TL;DR:

  • Token approvals allow decentralized apps (dApps) to withdraw and spend tokens from your wallet.
  • Users must inspect requests carefully, grant limited permissions to trusted apps only, and revoke approvals if needed.
  • Ready provides tools to inspect token requests thoroughly before approving and managing allowances to prevent scam risks.

Crypto wallets unlock a wealth of decentralized apps (dApps) and services via seamless integrations. But under the hood, these integrations often depend on approvals that allow dApps to spend your tokens programmatically. When faced with such requests on their wallets, many users may not grasp what they entail and if they are risky.

This article provides an in-depth look at token approvals, how they work, and how to manage them securely.

What is a Token Approval?

Token approvals are an important concept in decentralized finance (DeFi) that users need to understand to securely interact with dApps and protocols. In simple terms, token approvals grant permissions to contracts and applications to spend your tokens on your behalf, up to a defined limit.

When you approve a contract, you authorize it to withdraw from your wallet and use your tokens to execute transactions. These approvals allow dApps to offer automated services without taking custody of your funds.

Illustration of a person managing crypto assets on their phone
dApps need your approval before being able to spend your funds. Image: Freepik

How Token Approvals Work

Token approvals are implemented by developers using the ERC-20 specifications. In particular, the approve() function allows a contract to withdraw the approved token from the user’s wallet up to the defined allowance amount.

When users connect their wallet to a dApp, they are prompted to approve access to tokens needed for that app. After approving, the contract can automatically withdraw tokens via approve() without further consent from the user.

Let’s take Uniswap as an example. If you decide to swap your USDC stablecoins for ETH, you first need to give Uniswap the green light to handle your USDC with a token approval through your wallet app.

Once approved, the automated smart contract from Uniswap can take over whenever you request a swap. It will transfer your USDC to Uniswap’s address, execute the trading algorithm, and dispatch the ETH proceeds to your wallet. All of this happens with no further action needed from you.

Without this mechanism, you would have to manually send USDC to Uniswap each time you want to trade or swap- a clunky extra step.

Here is a typical token approval request in Ready. When receiving a request, the app displays critical information including the sender and recipient addresses, the specific token the dApp desires to utilize, and the quantity involved. It’s only upon the user’s acceptance of this request that the dApp gains the access to interact with the assets.

Screenshot of a token approval request in Ready
A token approval request in Ready.

Token Approval Scams and How to Avoid Them

Approvals are powerful as they allow “composability” – contracts integrating seamlessly without holding funds in custody. But the open-ended nature also means users must be prudent in granting approvals and setting allowance limits. Malicious contracts can drain tokens if given overly broad rights.

Illustration of a hacker stealing crypto assets
Token approvals can be used by scammers to drain and steal your assets. Image: Freepik

For example, an app may request approval for unlimited token withdrawals as part of onboarding new users. If granted, the contract can then systematically drain all approved tokens overnight while the user is unaware. Approvals like this give scammers a free pass to steal funds.

Scammers also benefit from approvals persisting indefinitely. Even if a dApp is no longer used, the approval remains valid. Forgotten approvals expose users to future risk should a legitimate app later turn malicious.

Users can take key steps to prevent approval scams:

  • Only connect wallets to trusted applications and research contracts before approving them. Approve established, audited protocols versus new, unproven apps. You can also start with small approvals to test and verify a dApp’s credibility first.
  • Carefully check allowance amounts before signing. Ask whether this specific contract needs unlimited withdrawals to perform its function?
  • Revoke approvals once done using the dApp to avoid potential exploitation in the future.
  • Regularly monitor active approvals using tools like Etherscan. This allows for revoking any unwanted persisting approvals.

Connect to dApps Safely With Ready

Screenshots of crypto asset management in Ready
Use wallet apps like Ready to inspect requests from dApps before approving them.

Ready provides a cutting-edge solution for managing token approvals securely.

Users maintain total control over token allowances when accessing DeFi via Ready, which only connects to external dApps using secure WalletConnect sessions. All approval requests provide detailed information like contract addresses and spending limits. Users can carefully configure limited allowances before signing transactions.

Check out Ready’s whitepaper for more technical details on Ready’s security architecture and scam prevention features. It dives deeper into the rationale and design behind Ready’s robust token approval controls, encryption protocols, and other protections that make it a trusted DeFi wallet.

Take control of your DeFi interactions by downloading the Ready mobile app.