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To unpack the evolution and future of crypto wallets, let's focus on Ethereum. It's the genesis of smart contracts and the blockchain where the vast majority of innovation has occurred. Let's dive in.
In Ethereum, apart from externally owned accounts (EOAs) controlled by private keys, commonly but inaccurately referred to as wallets, exists a second type of address: contract addresses (CAs). Their name says it all—they're addresses linked to smart contracts deployed on the Ethereum blockchain. Unlike EOAs, they lack a private key association and can contain programmable logic for crafting applications and use cases.
Externally owned accounts (EOA) are what we currently understand as wallets, and contract addresses (CA) are what we understand as smart contracts.
(Side note: If you're curious about what a wallet truly is, click here)
EOAs have serious UX problems
Wallets (EOAs), as gateways to decentralized finance, grapple with significant user experience (UX) hurdles hindering new user adoption. These problems are the reason we are still in the "early adopters" phase of DeFi. Let me describe the top 3:
Gas: EOAS providers can’t subsidize gas fees for users and enable settlement in tokens other than ETH. The system is too rigid.
Private Keys: Users are still writing down their private keys on paper because software and hardware wallets typically only store them on the user’s device. This is inconceivable in a digital world.
Abundance of signatures: Each transaction needs to be signed using your private key, and each token different from ETH needs to be approved before spent. Too many interactions.
The obvious conclusion is that UX needs to improve to move out of the "early adopters" phase into mass adoption.
Smart Wallets powered by Account Abstraction are the solution
A while back, Vitalik Buterin (co-founder of Ethereum) and other ethereans realized that private keys are not the final answer to self-custody because a secret number (in the form of a seed phrase) is hard to keep safe and easy to lose. They envisioned a world in which personal wallets can be contract accounts, allowing them to be secured by any custom logic.
This effort to start using contract accounts as wallets is referred to as Account Abstraction because a lot of that effort goes into making contract accounts "equal" to EOAs, in other words, first-class citizens on Ethereum. So, barely a year ago, Ethereum unveiled the Account Abstraction standard (ERC-4335), which essentially abstracts the complexities of EOAs, streamlining the user experience to unlock new use cases.
A smart wallet is a new type of wallet controlled by smart contracts and powered by Account Abstraction, which means you can custody and manage your digital assets without relying on a private key. They take the best of external addresses (EOAs), which is the ability to self-custody and manage digital assets, and the best of contract addresses (CAs), which is the ability to program logic.
Smart wallets tackle UX issues as follows:
Gas → Paymaster: Smart wallets can integrate a Paymaster feature, enabling DeFi applications to subsidize gas fees, rendering transactions cost-free. Gas fees can also be settled in a non-native crypto, like USDC or USDT, fostering parity with traditional finance.
Private Keys → Social Login: Smart wallets can generate unlimited encrypted private keys linked to conventional sign-in methods in an app. This obviates the need to write down private keys, keeping them encrypted "under the hood" without the user realizing it. Furthermore, security measures like multi-factor authentication or biometric sign-in can also be applied to enhance UX and security.
Abundance of signatures → Pre-approvals: With smart wallets, transactions don't need manual signing; signatures are pre-approved by the smart contract. This saves time and renders the user experience more intuitive.
Moreover, the programmability inherent in smart wallets enables the creation of functions (or as we like to call them, paths) to execute various transactions with a single click. For instance, if your crypto portfolio is divided among three assets—say, 50% in ETH, 30% in USDT, and 20% in LINK—you could instruct it to rebalance your portfolio to ETH with a single interaction. The possibilities are limitless.
Smart wallets powered by account abstraction are the key to mass adoption
You can create a wallet using your email, transact without gas or use any token to settle it, and execute complex financial operations in a click. They are the future of our interaction with blockchain technology and serve as a conduit to onboard new users into the ecosystem. An evolution.