Adoption of smart wallets

8/12/2021 Adoption of smart wallets com/adoption-of-smart-wallets-110651 1/18 Adoption of smart wallets July 8, 2021, 8:11AM EDT • 10 min read ETHEREUM WALLETS Igor Igamberdiev Quick Take There are more than 40 varieties of different smart contract wallets on Ethereum Gnosis Safe grows organically and remains the most popular solution among crypto- native projects Argent and Dharma lost users after canceling gas subsidies Instadapp has a sharp surge in interest related to the launch of its INST token Unlike Bitcoin, there are two fundamentally different types of accounts on Ethereum - externally owned EOA and contracts.

The difference between the two is that EOA is controlled by a private key, while contracts are controlled by code. In fact, contracts are 8/12/2021 Adoption of smart wallets com/adoption-of-smart-wallets-110651 2/18 autonomous agents that execute code when someone interacts with them. At the moment, 28% of all Ethereum addresses with which interactions took place are smart contracts. Source: Ethereum Since EOAs are controlled by only one private key, it is impossible to natively create a multisig that requires m-of-n private keys for a valid transaction. Bitcoin uses script hash addresses P2SH and Bech32 formats) to generate such multisigs.

As a last resort, it is still possible to use EOA as a multisig using the Multiparty Computation MPC technology used in RenVM. The most common way to create multisig and more advanced wallets, for example, with the social recovery function, is to use smart contracts. In particular, Gavin Wood wrote the first known multisig even before the launch of Ethereum, and the Ethereum Foundation still uses it. Six years have passed since that moment, but contract wallets have not achieved more popularity than EOAs. Gas price and smart contract wallets' security One of the most critical issues for the adoption of smart contract wallets is high transaction fees.

Fees are rising due to the rise of gas price, which is the cost of an abstract unit of computation of an Ethereum transaction. With the start of The Summer of DeFi and the 8/12/2021 Adoption of smart wallets com/adoption-of-smart-wallets-110651 3/18 emergence of a growing market, the demand for blockspace has grown incredibly, making Ethereum practically unusable for price sensitive retail users. Most smart wallets refused to provide gas subsidies to users due to rising gas prices, with some projects like Authereum, for example, pivoting entirely to new products. Additionally, these wallets have issues beyond just high gas prices.

The use of smart contracts, especially with complex logic, leads to an increase in the amount of gas required to execute transactions. To minimize the increased gas consumption as much as possible, modern smart contract wallets use compact proxy contracts using one implementation. Additionally, proxy contracts create the ability to add new functions to wallets without changing an address, which also positively affects UX. 2018 2019 2020 2021 $0 $10 $20 $30 $40 $50 ZOOM ALL YTD 3M 1M Chart embedded from The Block Crypto Data Average Transaction Fee on Ethereum (7DMA) SOURCE: COIN METRICS UPDATED: AUG 11, 2021

8/12/2021 Adoption of smart wallets com/adoption-of-smart-wallets-110651 4/18 Source: OpenZeppelin However, if there is a vulnerability in implementation, all proxies can be attacked. Ironically, Gavin Wood's Parity Wallet (an updated version of the first multisig) has been exploited twice because all wallets used the same code. In the first case, an attacker managed to become the owner of three large wallets and withdraw 153k ETH $30M. The damage could have been more serious, but a whitehat hackers' team saved funds from the remaining wallets. And six months later, a person with the Github nickname ‘devops199’ froze access to 513k ETH $150M on almost six hundred wallets.

Since that time, no similar exploits have occurred, however, known white hat hacker, samczsun did find a vulnerability in the already mentioned Authereum wallet right after its launch. 8/12/2021 Adoption of smart wallets com/adoption-of-smart-wallets-110651 5/18 Source: The Block Research Types of smart contract wallets At the end of 2020, according to the paper of two Austrian computer scientists, there were at least 40 different wallet implementations using smart contracts. Researchers have identified six main types of wallets: simple (only receiving and sending ETH and ERC20 tokens) multisig (transactions require signatures from m-of-n owners) forwarder (transfer assets further to main wallets) controlled (managed by third parties, such as deposit wallets of centralized exchanges) update (offer many possibilities for customization) smart (have functions like daily limits or recovery functions)

