Bessie Liu

Smart contract wallets are gaining momentum in the cryptocurrency space, and Instadapp is the latest to join the trend with the launch of its new wallet, Avocado.



There are many steps when it comes to interacting with a decentralized application today, often involving high gas prices and complicated processes.



The introduction of smart contract wallets, or account abstraction wallets, simplifies this processes and the costs involved, making decentralized finance (DeFi) more accessible to casual users.



<h2 class="wp-block-heading">What is account abstraction?</h2>



The concept of account abstraction wallets is that every wallet individually is a smart contract. The concept itself is not new and has been <a href="https://blockworks.co/news/ethereum-erc4337-account-abstraction-smart-contract">in the works for over nine years</a>.



The majority of existing wallets on Ethereum today are externally owned accounts (EOAs). This includes popular wallets such as Metamask and imToken.



To access EOAs, individuals require a private key, which often consists of a combination of random words. Once a private key is lost, the account, and all the funds associated with the account, are also lost forever.&nbsp;



An alternative to EOAs today is custodial wallets — accounts owned by centralized entities, such as exchanges.



There’s an old adage in crypto: “Not your keys, not your coins.” Following the collapse of FTX, the risks of custodial wallet accounts have become glaringly obvious.



An account abstraction wallets resolves both these issues — they are non-custodial, and yet completely managed by the individual who owns it. This means that the owner of the wallet can choose from an array of security features.



<h2 class="wp-block-heading">Avocado smart contract wallet explained</h2>



Beyond having a built-in account abstraction utility, the Avocado smart contract wallet has some other interesting features.



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">1/ Instadapp just launched Avocado: Blockchain aggregator with a next-gen wallet. It&#39;s the coolest thing I&#39;ve seen in a long time. Here&#39;s how it works &amp; why it&#39;s a big deal: 🥑&mdash; Ignas | DeFi Research (@DefiIgnas) <a href="https://twitter.com/DefiIgnas/status/1633626328330289152?ref_src=twsrc%5Etfw">March 9, 2023</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
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The wallet is connected to what they are calling the Avocado network, a deterministic smart contract which has its own Remote Procedure Call (RPC) node. This node allows the network to read on-chain data and send transactions to different blockchains.



This means that once a wallet is connected to the Avocado network, the network will automatically create a wallet address that is linked to your external wallet, and any tokens on any supported chain can be sent and received through your network wallet.



Gas fees, instead of being paid by the user in a chain&#8217;s native currency, such as ETH, are paid through USDC — which can be added from any chain and paid on any chain. The smart contract handles the conversion in the background, meaning that there is no need to maintain multiple gas balances on different chains in order to execute transactions.



Blockworks research analyst Matt Fiebach notes that, in a nutshell, Instadapp’s latest smart contract wallet will abstract away the cumbersome process of interacting with DeFi.



“Simpler workflows for using decentralized applications will be integral to the industry&#8217;s adoption and success and this is a significant step in the right direction,” Fiebach said. “Additionally, the gas scalar could create significant value for $INST if Avacodo achieves integrations and use.”



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Instadapp’s Avocado Smart Contract Wallet to Make DeFi Less Cumbersome

<div id="highlights-block_62b490a343898" class="highlights">
 <ul>
 <li>Lido staked ether has caused a liquidity crisis in the crypto market</li>
 <li>User funds will remain safe unless stETH sells at 15% discount, Instadapp founder Samyak Jain said</li>
 </ul>
 
</div>



Instadapp, a smart wallet built on top of popular DeFi projects such as Uniswap and Maker, is designed to help manage assets for users with little financial or technical background. But in addition to smart contract risk, the ongoing instability in the price of Lido staked ether (stETH) has the potential to wreak havoc.



The company launched Instadapp Lite in March, a platform that allows its users to earn interest by depositing funds into strategy vaults, including swapping ether for stETH. The strategy currently earns a projected 7.79% annualized yield, by applying leverage.



