The Ethereum ERC-4337 Standard and What it Means for Defi

Since the inception of the Ethereum blockchain, there have been different improvements to the standards on the chain. Ethereum Improvement Proposals (EIPs) get made and then go through a phase to be implemented depending on the proposal's complexity. It accompanies a significant chain upgrade.

Decentralized finance (Defi) is one aspect of Web3 that has seen fast growth and has helped onboard new users to use blockchain Decentralized Applications (dapps) and solutions.

However, there have been different limitations to Defi's development, and considering the implementation of EIP-4337, this might mean a new phase for the ecosystem

Decentralized Finance and Security

One of the most reiterated strengths of decentralized finance is security. The reasoning has always been that since users don't carry out transactions or finance in a centralized manner, it is presumed to be safer.

However, some events show that the opposite is the case. For example, in August of 2021, a decentralized platform, Poly Network, was exploited for $613 million.

Another crazy event of hack within the space happened in August 2022, when a malicious actor, as described by the Solana foundation, got access to and drained over 8000 walletsof crypto user's funds, totaling around $6m in stolen funds, none of which ever got back to the exploited users.

Of course, since these wallets were all non-custodians, no one was to blame other than the exploited users themselves because they have complete control and access to their funds and how they sign transactions.

Considering these exploits and constant security breaches, the EIP-4337 changes everything.

What is Account Abstraction (AA)?

It is the autonomous features that users on the Ethereum blockchain can use to get extra functionalities on their wallets. Crypto users will now enjoy these functionalities without the need to hard fork the blockchain, which is part of the features of the EIP-4337.

Different from when users have to write down their seed phrase on a sheet of paper, which doesn't stop hackers from getting funds in their wallets through other hacking methods. But thanks to account abstraction, users will now turn their smartphones into defacto hard wallets.

Two-factor authentication is easy with account abstraction because, aside from signing a transaction, there would also need to be a physical approval of such a transaction.

This aside, Web3 newbies and those who have spent a couple of years in the space note that the cost and time it takes to use a hardware wallet prevent many people from having one. However, with this update, this excuse flies out the window.

Decentralized Finance and Mass Adoption

Another limitation people often talk about is how the technicalities resolving around how Defi works make mass adoption harder.

However, with this new standard in play, there could be little worry about technicalities because of the reduction in onboarding time, thanks to the AA features. And unlike where users lose access to their wallets because they must have forgotten their seed phrase, they'd have to use a social recovery system where a group of trusted friends could help retrieve their accounts.

What does this mean for the future of Defi?

Although we have yet to see some of these features in use, implementing the standard is a positive step toward better security, easier adoption by newbies, and a truly decentralized ecosystem.

As more innovations come, crypto users remain enthusiastic about what this means for the future of decentralization and finance, reducing the reliance on centralized protocols and systems in the Web3 ecosystem.

Conclusion

Unlike previous years when Defi wasn't so secure and has gotten ridiculed for its security with hard-hitting figures from hacks, these hacks have caused hesitation for newbies and made old-timers play it safe with existing Defi protocols.

In the future, Defi will be more secure, robust, decentralized, and transparent for every user without the need to fear the loss of funds in the event of an attack. And the ERC-4337 standard makes this possible.