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Overview
In the dynamic realm of cryptocurrency, the pursuit of enhanced user experience (UX) and the acceleration of Web3 adoption have emerged as central goals. As smart contracts continue to evolve, their potential to empower users with increased control over transactions, such as batched transactions and customized gas payments, opens avenues for meaningful UX improvements. These advancements are poised to reshape the landscape of cryptocurrency usability and drive Web3 integration. This article delves into two pivotal shifts that are reshaping the crypto landscape: the transition from externally-owned accounts to modular smart accounts, and the shift from generalized wallets to specialized smart wallets.
Accounts
Stepping all the way back, we have to talk about Ethereum transactions and accounts. Many are familiar with the term Bitcoin UTXOs. The UTXO (Unspent Transaction Output) model is the foundational method of maintaining blockchain records and refers to the remaining amount of crypto unspent after executing a transaction. In the context of UTXO-modeled blockchain, individuals do not directly transact specific amounts of digital currency but instead transact in the denomination of UTXOs. Ethereum operates differently via an Account-based model.
The Account-Balance model is an alternative method of maintaining blockchain records, primarily employed by smart contract platforms such as Ethereum and Binance Chain (BNB). It emerged as a solution to the challenges faced by Ethereum developers in adapting the privacy-focused, disconnected logic of the UTXO model to the accounts of decentralized applications (dApps).
Unlike the UTXO model, which resembles cash-based accounting, the Account-Balance model resembles bank-based accounting. On smart contract platforms, each wallet address has a single balance, which is increased or decreased with the receipt or transfer of funds respectively.
The Account-Balance model, as used in Ethereum, functions as follows:
- Jan has 10 ETH and wishes to transfer 5 ETH to Steve. The system first deducts 5 ETH from Jan’s account, resulting in Jan now having 5 ETH.
- The system then increases Steve’s account by 5 ETH. Since the system is aware that Steve already has 5 ETH, Steve’s final balance is 10 ETH.
While the Account-Balance model allows wallets to derive account balances in a much more straightforward and efficient manner compared to the UTXO model, it should be noted that it is more susceptible to double-spending attacks as compared to the UTXO model.
The method of record-keeping employed by a blockchain is crucial as it directly affects how a crypto wallet derives digital asset holdings. If a wallet cannot conform to the blockchain's mode of record-keeping, it is not functional. For instance, if a Bitcoin-based wallet provider is unable to handle the complexity of the UTXO model and track all the new addresses associated with UTXOs, it will result in a perceived loss of funds for the wallet user.
Source: Kraken
Ethereum Accounts
The Ethereum network has two types of accounts: externally owned accounts (EOA) and smart contract accounts. An EOA is controlled by a private key and has three properties: an ETH balance, a nonce, and an address. Transactions on the Ethereum network must originate from an EOA and be validated using a hard-coded validation process that requires a valid signature, nonce, and account balance.
Externally Owned Accounts (EOAs)
Wallet services such as Metamask, Rainbow, or Coinbase wallet operate as EOAs. The account validation logic is hard-coded into the Ethereum Virtual Machine (EVM), and every signature must use the same signature scheme (ECDSA). However, with account abstraction, EOAs and smart contract accounts become unified and abstracted away, enabling more flexible transaction validation and enabling multi-owner accounts and post-quantum signatures.
Problems with the EOA model
The current design of externally owned accounts (EOA) in Ethereum, which is the standard for wallets today, is not in a state that billions of people across the world can use. The security of EOA wallets relies entirely on users managing a single private key, which is prone to mistakes and hacks, as evidenced by the frequent hacking of holders of valuable NFTs such as Bored Ape Yacht Club. This is a problem with the user experience of Ethereum, and it highlights the need for a more user-friendly and secure way of managing digital assets. We should not expect the next financial system to rely on outdated security measures such as memorizing 12 words written on a piece of paper.
(Smart) Contract Accounts (CAs)
The Ethereum network has two types of accounts: Externally Owned Accounts (EOAs) and Contract Accounts (CAs). CAs are controlled by the logic within the smart contract code and have additional properties like code and storage. To address some of the issues associated with EOAs, projects like Gnosis and Argent have developed smart contract wallets. These wallets dictate which entities are authorized to sign transactions and provide the ability to have multiple signers on an account. However, smart contract wallets are more gas-intensive and need an EOA like MetaMask to pay for gas and trigger actions, which makes their adoption limited. The Ethereum community has been seeking solutions through account abstraction to redesign chains for smart contract wallets to be widely adopted.
