In the decentralized finance (DeFi) ecosystem, users frequently interact with various applications and protocols. A common requirement across these platforms is the need to authorize smart contracts to access and manage tokens held within a user's wallet. This process, while necessary, introduces both operational and security considerations—especially when users grant unlimited approvals.
What Is ERC20 Token Approval?
When using native Ethereum tokens like ETH, users can send funds directly to a smart contract while simultaneously triggering a function call within the same transaction. However, ERC20 tokens operate differently. These tokens are themselves managed by smart contracts, meaning a simple send transaction does not automatically invoke functions in other DeFi contracts.
To enable DeFi applications to interact with ERC20 tokens, the ERC20 standard includes a function called transferFrom. This function allows a smart contract to transfer tokens on behalf of the user. But before this can happen, the user must grant approval to the contract.
For example, if a user wants to deposit USDT into a lending protocol like Aave, they must first approve Aave’s contract to withdraw USDT from their wallet. Only after this approval can the user complete the deposit transaction, which triggers Aave to execute the transferFrom function.
The Risks of Unlimited Approvals
Users often have two options when approving a DeFi contract: a one-time allowance for a specific amount or an unlimited approval. Many opt for unlimited approvals to save time and reduce transaction fees, as each approval operation requires gas costs.
While convenient, unlimited approvals introduce significant risks. By granting unlimited access, users allow the approved contract to withdraw any number of tokens from their wallet at any time—not only the tokens already deposited in the protocol.
If a approved contract is compromised due to a hack or exploit, an attacker could drain all the approved tokens from the user’s wallet. This remains a risk even if the user stores assets in a cold wallet, since the approval was signed using their private key.
Best Practices for Secure Token Approvals
1. Review and Revoke Unnecessary Approvals
Many users have granted approvals to multiple DeFi projects over time, some of which may no longer be in use or may pose security risks. It is advisable to regularly review all active approvals using blockchain analytics tools or platforms like DeBank. Revoke permissions for any contracts that are unfamiliar or no longer needed.
2. Use Multiple Wallets for Different Purposes
Diversifying assets across several wallets can help mitigate risk. Use one wallet for interacting with new or less-audited dApps and another for storing large or long-term holdings. After completing transactions, move assets out of the active wallet whenever possible.
3. Consider Alternative Blockchain infrastructures
Some blockchain networks are designed to reduce the need for token approvals. For instance, platforms that support multiple native tokens allow users to interact with smart contracts without granting external approvals. This architecture can enhance security and simplify the user experience.
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Frequently Asked Questions
What does ERC20 approval do?
ERC20 approval grants a smart contract permission to transfer a specific amount—or an unlimited amount—of tokens from your wallet. This is required for many DeFi operations such as lending, swapping, or providing liquidity.
Can I change an approval after it’s been granted?
Yes, you can revoke or reduce an approval at any time by submitting a new transaction that sets the allowance to zero or a lower value. This will update the contract’s permissions immediately.
Is unlimited approval safe?
Unlimited approval is not safe if the approved contract has vulnerabilities or is malicious. It is best to use limited approvals whenever possible, especially with newer or less-audited protocols.
How can I check which contracts I’ve approved?
You can use blockchain explorers or dedicated dashboards like DeBank or Etherscan to review all contracts that have been granted access to your tokens. These tools provide clear insights and options to revoke approvals.
Do other blockchains require token approvals?
Many EVM-compatible blockchains (like BSC, Polygon, or Avalanche) use similar approval mechanisms. However, newer architectures or non-EVM chains may offer different security models that reduce reliance on approvals.
What are the gas implications of approving tokens?
Each approval transaction requires gas fees. While unlimited approvals can save gas in the long run, they increase risk. Some wallets and dApps now support gas-efficient approval methods or batched transactions.
Conclusion
Token approvals are essential for DeFi operations but come with security trade-offs. While unlimited approvals offer convenience and cost savings, they can expose users to significant risks if contracts are exploited. Adopting careful approval habits, diversifying assets across wallets, and exploring alternative blockchain solutions can help users safely navigate the DeFi landscape.
As the industry evolves, more secure and user-friendly alternatives may reduce reliance on traditional approval mechanisms. For now, staying informed and cautious is the best defense against potential threats.