Protecting Your Crypto Assets: Securing Your Self-Custodial Smart Wallet

Smart wallets are gaining in popularity. They enhance both user accessibility and security by combining advanced security measures and smart contract capabilities. They offer innovative features like multi-signature configuration, passkeys, two-factor authentication, social recovery and other security measures.

In our last blog post, we reviewed the different types of wallets out there and how to use them in combination to maximize safety and convenience. In Part Two of our Protecting Your Crypto Assets series, we delve into self-custodial smart wallets and some of the most interesting features smart contract wallets offer, with great potential for increased protection over your wealth.

What Are Smart Contracts?

Smart contracts refer to code built within an address on the blockchain, which, given specific conditions are met, automate actions, including blockchain transactions, in a traceable, accurate and immutable fashion as to eliminate any need for third party involvement beyond the initial programming. Smart contracts have also found use beyond the world of crypto, notably in supply chain management and corporate governance.

While Ethereum pioneered and popularized smart contracts, increasingly, more blockchain networks are becoming compatible with them. While the reliability of smart contracts depends on the code and its developer, it all remains publicly available for consultation, which means errors or vulnerabilities can be detected by the community in order to expedite fixes. While the immutable nature of the blockchain renders it impossible to replace erroneous or vulnerable code by new code, it is possible to fix it by proxy, in effect upgrading the original code.

A smart contract wallet, or smart wallet, interacts with the smart contracts on the blockchain network in order to execute transactions or to activate diverse programmed functionalities. These include many interesting options for you to consider, offering you greater control and security over your keys and your crypto assets. Overall, smart contracts ensure transparency and guarantee of enforcement between parties of any given transaction or ownership configuration.

Smart Contract Functionalities

Multi-Signature Smart Wallets

An outgoing transaction on the blockchain from a traditional single-signature wallet must be verified before the funds are sent to a new address. This is done automatically by the wallet’s underlying code using the private and public key pairs it stores, as long as you input a specific PIN to access the wallet itself (which also protects your seed phrase). 

As such, single-sig wallets are simple and convenient to use, as well as more common on the market.

On the other hand, multi-sig wallets require multiple inputs verified by the smart contract at the blockchain address in order to confirm an outgoing transaction. If someone were to find the PIN for your single-signature wallet or your seed phrase, nothing can stop them from spending your crypto holdings, as they will have full access and control over your private and public keys. 

Multi-sig wallets offer a measure of protection over such an occurrence by only allowing transactions to be made using at least 2 independent inputs or signatures, decentralizing access to your keys.

Say you share crypto holdings with a trusted partner, but your personal PIN or seed phrase has been stolen and your wallet is compromised. With a multi-sig configuration in place, outgoing transactions will be denied unless the second party signs on to it. This adds a layer of security to your shared funds, provided the two access-keys to each wallet are kept safe and separate. This also ensures that neither party can unilaterally retrieve the funds, in the event of a dispute, for example.

Multi-sig wallets can be compared to multi-factor authentication measures, with degrees of complexity varying from one issuer to another. Multi-signature wallets are useful for pairs and larger groups of holders, but it is also possible to create a multi-sig configuration for yourself using different self-custodial wallets. Despite the added benefits of this extra security measure, setting this up requires a fair amount of crypto expertise.

Smart Wallet Passkeys

Information contained in wallets are usually accessible via PINs of varying complexity. This, in practice, replaces the wallet masterkeys known as seed phrases. If you lose your PIN, you are able to recover your keys using your seed phrase.

A PIN, unfortunately, does not constitute an invincible defense against hackers. Even if you remain careful, your passwords can appear in data leaks. Similarly, a seed phrase can be targeted by spyware scurrying through your computer or smartphone files, looking for any strings of 12 to 24 words to steal.

To these concerns, a solution is starting to gain ground in the crypto world and beyond. Passkeys differ from passwords in that passkeys are automatically generated using cryptography or biometric data, as opposed to being created by the user. The vulnerability of weak passwords is eliminated.

When a passkey is initiated, two keys are generated: a private key, stored directly in the user’s device, and a public key which corresponds to the latter, and which is stored with the account company. The public key then serves to authenticate the device’s private key. This two-step authentication process, although automatic, allows for enhanced privacy and security, as the private key never leaves your device.

Personal biometric data, like a fingerprint, is much harder to access and successfully replicate. Biometric data remains stored in the device. Though not invincible either, it is more secure than other forms of identification, including PINs and passwords. Apple has been using Touch ID for over a decade now, and Android has offered biometric identification for even longer. The convenience of biometric passkeys is known to most who own a smartphone today, and luckily, it does well at strengthening the security.

Integrating this technology to that of blockchain, self-custodial smart wallets which include advanced features like passkeys and multi-signature configuration are emerging in the crypto world as contenders for one of the most convenient and secure.

The features smart contracts offer do not stop there. While they are useful to protect the contents of your wallet, they also yield interesting internal features, further helping you build towards your financial health and security.

Smart Wallet Social Recovery

Using smart wallet contracts, you can set upwards of three wallet addresses as guardians, including your own or those of trusted individuals. These guardians will be able to help you recover your wallet in the unfortunate event you lose the signing key needed to approve your transactions. With this signing key, you can also add or remove addresses from your list of guardians, with a delay of a few days to prevent fraud.

As guardians, they will be notified that you have lost your signing key once you start the recovery process. They can take a majority vote to change the signing key. From there, you will regain control of your wallet.

This social recovery mechanism is celebrated by Vitalik Buterin, co-founder of Ethereum, who is outspoken about how he believes social recovery bolsters wallet security and usability.

Smart Wallet Checks on Financial Behaviour

Smart contracts can also be enabled to protect your crypto assets by providing automated checks on your financial behaviour, including daily withdrawal limits. This feature can also be useful to buy more time and limit the damage of unauthorized transactions in the event your seed phrase or PIN is leaked.

Another use smart contracts allow is that of imposing a time delay for large withdrawals, giving you time to take the right steps in reacting to suspicious activity on your account.

You can also, thanks to smart contracts, create a whitelist of approved and trusted addresses from which you can receive and send funds in full confidence.

These features are innovative, yet they only represent the beginning of what smart contracts can do for you. Smart contracts continue to evolve rapidly since they began to break into the crypto world, with both new features and increased security for both smart contract code and smart wallets.

As part of our Protecting Your Crypto Assets series, learn key points to look for in a crypto company for safe business in our next blog post. Sign up for our newsletter for more content.

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Frequently Asked Questions

What Are Crypto Smart Wallets?

Also known as smart contract wallets, these self-custodial wallets use smart contract codes to enhance the security and automation of traditional wallets, offering additional features including multi-factor authentication, passkeys, social recovery or multi-signature.

What Are Smart Contracts in Blockchain?

Smart contracts are immutable code embedded within the blockchain to automatically process an agreement as programmed to do given specific conditions are met. They enable multi-signature wallet configuration, social recovery and checks on financial behaviour, among many other interesting features.

What Services Does EZO Swap Provide?

EZO Swap enables you to seamlessly convert available currencies of your choice between one another, whether it is cryptocurrencies or fiat currencies, all while ensuring your privacy and your security with each transaction.