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Ethereum ERC 4337 Proposal

Exclusive Research

  • ERC 4337 - a new account abstraction proposal that brings customisability to wallets without Ethereum protocol changes.
  • New features added to the smart contract wallets make ethereum’s execution layer quantum-safe.
  • Social wallet recovery and usage in DeFi protocol are two main use-cases of account abstraction.
  • This proposal could significantly enhance user experience and the onboarding of new users without compromising the decentralisation of the Ethereum network.

The biggest development of the Ethereum network is already in action with London EIPs. On 5 August 2021, the London hard fork activated at block 12,965,000, which ultimately changed the transaction fee market. Vitalik Buterin, the co-founder of Ethereum, also stated that EIP-1559 was the most important part of London. The hard fork democratises access to the network by adopting a base fee structure and proves that the Ethereum network can undergo significant changes without any drop-offs in terms of performance and decentralisation.

Speaking of upgrades without any trade-offs, Vitalik recently announced a new account abstraction proposal to make users’ wallets quantum-safe. In the last five years, Vitalik created as many as four proposals related to account abstraction. It is the desired goal for both users and developers, as creating a single account for storing coins and contract transfers will simplify wallet design and make algorithms more secure.

The latest ERC 4337 account abstraction proposal is quite different from its previous iterations. In the new proposal, the Ethereum network will provide more composability and wallet recovery functionality, but it wouldn’t require consensus-layer protocol changes.

History of Account Abstraction

The very first proposal for account abstraction was made in 2016. Vitalik wanted to create a model where users can design security for their wallets by simply paying for the network gas fee. This was done using the default nonce scheme and ethereum signatures (ECDSA) in the traditional method.

At that time, Vitalik already knew how the abstraction changes for Metropolis, the third development stage of Ethereum, launched in October 2017, could benefit the network. A few of the use cases discussed were custom cryptography, ring signature mixers and multisig wallets. In 2017, the EIP 86 made its entrance to address transaction origin and signature. This proposal aimed to adopt a new way of verifying signatures and nonce checking. By establishing account contracts, users could perform any desired changes without engaging with the hard-coded transaction processing mechanism.

Three years later, in 2020, EIP 2938 was introduced. This was the first account abstraction proposal that needed changes in the consensus protocol. It differed from the traditional transactions and integrated a new type called AA. The priority order for AA transactions is much higher than pending ones. In the previous model, the transactions were revalidated when a new block was generated.

This year, Buterin joined Kristof Gazso, Yav.eth, Dror Tirosh, Namra Patel, Tomasz K. Stanczak and others, to propose a new approach for account abstraction. Without making any modifications to the consensus layer, the ERC 4337 proposal aims to bring the same functionality of a transaction mempool with more logic flexibility and wallet safety.

The implementation process of ERC 4337 Account Abstraction Proposal

The new proposal avoids consensus changes by sending user operations in the form of bundles. These “bundle transactions” are created by miners or bundlers using Flashbots. The network compensates bundlers in ETH for the execution and fee prioritisation of user operations. Bundlers can be either miners or validators or someone who publishes bundle transactions on-chain through Flashbots.

The proposal also mentions that wallets behave like a smart contract with two main functions: validation and execution. While the former deals with signature and nonce verification, the latter interprets user operations and executes them in an open-ended way. A new entry point is created to verify operations and pay fees to ensure both wallet and global contract are secure.

Properties of ERC 4337 Abstraction Proposal

The new account abstraction design has many new and maintained properties compared to the regular mempool, ethereum’s node mechanism for storing transaction data. Wallet setup complexity is not a problem anymore, as the wallets are now contracts and users do not have to worry whether their account is published. If the address is not present, then the user operation will deploy one immediately. With this proposal, the network will likely become more decentralised, as everything is done through a P2P mempool. The ERC 4337 also can replace new operations or get them included faster by paying a higher fee to the bundler. As it supports EIP 1559, it may also adopt a fixed fee premium and max total fee to charge users in a fair way.

