classified as custodial and non-custodial wallets, Custodial wallets are issued by central exchanges like Coinbase or Binance. They offer convenience but expect the users to trust the centralized company to safeguard their cryptos.
The old, but rarely followed advice “not your keys, not your coins,” seeks to eliminate the third party and instead asks users to park their cryptos in non-custodial wallets. These wallets are secured by a private key, which you also need every time you need to authorize transactions and send money to other accounts.
Both of these wallets have big flaws when it comes to safeguarding cryptos. The former puts too much trust in a third party, while the latter shifts the onus of securing the wallet on to the user.
This is where SCWs come into the picture. By combining the benefits of both custodial and non-custodial wallets, SCWs puts people in control of their cryptos, while ensuring the funds are as safe as they are with banks. An SCW has several interesting features, such as additional security and recovery without a seed phrase, thanks to its use of smart contracts.
Instead of requiring seed phrases, SCWs rely on several other mechanisms with “social recovery” being one of the most popular ones. In the same vein, transactions from SCWs can be made to require multiple signatures from multiple associated wallets to facilitate a transaction, for additional security.
Another major advantage of SCWs is the ability to conduct transactions without paying gas fees. You can also use SCWs to bundle multiple transactions inside a single transaction in order to cut down on both the gas fees and the time it takes to validate that transaction.
Some of the most popular SCWs are MetaMask, InstaDApp, and Zerion.
The biggest downside to SCWs is that many of the popular exchanges don’t support transactions from SCWs.
All things considered, SCWs are the way of the future since they don’t just let people stay in control of their funds, but also offer several interesting features that help deliver on the decentralized promise of the decentralized finance (DeFi) economy.
True, SCWs are currently harder to implement on blockchains that lack Ethereum’s smart contract capabilities. However, it’s just a matter of time before some crypto developers get together to brainstorm a solution.