8/12/2021 Adoption of smart wallets com/adoption-of-smart-wallets-110651 6/18 Source: Monika di Angelo, Gernot Salzer Among the six types, update and smart wallets are the most interesting. These types of wallets offer the most significant number of use cases and are the youngest, as they appeared only towards the end of 2018. Such a late appearance is associated with the 8/12/2021 Adoption of smart wallets com/adoption-of-smart-wallets-110651 7/18 emergence of secure proxy contracts and the emergence of DeFi, which are often inextricably linked with such wallets. Thus, out of 40 different wallets, it makes sense to consider at what stage of development and adoption four of them are: Gnosis Safe (multisig standard) Argent (strong security features) Dharma (fiat ramp + DeFi integration) Instadapp DeFi native) Gnosis Safe Launched in early 2017, Gnosis Multisig quickly gained popularity with numerous ICO projects like Aragon and Golem.

Two years later, when a successor called Gnosis Safe was officially launched, the number of multisigs hit the 3.2k mark. Due to DeFi and the growing market, Gnosis Safes product has grown even faster than its predecessor. Currently, there are 23k+ wallets, of which 93% are v. 1.1. The most current Gnosis Safe v. 3.0 was released in mid-May, and its main feature is L2 support, such as Optimism and Arbitrum. Source: Dune Analytics (@tschubotz, @theblockcrypto) 8/12/2021 Adoption of smart wallets com/adoption-of-smart-wallets-110651 8/18 Two sharp increases a week ago and at the end of October last year are associated with the HEX smart wallet from Rockside.

At the moment, they own at least 8k Gnosis Safes, a third of the total. In addition, they are mostly not used and are classified as ‘forwarder’ and ‘controlled’ wallets, according to the classification of Austrian scientists. An analysis of the access controls settings used for Gnosis Safes also shows the prevalence of multisigs with one single owner, which indicates some kind of centralization. Source: Dune Analytics (@tschubotz) Gnosis Safes store $41B of assets, of which only $4B is in ETH. Among the most famous ERC20 tokens, which are stored in Safe contracts for an amount of more than $1B, are 1INCH, LEO, and MATIC.

This fact allows us to conclude that 1inch Foundation, Bitfinex, Polygon are among the users of Gnosis Safe. Recently, Vitalik Buterin has also started using Gnosis Safes. The number of active wallets began to grow significantly after The Summer of DeFi and the launch of the HEX wallet, now reaching a maximum of 400 daily active Safe contracts 1.7%. However, for this indicator, a certain seasonality is noticeable, so periodically, the activity of wallets drops by about half. It's easy to guess that these downturns occur on weekends, when projects, like people in general, may be less active.

8/12/2021 Adoption of smart wallets com/adoption-of-smart-wallets-110651 9/18 Source: Dune Analytics (@tschubotz) The monthly number of transactions also peaked (21k) last month. During the year of using Safes contracts, the following things happened: the share of interactions with DeFi fell from 50% to 15% (the complication of transactions played a role in this, due to which some of them ended up in the Other category) an increase in the number of interactions with other Safes (associated with the launch of the Rockside wallet) the number of transactions that cannot be unambiguously classified is consistently about a third of all transactions (many of these transactions change the parameters of DeFi protocols, simultaneously interact with a large number of projects)

8/12/2021 Adoption of smart wallets com/adoption-of-smart-wallets-110651 10/18 Source: Ethereum, The Block Research Argent The mobile wallet Argent touts high safety as one of its main features. This concept includes guardians EOA, able to restore access to a wallet or restrict it) and whitelists of safe contracts. Even during the beta testing phase until May 2020, users created 20k Argent wallets. Since then, the number of wallets has reached the 50k mark, aided mainly by the rapid DeFi growth. 8/12/2021 Adoption of smart wallets com/adoption-of-smart-wallets-110651 11/18 Source: Ethereum, The Block Research For Argent wallets, unlike Gnosis, there is no growing trend in user activity.

The userbase reached the first peak of 1,600 active wallets on the day of the official launch. The next peak of 1,700 wallets was achieved a month later, after which the number of active users began to fall. The reason for this drop was the canceling of gas subsidies. The last time Argent had over 1,000 active users was during the UNI airdrop. 8/12/2021 Adoption of smart wallets com/adoption-of-smart-wallets-110651 12/18 Source: Ethereum, The Block Research The downward trend in the use of Argent can also be found in the number of transactions. From a peak of 80k+ transactions immediately after launch, their number fell to 18k, even less than Gnosis Safes.