While stETH was expected to trade at the same price as ether, it is not pegged to it and in fact has recently traded at a discount. Ordinarily that’s not a problem, and funds in Instadapp’s vault will remain safe unless stETH diverges in value relative to ETH by -15%, Samyak Jain, founder of Instadapp, said during a Wednesday <a href="https://twitter.com/MakerDAO/status/1538914358469742593" target="_blank" rel="noreferrer noopener">Twitter spaces</a> interview with MakerDAO.



So far, stETH has remained no more than about -7% relative to ETH, but the gap is wide enough to <a href="https://cms.blockworks.co/will-lido-staked-ether-trigger-the-next-big-crypto-crash/" target="_blank" rel="noreferrer noopener">cause fears</a> of a liquidity crisis in the crypto market. As of Thursday at 11:00 am ET, each stETH trades at about 0.95 ETH.



After TerraUSD (UST) <a href="https://cms.blockworks.co/?s=Terra" target="_blank" rel="noreferrer noopener">collapsed</a> in May, setting off a broad market decline, demand for stETH dropped substantially as investors seeking liquid assets rushed to sell. That placed significant pressure on liquidity pools where stETH is traded, chiefly the Curve decentralized exchange.



The crux of the problem is that once stETH is minted, it cannot be redeemed until after both <a href="https://cms.blockworks.co/?s=the+Merge" target="_blank" rel="noreferrer noopener">the Merge</a> — when the Ethereum blockchain migrates from proof-of-work to proof-of-stake — and a further upgrade that will enable withdrawals expected in the second quarter of 2023. While stETH itself is fully liquid, the ETH backing it is not, and the market therefore applies a discount.



The Lido DAO which administers stETH has tried to mitigate risks by increasing short-term rewards in its LDO governance token tokens.



“The most [Lido] can do is create awareness and provide rewards so that users are willing to buy more stETH in the current market situation,” Jain said. Until then, the stETH price divergence remains a risk.



Despite his concerns, Jain remains optimistic that the price of stETH will recover once the market stabilizes, stating in a <a href="https://blog.instadapp.io/usdc-strategy" target="_blank" rel="noreferrer noopener">blog post</a> that “almost all my ETH holdings are in the form of Lido Staked ETH.”



A second vault in Instadapp Lite generates additional yield by betting on the future price of stETH but allows users to deposit and withdraw in USD Coin (USDC), a stablecoin pegged to the US dollar.



This approach uses the first stETH strategy, by borrowing ETH using USDC as collateral in the Aave money market protocol and buying stETH. The stETH is then supplied to Aave and used to borrow an equal amount of ETH, which is sold back to USDC, and also supplied to Aave. This limits directional price risk on ETH, and uses ETH staking rewards converted back to USDC to generate interest.



“You are able to capitalize on the current market inefficiency by first building a capital allotment, in this case using USDC. [You can utilize] that capital to borrow in ETH and buy stETH at a discounted rate which you can immediately cash out,” he said.



If stETH returns to par with ETH, you can close the position and pocket the extra profits, Jain said.



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Start your day with top crypto insights from David Canellis and Katherine Ross. <a href="https://blockworks.co/newsletter/empire">Subscribe to the Empire newsletter</a>.



Explore the growing intersection between crypto, macroeconomics, policy and finance with Ben Strack, Casey Wagner and Felix Jauvin. <a href="https://blockworks.co/newsletter/onthemargin">Subscribe to the Forward Guidance newsletter</a>.



Get alpha directly in your inbox with the <a href="https://blockworks.co/newsletter/research">0xResearch newsletter</a> — market highlights, charts, degen trade ideas, governance updates, and more.



The Lightspeed newsletter is all things Solana, in your inbox, every day. <a href="https://blockworks.co/newsletter/lightspeed">Subscribe to daily Solana news</a> from Jack Kubinec and Jeff Albus.