How Account Abstraction will Transform Digital Asset Management: A Deep Dive

Crypto has moved from a mere fad to a recognised financial instrument in the international financial setting. However, several institutional leaders still find adopting crypto a bit difficult due to some user experience pitfalls, including the inability to:

• recover a wallet once the key is lost
• pay gas fees with whatever tokens you have, not only ETH
• automate transactions, and so on

In view of these challenges, there have been developments to create an equally safe and accessible interface for storing and transacting in crypto, and this is where account abstraction comes in.

This quick guide will furnish you with key facts you need to know about account abstraction and how it will transform the digital asset management industry.

The Nature of Ethereum Wallets

Before fully explaining the nuances of account abstraction, we must explain the two types of wallets in the EVM space.

Wallets on Ethereum have different purposes, and they are generally of two nature:

1. Smart Contract Accounts (SCA)

Projects on Ethereum are built as smart contracts, which are custom technical implementations of businesses or tools on the blockchain.

This is how smart contracts communicate with the Ethereum Virtual Machine: their high-level code in Solidity or Vyper will be interpreted into bytecode, which the EVM understands.

It is interesting to note that smart contracts, apart from their business nature, can also be a wallet.

For instance, assume there is a thrift smart contract where people save money and get it back after a year.

In practice, smart contracts have wallet capabilities by receiving crypto tokens and being capable of sending tokens to the right addresses.

Having said that, a smart contract can only be deployed on the blockchain with the help of an external wallet to pay for gas fees and serve as the address responsible for the contract.

This poses a major problem: a smart contract wallet cannot exist independently of the external wallet that deployed it. Why? SCAs don’t have private keys.

2. Externally-owned Accounts (EOA)

This form of Ethereum wallets is distinct from SCAs as they can be used independently.

They always come with seed phrases, loosely the passwords to those wallets. 

Popular examples of externally owned wallets include Phantom and MetaMask. 

Any changes initiated by externally owned Accounts update the state of the blockchain. For instance, if they send out some tokens to another address, it will reflect globally on the blockchain.

But they also have their pitfalls.

First, once the seed phrase to a wallet is lost, it cannot be recovered. Second, all gas payments must be made with Ether, and so on.

Now that we have explained the nature of Ethereum wallets, what is account abstraction?

In simple words, what is account abstraction?

Account abstraction (AA) refers to the development of the Ethereum ecosystem so that people can use wallets to perform any activity without worrying about barriers. In short, the goal is to enhance the wallet experience on Ethereum.

We must deconstruct the two keywords to understand better what account abstraction means. We have explained the two types of accounts in the previous subheadings. 

Moving on to Abstraction, it suggests the taking away of excessive technicalities. So that even someone who is not a crypto nerd can easily use crypto wallets on their first try.

In addition, AA empowers smart contract wallets to have the capacity of externally owned wallets; this fusion births smart accounts, as most protocols and researchers prefer to call them.

Major EIPs on Account Abstraction

While other layer-1 blockchains have various implementations or nomenclatures for AA, Ethereum was the first to mainstream the idea. As a result, several Ethereum Improvement Proposals have been to this effect. 

Of course, the entire industry is clear about what is wanted as improvements in the current wallet system, but their technical implementations are not a walk in the park; hence, a few EIPs are introduced to actualize it.

There have been many proposals on account abstractions, but for the purpose of our discussion, we will examine four pivotal ones.

EIP-86

This was the first EIP on AA’s entire subject matter, as Vitalik Buterin authored. 

The major proposition was that transaction origin and signature should be removed or rather become more fluid so that every wallet can be adaptable to being a smart contract wallet and also an externally owned wallet.

Even though EIP-86 introduced a brilliant idea, modern EIPs’ advent has overshadowed it and made it stagnant.

EIP-1271

In intermediate and advanced trading activities, traders sign orders to buy some tokens or take other actions. However, such signatures are impossible with smart contracts as they don’t have private keys.

To fix this, the proposal pushes for the inclusion of an isValidSignature function in contracts. The functions should have two parameters: hash, which is the hash of the data to be signed, and the signature associated with it.

As a getter function, it should return the validity of the signature for which the hash was provided.

EIP-3074

EIP-3074, authored by Sam Wilson and three other Ethereum researchers in 2020, allows external accounts to delegate control to a smart contract wallet.

Smart contracts can initiate transactions and perform other activities on behalf of a connected external wallet.

It performs this by introducing two opcodes: auth and authCall. The former enables an external wallet to delegate control, while the former empowers contracts to make authorised calls on behalf of external wallets.

The major pitfall of this proposal is that it still needs to attain the actual vision of account abstraction, as the smart contract will still rely on the external wallet.

EIP-4337

This is the leading EIP in the account abstraction space. Notably, a major deficiency of major account abstraction EIPs is the need for protocol-level adjustments.

In practice, this can be difficult as most protocols would have to tweak a lot of logic in their protocol-layer. Wallet providers also must reconstruct their code to adapt to various protocols.

But EIP-4337 is moving past that with the speed of light. It has two major innovations:

First, it introduced PayMaster which enables users to pay gas fees with any token that complies with the ERC-20 standard, not necessarily Ether.

Secondly, it also creates UserOperation objects, which the Ethereum nodes can merge and process as a single transaction; this will lead to cheaper fees and the possibility of batch transactions.

