Tokens: Not Physically Held in Wallets
Contrary to what you may think, when you “hold” tokens in a crypto wallet, they aren’t physically stored there. In platforms like Ethereum, ERC20 tokens and NFTs are actually balance entries in smart contracts. These contracts keep track of the number of tokens each account address possesses. So, when you transfer tokens, you’re simply instructing the smart contract to update the entry, reducing your balance and increasing the recipient’s balance.
This is more like having balances in different bank accounts rather than physically possessing currency in a wallet. Your balance is merely an entry in the smart contract, which means you’re dependent on it. This is different from native tokens like BTC or ETH, which are not balance entries and are not controlled by a single developer.
The Problem with Spend Approvals
A major issue arises from “spend approval” in DeFi apps. When you want to use tokens in a dApp, you have to give it permission to spend your tokens by allowing the token smart contract to grant this permission to the dApp.
Most decentralized exchanges request unlimited permission to spend your tokens, so you don’t have to approve each trade individually. While this makes the user experience smoother, it also introduces significant risk. If the dApp is malicious or compromised, it can empty your tokens without needing additional consent.
This vulnerability extends to smart contract ecosystems in general. That’s why third-party services like revoke.cash are popular.
New Layer 1s and Asset-Oriented Virtual Machines
New Layer 1 smart contract platforms aim to address these issues by reimagining how assets are held and transferred. They allow direct asset ownership, where tokens physically reside in users’ accounts and are moved during transactions. This eliminates the need for “approval” because tokens are no longer just balance entries in a smart contract.
This paradigm treats tokens as physical objects understood by the smart contract platform itself, creating an asset-oriented programming environment. In this environment, the programming framework ensures the security of users’ tokens, reducing dependence on a developer’s smart contract.
Radix, a Layer 1 platform launching smart contract functionality in September 2023, is a pioneer in this asset-oriented approach. With Radix, tokens are held inside a Smart Account, improving security and eliminating the need for spend approvals. To learn more, visit the Radix Full Stack website.
Hot Take:
Rethinking the way tokens are held and transferred is crucial for enhancing security and reducing risks in the crypto world. New Layer 1 platforms and asset-oriented virtual machines offer promising solutions by allowing direct asset ownership and eliminating the need for spend approvals. This shift empowers users and reduces their dependence on smart contract developers. Radix is leading the way with its asset-oriented approach, ensuring that tokens are securely held inside Smart Accounts. As the crypto landscape evolves, it’s important to embrace innovative solutions that prioritize user security and control over their assets.
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