Source: Binance Research
Differences between EOA and CAs
In Ethereum, digital signatures are used to verify the authenticity and integrity of a message. This is done through keypairs consisting of a private key and a public key. Ethereum uses the Elliptic Curve Digital Signature Algorithm (ECDSA) to generate keypairs for Externally Owned Accounts (EOAs) that control Ethereum accounts. EOAs and Signers are essentially the same things, as they both hold tokens and can move them. In contrast, Contract Accounts (CAs) do not have signing keys, but rather ownership manifested through the contract's code. Only EOAs can initiate transactions and computations on the EVM, but this rule could be changed through the Ethereum Improvement Process (EIP).
Account abstraction is a concept that seeks to make the self-custody of digital assets on the blockchain safer and easier. Currently, externally owned accounts (EOAs) on Ethereum have special privileges that smart contract (SC) accounts do not, despite both account types sharing many of the same properties. With account abstraction, smart contract logic can be used to replace the hardcoded functions of EOAs, making account creation and management more flexible and customizable. This also means that users can build their own safety nets for self-custody, reducing the risk of losing seed phrases or falling victim to hacks. Additionally, account abstraction promises to significantly improve the user experience on Ethereum by simplifying complex transactions and reducing the number of steps required to perform them.
The Transition to Smart Accounts
The transformation from externally-owned accounts to modular smart accounts is a significant step in crypto mainstream adoption. Modular smart accounts introduce a more sophisticated architecture that caters to diverse user needs while eliminating the need for users to engage in complex infrastructure maintenance. This shift entails embracing modularity in the form of pre-built components, offering functionalities like batched transactions, paymasters, and session keys.
This shift is not just about technical efficiency, but also about strategic pragmatism. In the quest to maintain competitiveness, wallets are more inclined to integrate established bundlers, paymasters, and session keys developed by specialized infrastructure providers. This approach mitigates the need for redundant in-house development efforts and facilitates swift alignment with industry standards. Moreover, the integration of external modules can extend wallet functionality, enhance privacy, and add transaction safeguards. These modules, subject to meticulous audits, offer the choice of integrating verified solutions rather than reinventing the wheel.
The emergence of aggregators, such as Safe {Core}, Biconomy, and ZeroDev, is instrumental in streamlining the development process for modular smart accounts. These aggregators consolidate signing methods, logic modules, and execution infrastructure, akin to "module app stores." ZeroDev's offering, for instance, abstracts the complexity of bundler and paymaster infrastructure from developers while providing diverse web3 onboarding/signing options. While these full-stack solutions have gained traction, the module marketplaces are still in their infancy. However, their potential to monetize through network effects and shared revenues is evident.
The Rise of Specialized Smart Wallets
In a landscape characterized by burgeoning diversity in web3 use cases and user profiles, the prominence of specialized smart wallets is gaining ground. Generalist wallets are proving insufficient in catering to the nuanced requirements of varied users, prompting the emergence of specialized alternatives. The Safe {Wallet} exemplifies this trend, addressing security needs for organizations that the more retail-focused Metamask might overlook.
Modular smart accounts pave the way for a novel approach – the creation of specialized wallets through the permissionless combination of smart account modules. Users can now assemble modules to tailor their wallets precisely to their web3 needs. This customization brings flexibility that extends beyond conventional wallets. For instance, Castle crafts a specialized smart wallet catering to high-net-worth NFT owners by integrating Safe's multisig contracts for enhanced security. Rhinestone is another groundbreaking initiative, envisioning a user-friendly platform where individuals can craft their custom wallets by assembling smart account modules like building blocks.
As niche sectors within Web3 mature, specialized wallets are poised to capture significant market share. Whether it's gamers, DeFi enthusiasts, or NFT collectors, tailored smart wallets offer unique value propositions. However, their success hinges on key factors: interoperability among modules (via standards like EIP-6900), seamless discovery through module app stores, and robust security measures to prevent potential vulnerabilities.
Towards a Multichain Abstraction
The future of cryptocurrency usability extends beyond individual chains, necessitating a seamless experience across multiple chains. Crucially, the prospect of a user deploying multiple smart contract accounts across chains raises the challenge of maintaining a unified and efficient experience. Vitalik Buterin proposes a strategic approach: smart account keys could be anchored on one chain (such as L1 or L2), with a corresponding "keystore contract" facilitating cross-chain verification. This approach streamlines user interaction by reducing the need for multiple transactions across chains.
In conclusion, the cryptocurrency landscape is undergoing a transformative phase driven by two central shifts: the rise of modular smart accounts and specialized smart wallets. These developments respond to the growing demand for enhanced UX, diversified functionality, and secure user interactions. By embracing modular architectures and targeted functionalities, the crypto industry paves the way for more intuitive and efficient user experiences, propelling the adoption of Web3 technologies into new horizons.