Use Cases of Account Abstraction for Digital Assets

Account abstraction is not only a mere theoretical or technical goal; it does have a tangible impact in how we interact with digital assets and wallets.

Here are a few practical use cases:

Security

Prior to the development of account abstraction, losing private keys might have been tantamount to losing both the wallet and its assets. This is clearly a bad user experience, and Web3 will not gain wider adoption with it.

But account abstraction has introduced multi-factor authentication mechanisms, such that in cases of private key loss, the owner of the wallet can still prove ownership.

More importantly, zero-knowledge proof is also gaining another use case in implementing account abstraction, as some researchers are proposing zkLogin as the most perfect means of wallet recovery.

Gasless Transactions

Customers do not always need to pay for gas fees, especially if the transaction goes under the hood and will not be apparent.

Protocols can simply make some things free for the users to enjoy. In turn, the protocol themselves would have kept some funds to settle gas on behalf of the users.

Many people believe this will reduce the “financialization” of every Web3 experience.

Batch Calling

In some cases, the users want to make multiple transfers at once. Such instances include when a user wants to make several actions to qualify for an airdrop or point or in an attempt to buy multiple tokens together on a decentralized exchange.

The usual flow is to sign the transactions one after the other, which can be stressful at scale.

But with batch calling or batch transactions, a group of similar transactions can be bundled up and executed at once. Apart from the speed and ease, it is also gas-effective.

Transaction Automation

Smart accounts are way better as users can set parameters in their constructor or possibly an interface and specify the conditions that should be met for the wallet to perform some actions.

This way, transactions can be automated, and users no longer have to handle everything manually.

Removal Of ETH As The Benchmark for Gas

In the EVM ecosystem, Ether is always the token used for settling gas; this is how the protocol was architectured, so many protocols had to imbibe it.

However, that is a poor experience. In traditional finance, users don’t need to pay processing fees in only Euro or USD, they can pay with whatever they are transacting.

In the latest update of Circle, USDC can now be used to settle gas from smart wallets. Account Abstraction brings the same narrative on-chain so users can settle gas in any token they are dealing with.

One-Wallet-For-All

With the wallet abstraction innovation, the line between SCAs and EOAs is fast becoming blurry, and the end goal is to have a total fusion of the two forms of accounts become one.

Thus, deploying a smart contract with another wallet will not be necessary. One wallet can impressively manage both a smart contract account and an externally owned account.

What do institutions stand to gain from account abstraction?

For a long time, institutions have found it slightly difficult to assimilate into the Web3 culture due to wallet complexities and shortcomings.

However, account abstraction creates a soft landing for institutions, allowing them to participate in the crypto economy while providing the best user experience possible.

Payment Automation: Crypto payment processing can be automated with account abstraction as incoming payments can be attributed to specific invoice, and it will be automatically transferred to a main treasury account.

A Smart Wallet is Enough: They do not need to bother with the different natures of wallets in Ethereum, as one smart wallet can perform any function.

Security: In addition, there have been cases where firms lost their records due to one incident or another. With respect to crypto wallets, they can simply access their assets by logging in through another authentication method they have set.

Since most institutions are used to the Web2 experience, account abstraction allows firms to explore Web3 products with the Web2 modus operandi they are familiar with.

The Current State and Future of Account Abstraction

The quest for account abstraction has not stopped since EIP-86 was advocated. Even though various implementations have not been widely adopted for technical or security reasons, EIP-4337 is looking more promising.

Along with the Ethereum native implementations, a lot of forward-looking infrastructure protocols are already providing SDKs for other protocols to implement account abstraction within their codebase.

It is important to remember that Ethereum only needs AA because of its peculiar protocol architecture technical debt. In comparison to the EVM, some layer-1 blockchains, such as Solana, have implemented account abstraction since Day 1.

In the Solana ecosystem, wallets are accounts, capable of being program accounts or data accounts. Similarly, Polkadot implemented a protocol-level AA as well.

Notably, blockchains such as NEAR are creating a new future beyond AA to Chain Abstraction, where users do not need to know the exact chain they are operating upon as everything will be more uniform.

Utila: Simplifying Digital Asset Management for Institutions

Account abstraction, which is embedded into Utila, is positioned to be a relief for the users in terms of payment processing. For example, you can settle the gas of a payment with USDC as against using ETH compulsorily.

Note that most account abstraction proposals are targeted toward either smart contract accounts or externally owned accounts.

However, these forms of wallets are not suitable for institutions.

This is why Utila embraced the multi-party computation in its wallet. This is far better as several offices of authority in a firm can have independent access to an MPC wallet.

In an MPC wallet, a single private key is sharded for other users to own and use. If a user loses their own private key, it does not affect the entire firm. Meanwhile, they can also recover their wallet if they can remember only the 13th keyword of their seed phrase.

Apart from the advancement in wallet and asset custody, Utila has natively implemented other variations of account abstraction such as batch transactions.

It provides a simple interface—that even non-technical people can understand—to manage assets and perform crypto operations.

Institutions such as Fasnara and Psalion are among the numerous firms tapping into Utila for their digital asset management systems.

Are you a leader in an institutional investment or trading firm? Utila is the best platform for your organization to use for crypto asset management and day-to-day operations.