In terms of custom verification and wallet upgradeability, users have full control. They can add new signature schemes and change the execution logic. As users can make the verification logic more complex, the protocol is slightly more vulnerable to DoS attacks compared to single ECDSA verification. Another maintained property for abstraction proposals is one transaction at a time. Users cannot send multiple transactions and line up their accounts for faster execution.

Major Use Cases of Account Abstraction

The transition from EOA wallets to smart-contract wallets removes human errors while still protecting the base layer of the ethereum infrastructure. If a smart contract is exposed to bugs, then the wallets it supports can also be compromised. Now, the risk associated with smart contracts can be mitigated by doing rigorous security testing. Account abstraction will also help users avoid relayer-specific protocols that charge high base gas charges to process meta transactions. A meta transaction is something that is executed off-chain between two people. One handles data creation and signing off-chain, and the other executes the message by paying the gas fees. By using smart wallets based on AA, users can process the same meta transactions gasless and not rely on the relay network.

The new account abstraction proposal also allows sponsored transactions with the help of a built-in paymaster. As a result, developers can now pay fees in ERC 20 tokens on behalf of the users. The inner working of this mechanism consists of two main use cases. In the first case, the paymaster verifies the sponsor's legitimacy by checking their signature and deducts fees accordingly. For the second use case, the paymaster checks the sponsor's wallet balance, and if they have ERC 20 tokens, the ETH fees are paid, and tokens are claimed.

It is also expected that smart-contract wallets will increase blockchain scalability and gas efficiency by using them in DeFi protocols. In normal circumstances, traders would store their coins outside the DeFi contract. But with contract wallets, arbitrage traders who benefit from the price differences of an asset in different markets can transfer transactions based on external market conditions. However, the DeFi contract will not include them on-chain, removing many trash transactions. This ultimately increases the market efficiency and solves cross-exchange price differences.

Another major use case involving the ERC 4337 proposal is wallet recovery. Account abstraction could add to the existing functionality and allow users to recover lost ETH wallets. The social recovery feature associated with multisig makes it possible to add a new layer of protection. They can introduce more than three guardians for social recovery purposes. If users lose access to their wallets, a guardian can sign a special transaction to create a new one.

Next Steps

The account abstraction ERC 4337 is still being discussed in Ethereum research forums, so the timeline for its launch on testnet is not very clear at the moment. Even the current status wallets remain to be EOA wallets. We are still in the initial stages of AA development, and this proposal needs to be fully supported by EIP 1559. When EIP 2938 was in progress, Vitalik mentioned that account abstraction could be implemented on layer 2, regardless of whether or not layer 1 supports it. In his recent post, he said that an early alpha version would be coming soon, and developers would be allowed to experiment with AA wallets. After that, security audits will be conducted to confirm the scheme’s safety before launching on testnet. Ethereum devs are also working on the first major upgrade for the Beacon Chain. It is going to help the network switch from Proof-of-Work (PoW) to Proof-of-Stake (PoS).

Conclusion

The London hard fork is now successfully burning ETH at a high rate and, as of 14 October 2021, it has burned more than $1.7bn worth of Ethereum. This upgrade significantly helped the price rally of Ethereum and also removed entry barriers like high transaction fees.

We can expect similar things for the ERC 4337 account abstraction proposal. Onboarding new users will become simpler with its contract wallets and help increase market efficiency, while still maintaining a high degree of decentralisation. If implemented well, AA will have a huge impact on user experience across various avenues of crypto such as mixers, wallets and DApps. And this would be possible without ever relying on a centralised entity.

Nothing in this article constitutes professional and/or financial advice. The content is provided exclusively for informational and/or educational purposes. Nothing is to be construed as an offer or a recommendation to buy or sell any type of asset. Seek independent professional advice in regards to financial, tax, legal and other matters.

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