How it Works

What is a Smart Wallet?

A Smart Wallet is a wallet that is controlled by a smart contract following the ERC-4337 specification.

Ethereum has 2 types of accounts to transfer and receive tokens: EOAs (Externally Owned Accounts) and Contract Accounts. A smart contract wallet is a wallet managed by a contract account instead of an EOA. A smart wallet is a wallet type requiring no private keys or seed phrases. Smart contract wallets rely on code instead of private keys to secure and recover wallet information.

A smart contract wallet is a type of Web3 wallet powered by smart contracts.

This smart wallet is unlocked by a 'key' - a personal account. This key can be anything from a MetaMask wallet or even a Local Wallet and is used as a way to 'sign in' to the wallet.

Benefits of Smart Wallets:

1. Optimized transaction efficiency & batch transactions
   • Combine multiple transactions into a single transaction to save on gas fees
2. Improved Security Features
3. Social & Multi-Sig Recovery
   • Recover a wallet without seed phrases/passwords
   • Nominate a trusted person to recover your wallet in the case of an emergency

How does it work?

When sending a transaction using a smart wallet, the execute method is called on the account contracts which sends a UserOperation object that defines the purpose of the transaction and includes the relevant data for verification.

The requested UserOperation goes to an alt mempool — a waiting area specifically for pending smart account transactions — and waits for bundlers (nodes) to pick up transactions, bundle them, and pay the gas, via a paymaster contract, for the transaction to register all UserOperation in a block.

To prioritize transactions, bundlers use a similar logic to how miners or validators prioritize transactions in the mempool based on the fee associated with each of them. Bundlers earn the combined fee paid within all UserOperation they bundled.

These bundled UserOperation are then sent to the EntryPoint contract which verifies the UserOperation and executes the transaction.

To learn more about how smart wallets work, read our smart contract deep dive.

How transactions work in Ethereum smart accounts (Vitalik Buterin)

Account Factories

In order to issue smart wallet account contracts for users, an account factory contract must be deployed. A factory contract is a contract which clones an implementation contract which defines the functions and logic on the clone.

To create accounts with the factory contract, the createAccount function is called. This function calls _initializeAccount which initializes the account and sets the default admin on the account.

One Account Per Personal Wallet

The thirdweb Account Factories are designed so that only one account can be created per personal wallet key. This means that any one personal wallet can only be a default admin on one account per factory.

This is because, when the account contract is cloned by the factory, the account is craeted deterministically via the cloneDeterministic function. This function takes a salt as a parameter to predict the deployment address. The salt is calculated using the default admin address. Since the deployment address will be the same if the default admin is the same, if an account already exists at that address, the transaction will revert.

/// @notice Deploys a new Account for admin.
    function createAccount(address _admin, bytes calldata _data) external virtual override returns (address) {
        address impl = accountImplementation;
        bytes32 salt = _generateSalt(_admin, _data);
        address account = Clones.predictDeterministicAddress(impl, salt);

        if (account.code.length > 0) {
            return account;
        }

        account = Clones.cloneDeterministic(impl, salt);

        if (msg.sender != entrypoint) {
            require(allAccounts.add(account), "AccountFactory: account already registered");
        }

        _initializeAccount(account, _admin, _data);

        emit AccountCreated(account, _admin);

        return account;
    }

Types of Account and Account Factory

	Simple	Dynamic	Managed
Upgradeability	Non-upgradeable	Account upgrades controlled locally by account admin.	Account upgrades controlled centrally by the parent account factory admin.
Expected Usage	Developer wants to issue simple smart wallets to their users. They do not anticipate that users wallets will need any feature upgrades.	Developer wants to issue smart wallets to their users. They do anticipate feature upgrades to user wallets but do not want to push upgrades to user wallets without consent.	Developer wants to issue smart wallets to their users. They do anticipate feature upgrades to user wallets, and want to push upgrades to user wallets for seamless/invisible UX for upgrades.

Account Type Feature Comparison

	Simple	Dynamic	Managed
Contracts	AccountFactory Account	DynamicAccountFactory DynamicAccount	ManagedAccountFactory ManagedAccount
ERC-4337 Compatible	✅	✅	✅
Can hold native ERC-20, ERC-721 and ERC-1155 Tokens	✅	✅	✅
Multi-signer	✅	✅	✅
Execute transactions in Batches	✅	✅	✅
Is the Account Upgradeable	❌	✅	✅
Who controls upgrades (?)	n/a	Admin of the account.	Admin of the account’s parent account factory.

Terminology

Personal Wallet/Key

This is the default admin on an account or the "key" to an account. It can be any wallet and is used to initialize the account. Any one wallet can only be the "key" to one account per factory contract.

This wallet is the primary way to access and interact with the account.

Account

In the context of smart wallets, the account is the ERC-4337 compatible smart contract which holds all of the assets.

Smart Wallet

The smart wallet is the combination of your personal wallet "key" plus the account smart contract with all of it's assets.

UserOperations

This is the data structure for the "pseudo-transaction" that the user wants to perform. The transaction is pseudo as Smart Wallets cannot initiate transactions on EVM chains as they are not supported natively. It contains the following fields:

• sender: The account making the operation.
• nonce: Anti-replay parameter; also used as the salt for first-time account creation.
• initCode: The initialization code needed to create the account (needed if and only if the account is not yet on-chain).
• callData: The data to pass to the sender during the operation.
• callGasLimit: The amount of gas to allocate for the operation.
• verificationGasLimit: The amount of gas to allocate for the verification step.
• preVerificationGas: The amount of gas to pay for to compensate the bundler for pre-verification execution and calldata.
• maxFeePerGas: Maximum fee per gas (similar to EIP-1559 max_fee_per_gas).
• maxPriorityFeePerGas: Maximum priority fee per gas (similar to EIP-1559).
• paymasterAndData: Address of paymaster sponsoring the transaction, followed by extra data to send to the paymaster (empty for self-sponsored transaction).
• signature: Data passed into the account along with the nonce during the verification step. Should depend on the chainid and EntryPoint address to prevent replay attacks.

EntryPoint

The EntryPoint is a singleton contract (a contract that has a predictable address that is the same on every chain). It has two methods that are used as entry points to execute bundles of UserOperations: handleOps and handleAggregatedOps.

Bundler (relayer)

A bundler is a node that monitors the alternative mempool of UserOperations and bundles multiple UpserOps together to forward to the EntryPoint contract as a single transaction. These UserOps can be sent from different accounts and are bundled and sent to the EntryPoint contract via a handleOps call.

The bundler is controlled by its own EOA which initially pays for the gas fees upfront and is then repaid by either the sender or a paymaster if the transaction is sponsored.

The entry point contract then uses the validateOp and executeOp functions on the smart wallet account contract to verify and execute the UserOps on behalf of the users.

It allows you to send transactions with smart wallet accounts.

Paymaster

A paymaster is a smart contract that relays transactions. It provides a service that enables a third party to pay the transaction fee on behalf of the user by funding the paymaster contract in advance. The paymaster acts as a gas reserve which then can be used during the call execution via the EntryPoint contract. The thirdweb Smart Wallet paymaster is initially paid for by thirdweb. By using an API key, the usage is tracked and billed.