TOKEN APPROVALS EXPLAINED

What Are Token Approvals?

Token approvals, also known as token allowances, refer to a permission mechanism within the Ethereum ecosystem and other blockchain networks that follow similar architecture, such as Binance Smart Chain or Polygon. This feature enables decentralised applications (DApps) to interact with a user's tokens without the user needing to approve each transaction individually.

At their core, token approvals are implemented through the ERC-20 standard, which governs fungible tokens. When a user wants to interact with a smart contract—such as performing a token swap, staking assets in a yield farming pool, or providing liquidity—they must grant that smart contract permission to move a specified amount of their tokens. This is critical because it enables non-custodial protocols to operate autonomously while still requiring explicit user consent.

How Token Approvals Work

Here’s a basic breakdown of how token allowances operate:

• A user owns Token A in their wallet.
• They wish to use a DApp (e.g., a decentralised exchange such as Uniswap) that requires Token A for a specific transaction.
• Before completing the transaction, the DApp will ask the user to approve an allowance. This invokes the approve() function on the token's smart contract.
• Through this function, the user allows the DApp’s smart contract to spend a specified amount of Token A on their behalf.

Approvals are essential because Ethereum wallets and blockchain protocols are designed to protect users' assets. Without approvals, every token movement would have to be manually signed and authorised by the user, making the user experience highly cumbersome, especially in complex operations involving multiple transactions.

Persistent Approvals

Importantly, token approvals persist on-chain until revoked. Once a smart contract is authorised, it can access the granted tokens at any time, without additional user confirmation—up to the approved limit. Some protocols request "infinite approvals" for convenience, allowing the smart contract to operate without future approval transactions. While user-friendly, this practice introduces potential risks if the smart contract is compromised.

Key Terminology

• Allowance: The specific amount of tokens a smart contract is permitted to spend.
• approve(): The function that sets an allowance in the smart contract.
• transferFrom(): The function used by the authorised contract to move user tokens within the allowance limit.

Understanding these core mechanics is essential for users navigating decentralised finance (DeFi) and other blockchain-based applications, as it is a foundational aspect of secure and efficient interactions within the ecosystem.

Why Token Allowances Are Necessary

Token approvals exist to provide decentralised applications (DApps) with secure, limited access to a user’s assets. In a decentralised environment where no central authority exists to mediate transactions, smart contracts rely on the concept of token allowances to perform vital functions while preserving user autonomy. This section explores the reasons token approvals are indispensable to the blockchain ecosystem.

1. Enabling Non-Custodial Interactions

One of the hallmarks of blockchain innovation is the ability to retain control over assets without intermediaries. DApps function without banks or brokers, but they still need a way to carry out token-related transactions on the user’s behalf. Token allowances make it possible for automated protocols to temporarily operate with delegated authority, without taking custody of the user’s tokens.

2. Enhancing User Experience

Without token approvals, every interaction involving token transfers would require the user to manually confirm and sign each transaction. For example, in a yield farming protocol where frequent reinvestments occur, this would become tedious and impractical. Approvals streamline these operations by giving pre-defined permissions, improving efficiency while maintaining transparency.

3. Supporting Complex Multi-Step Protocols

Modern DApps often engage in multi-step transactions, such as swapping token pairs, providing liquidity, or interacting with derivatives. Each of these steps could require separate token transfers. Token approvals allow smart contracts to batch or automate these sequences, enabling services like flash loans, cross-chain bridges, and staking NFTs to function effectively.

4. Optimising Gas Costs

Approving a contract only once for an unlimited amount can save on gas fees, which are especially critical during periods of network congestion. Repeating approvals for each individual transaction would drive up costs and potentially deter participation in DeFi.

5. Permissioned Security Model

Approvals represent a granular level of permission that aligns with principles of principle-of-least-privilege security models. Users determine who can access their tokens and how much they can access. This opt-in nature ensures that even when interacting with DApps, users remain in control.

6. Compatibility Across Applications

Token allowances are standardised through ERC-20 and its derivatives, making them widely compatible across the Ethereum Virtual Machine (EVM) ecosystem. This uniformity enables tokens to be used seamlessly across decentralised exchanges, lending protocols, gaming platforms, and payment gateways.

7. Programmatic Integrations

For developers, token approvals are also crucial. They allow programmatic access to tokens from within smart contracts, automating actions such as liquidations in lending markets or transaction settlements in decentralised payment systems.

Ultimately, token approvals are the backbone of permissioned access in DeFi. Without them, every decentralised application would require full custody of user funds—defeating the purpose of decentralisation. They help preserve trustless interaction while fulfilling the practical needs of digital finance.

How Token Approvals Are Abused

While token approvals serve an essential technical and functional role in decentralised applications, they also open the door to potential misuse and exploitation. Because permissions can persist on-chain indefinitely and facilitate automated access to user funds, malicious actors frequently look for ways to abuse token allowances. This section explores the primary ways in which token approvals can be exploited and what users can do to protect themselves.

1. Infinite Approvals and Overexposure

Many DApps request infinite or very high token allowances as a convenience feature to avoid repeated approvals. Unfortunately, this leaves users exposed. If that smart contract is ever compromised—for instance, through a software vulnerability or a governance attack—attackers could drain all approved tokens from user wallets. Although tokens remain in the user’s control on-chain, this over-permissioning effectively breaks the principle of least privilege.

2. Malicious Smart Contracts

Scammers frequently deploy malicious smart contracts that appear as legitimate DApps or NFT drops. Once a user approves token access for such a contract, it can be programmed to steal funds immediately or at a future date. These approvals are not inherently reversible by the smart contract or wallet apps; revoking must be done manually by the user or through a token approval manager.

3. Phishing via Smart Contract Interfaces

Another common vector is phishing websites that mimic well-known protocols. Users unknowingly interact with fake interfaces, which prompt them to approve token access to fraudulent addresses. These can result in immediate asset theft or delayed attacks that trigger once a predefined condition is met.

4. Exploitable Bugs in Protocols

When reputable DApps are exploited via vulnerabilities, attackers can leverage existing token allowances to drain user funds. In DeFi history, examples such as the bZx exploit and BadgerDAO hack stood out because users who had granted high-value allowances suffered significant losses, despite never engaging in immediate transactions at the time of attack.

5. Dormant Approvals

Many users forget to revoke allowances after interacting with a DApp—even if they never intend to use it again. These dormant approvals linger on-chain and can be exploited much later if the associated smart contracts become vulnerable. Regular auditing and revocation of unnecessary approvals are vital for long-term security.

6. Approval Front-Running and Race Conditions

While rare, some exploits involve front-running token approvals. An attacker may monitor the mempool (where pending transactions are visible) and attempt to exploit transaction ordering to intercept or capitalise on token approvals before users realise. Malicious bots may also attempt race conditions, though most wallets now vary nonces and offer protections against these edge cases.

7. Irreversible Nature of Permissions

Unlike traditional financial systems where permissions can be revoked at a bank's discretion, blockchain approvals require the user to take proactive steps to remove or adjust allowances. Unless a user interacts with platforms such as Revoke.cash or Etherscan’s Approval Checker, they may remain unaware of outstanding permissions that pose security threats.

Security Best Practices

To mitigate these risks, users should consider the following precautions:

• Only interact with verified DApps and official URLs.
• Grant limited or specific token allowances when possible.
• Use token approval tools to monitor and revoke existing permissions.
• Be cautious of DApps requesting infinite approvals.
• Periodically review wallet activity for unused or abandoned applications.

While the decentralised nature of blockchain empowers users, it also requires greater individual responsibility. Maintaining a clean allowance history is a vital part of secure crypto asset management.