Consequently, for retail users, transaction fees play a huge role, which is desirable to subsidize. In turn, the Argent team, observing the lack of active use of wallets, is already betting on L2 solutions, such as ZK-rollups. Source: Ethereum, The Block Research Dharma Initially, Dharma was a P2P lending protocol, and later a kind of frontend for Compound with support for fixed interest rates. In the current iteration, it is a smart contract-based mobile wallet with access to the fiat world. However, Dharma has limited functionality compared to Argent since it is not guardians who help with the safety of funds, but Dharma Labs itself.

There are currently under 14k Dharma wallets, which is even less than Argent before the official launch. The most likely explanation would be a much smaller number of opportunities for DeFi interactions and an orientation towards a less mature part of users. 8/12/2021 Adoption of smart wallets com/adoption-of-smart-wallets-110651 13/18 In addition, it is impossible to count all wallets since Dharma does not deploy a smart contract after funds are deposited. Source: Ethereum, The Block Research On average, Dharma has about 60 users per day, with no trend whatsoever. Activity peaked 640 wallets) in August last year and fell to its current level by the end of October.

The growth was the launch of no-fee trading throughout August, and the fall was the cancelling of all gas subsidies not related to security. Right now, Dharma's primary use case is token trading and interacting with various DeFi through DharmaOS. 8/12/2021 Adoption of smart wallets com/adoption-of-smart-wallets-110651 14/18 Source: Ethereum, The Block Research The dynamics of Dharma wallets interactions repeat the pattern of wallet activity. There is a sharp surge associated with the addition of trading and gas subsidizing. In the future, the number of interactions belonging to the “Other” category decreased due to the disabling of Compound integration.

Among the positive aspects of Dharma is its relative success as a fiat on-ramp solution. 8/12/2021 Adoption of smart wallets com/adoption-of-smart-wallets-110651 15/18 Source: Ethereum, The Block Research Instadapp Unlike previous wallets, Instadapp was created to facilitate interaction with the largest DeFi protocols: Maker, Compound, Aave, and Uniswap. Instadapp’s capabilities include access control for DeFi Smart Accounts DSA and some automation functionality. The benefits of using this approach probably outweigh the slightly increased fees, which is why just recently, the number of Instadapp wallets has reached 40k. The recent growth of the number of DSA is associated with the launch of a governance token INST and a retrospective airdrop for users who transfer their DeFi positions to Instadapp.

8/12/2021 Adoption of smart wallets com/adoption-of-smart-wallets-110651 16/18 Source: Ethereum, The Block Research The number of daily active Instadapp wallets ranges from 50 to 100, with a noticeable increase in the last half month. This increase is already a fairly familiar phenomenon associated with liquidity mining, and the big question is what will happen after it ends. The token's launch can explain the recent activity spike. Still, the one that preceded it, which occurred at the end of December, is most likely associated with an attempt to create DSAs pending the token's launch. 8/12/2021 Adoption of smart wallets

com/adoption-of-smart-wallets-110651 17/18 Source: Ethereum, The Block Research Almost all interactions with Instadapp are presented in the form of a list of actions like: take a flash loan on dYdX refinance with it on Aave repay a flash loan on dYdX For this reason, no categorization of transactions has been performed for Instadapp. The number of transactions for Instadapp also does not show any trend. The first spike last summer was when Instadapp provided users with an opportunity for leveraged liquidity mining. In December, users began to make various transactions in anticipation of the token airdrop, and the last peak is associated with the INST launch.

Source: Ethereum, The Block Research Conclusion Wallets were thought to be one of the smart contract use cases even before the launch of Ethereum. Their indisputable advantage is storing and executing all the logic of work 8/12/2021 Adoption of smart wallets com/adoption-of-smart-wallets-110651 18/18 directly on the blockchain. However, this also creates the possibility of a loss of access to funds or theft due to errors in the contract code. For example, Parity wallets' users lost access to 666k ETH as a result of two exploits. Among the four smart wallets reviewed, Gnosis Safe has seen the most organic growth in adoption.

One of the reasons for this is Gnosis's lack of positioning of its wallets as a retail product. Argent and Dharma promise their users an incredible DeFi experience, but the high gas price does not allow for a stable userbase. The lack of adoption of smart wallets is primarily due to high fees, which cannot be subsidized indefinitely. The solution to this problem is introducing L2 solutions, and wallets are already working on their implementation. The public launch of rollups will change the way users interact with Ethereum, giving smart wallets a second chance. © 2021 The Block Crypto, Inc.

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