UTXO Smart Contract Wallet For Account Based Cryptocurrencies

To see the whole story as it is being updated by me, click here to go to Google Docs.

Anyone who used Ethereum before will notice that you will only have one address that does not change unlike Bitcoin. While this is good for convenience, a single address is bad for privacy as all transactions tied to this address will be shown on the blockchain explorer and it is also not secure. With just a single address, the account user will have no choice but to stick to a single address, which usually means using a single private key and if the private key gets compromised, all of the cryptocurrencies associated with the address will be stolen. Sure, you can use a fresh account for every transaction, but not only are the costs for sending cryptocurrencies out of every wallet very high for an average user, it is also very confusing for people to manage every wallet (just imagine 50 different accounts, with each holding different kinds of tokens).

Since all of us are using wallets with a seed phrase usually containing 12 or 24 words backing up the accounts, we can treat the seed phrase as the master key that is able to unlock all the addresses associated with a smart contract when it is needed to send funds with a single transaction. With smart contracts, we are also able to be flexible in terms of generating addresses. The solution here will ensure privacy as people tracking a transaction will only see an address with one transaction, and will have a harder time figuring out the total amount of cryptocurrency a person is holding. To increase security of cryptocurrencies held in the wallet, an optional multisignature function can be implemented as well.

Based on the current survey done on Google Forms with 11 participants at the time of writing, the answers are:

1. Many people prioritize security (81.8%) when using a non-custodial wallet, and the second being privacy (63.6%). Surprisingly, convenience is not the most popular (45.5%).
2. 81.8% of the participants are experienced in the field of cryptocurrencies, and
3. 54.5% mentioned that they hold lots of cryptocurrencies.
4. 36.4% do not consider METAMASK (Ethereum’s non-custodial wallet) to be safe 
5. Majority (90.9%) do not use multisignature wallets.

Based on the results, we are able to deduce that:

1. Wallet users want security when depositing large amounts of cryptocurrencies into a wallet. This is likely due to the fact that non-custodial wallets are hackable and funds can be stolen easily.
2. Wallet users want privacy when depositing large amounts of cryptocurrencies. This may be due to the fact that the blockchain is public, and anyone can view the blockchain easily with the blockchain explorer and find out who are the ones who hold lots of cryptocurrencies.
3. Multisignature wallets are not user friendly. Based on the results from the poll, the majority do not view multisignature wallets to be easy to use, even though the majority of the survey participants are not new to the cryptocurrency space.

Solutions:

Unspent Transaction Outputs or UTXO, is the amount of digital currency remaining after a cryptocurrency transaction as an output, and unspent coins will be returned as an input. The closest example to an UTXO will be cash. Imagine you have 10 dollars and a drink costs 5 dollars, you will pay the cashier (output) 5 dollars, and you will receive 5 dollars as change (input) except that with UTXO, your input will be sent from your current address, and you will receive the change or unspent coins in a new address. 

This is used by Bitcoin as the main benefit of the UTXO model is privacy. Each transaction is unique as every transaction has a unique address. Even though you are able to view the transaction on the blockchain explorer, it is very difficult to link an address to any one person.

2. Smart Contracts

Smart contracts are self-executing, self-enforcing contracts. They are governed by the explicit terms and conditions laid out within them. With clear instructions written into them, we will be able to integrate UTXO into a single contract, making a smart contract a wallet. Since smart contracts are immutable once deployed on the blockchain, this will ensure that user’s funds will be secure when using the wallet.

3. Multisignature

Since multisignature is not popular among the survey participants as they mentioned that they do not use multisignature wallets much, this function should be made easy for both beginners and experts to use but only as an optional choice since it is a more risky option to use if a user does not know what they are doing.

1. 1. https://river.com/learn/bitcoins-utxo-model/#the-utxo-model-vs-the-accounts-model
   2. https://medium.com/@ChainTrade/10-advantages-of-using-smart-contracts-bc29c508691a
   3. https://www.argent.xyz/learn/what-is-a-multi-sig/
   4. https://www.investopedia.com/terms/u/utxo.asp
   5. https://en.bitcoin.it/wiki/Privacy#:~:text=While%20Bitcoin%20can%20support%20strong,traceable%3B%20this%20is%20completely%20false
   6. https://academy.horizen.io/technology/expert/utxo-vs-account-model/#:~:text=One%20benefit%20of%20the%20UTXO,depends%20on%20the%20input%20state
   7. https://en.bitcoin.it/wiki/Address_reuse#:~:text=Address%20reuse%20refers%20to%20the,depended%20on%20to%20work%20reliably
   8. https://www.coindesk.com/tech/2020/11/10/multisignature-wallets-can-keep-your-coins-safer-if-you-use-them-right/
   9. https://ethereum.org/en/developers/docs/scaling/layer-2-rollups/