Smart contracts are self-executing code that runs on the blockchain networks of Ethereum, Binance Smart Chain, and Polygon, among others. The code automates complex transactions such as token exchanges, lending, borrowing, NFT transactions, staking, and payments for subscription services.
However, many new users pose this question: Why do smart contracts need token approvals to work? Smart contracts are autonomous; therefore, should they not have direct access to tokens?
This is where the principles of blockchain come into play, and that is that users always have the ability to control their assets and that smart contracts have no ability to access the tokens unless authorized. This is where the concept of approvals is useful.
This piece will examine the details involved in the approval of crypto tokens, the need for this process, dangers, guidelines, or rules, and examples or illustrations, covering every aspect of this major component of blockchain.
Token Ownership on Blockchain
In blockchain technology, tokens are non-custodial because:
Only the user who holds the private key can authorize transactions.
Smart contracts have no capability to transfer tokens by themselves
Everything, from approvals to actions, is recorded on blockchain.
If there were no token approvals, people would have to actually sign for everything that is transferred or done. This would make using decentralized applications or dApps highly inefficient, costly, and error-prone. Token approvals ensure that all automatic actions performed by smart contracts do not affect security.
What is Token Approval?
Token approval is the process of a blockchain transaction whereby an individual approves a smart contract to spend a particular number of tokens.
Important points about approvals of tokens:
Conditional access: Approval generates an allowance, where the number of tokens that can be accessed by the smart contract is indicated.
No direct transfer: Tokens are held within the user’s wallet until the time the contract performs an operation.
Compatibility: Used with ERC-20 tokens, ERC-721 NFTs and ERC-1155 semi-fungible tokens.
Automation: Facilitates multiple-step activities by self-executable smart contracts without the need for subsequent approvals from users
In essence, approvals are a means by which smart contracts can work independently but in accordance with user preferences.
Why Do Token Approvals Exist in Blockchain Systems?
Token approvals exist because of how blockchain systems are fundamentally designed around user sovereignty, non-custodial ownership, and explicit consent. Unlike traditional applications where software is granted broad access to user accounts, blockchains deliberately separate asset ownership from application logic.
On a blockchain, smart contracts are autonomous programs, but they are not trusted custodians. They do not own user funds, cannot initiate transactions on their own, and cannot bypass wallet-level permissions. This design choice ensures that users remain in full control of their assets at all times.
Token approvals were introduced as a controlled permission layer that allows smart contracts to function without violating these principles. Instead of granting direct access to tokens, users provide limited, programmable consent that defines:
Which contract can interact with the tokens
Which token can be used
How much of that token can be accessed
This mechanism enables automation while preventing unrestricted access. Without approvals, every interaction—such as swaps, staking, or lending—would require separate manual signatures for each step, making decentralized applications inefficient and impractical.
The Necessity of Token Approvals in Smart Contracts
Smart contracts are deliberately limited from accessing user funds by default. Token approvals are required because of several reasons:
1. Explicit User Consent
The blockchain technology prevents the migration of any given token without the owner's approval. Token approvals help to provide an auditable process for obtaining the owner's approval for the start of the transactions initiated by the owner.
2. Security and Risk Management
Exposure is limited by token approvals:
Only authorized tokens can be used by the contract.
Unauthorized accesses are blocked by default.
Helps in safeguarding the money from bugs or malicious smart contracts.
3. Automation of Multi-Step Processes
Approvals allow smart contracts to execute complex operations such as:
Swaps on various pools on DEXs
Collateral management and loans within lending platforms
Automated Staking and Reward claims
This means that without the approvals, the users would actually have to go through the process of approving each action, increasing the associated costs.
4. Decentralization
By including the need for token approvals, blockchains preserve non-custodian design paradigms. Smart contracts do not have ownership of the money but only use the tokens depending on the approved commands.
5. Cross-contact interaction
Current dApps frequently involve interacting with more than one smart contract at a time. The use of token approvals ensures the smooth running of complicated transactions, such as token swaps via an aggregator across different platforms in a single transaction.
How Token Approvals Work
The flow of token approval is quite simple but effective:
Approval Request: User gives permission to a smart contract through their wallet.
Allowance Recording: Token contract records the allowance on-chain.
Smart Contract Verification; Before undertaking actions, the contract verifies the allowance.
Token Transfer: It only happens within the approved limits.
Allowance Update: It could decrease or go into infinity, depending on its type.
This process ensures the integrity of security and transparency and supports the users’ independence.
Types of Token Approvals
Approval Type | Description | Risk Level |
Limited Approval | Approves a fixed amount of tokens | Low |
Infinite Approval | Grants unlimited access to tokens indefinitely | High |
Infinite Approvals
Helpful for frequent customers to prevent repeated approval transactions.
Saves gas fees.
Commonly found on DEXs, liquidity pool protocols, and staking services.
Risk: If a contract is compromised or hacked, all the tokens with infinite approvals could be lost. It is a trade-off between convenience and security.
Real World Use Cases
Token approvals underpin almost all existing DeFi and NFT applications:
Decentralized Exchanges (DEX) - Swap tokens without having to physically transfer them every.
Liquidity Pools: Tokens for market making and yield farming.
Lending and borrowing: Approvals enable the contracting parties to automatically manage the collateral offered and the repayment of
NFT Marketplaces: Approvals enable contract ownership of NFTs after a purchase transaction.
Staking & Rewards: Support automatic reward collection or reInvest.
Subscriptions and Payments: Subscriptions & payments can all be
Advanced Considerations in Token Approvals
1. Cross-Contract
In some dApps, several smart contracts are accessed at a time. Token approvals enable a smooth process when working with several contracts at once.
2. Multi-Step
In order for complex DeFi transactions, such as an aggregator or a yield optimizer, to take place, there is a need for approval so that various steps are done at the same time in one transaction. This is because if transactions are done separately, there would be a need for
3. Gas Optimization
Every transaction costs gas. Approvals cut the gas costs by facilitating repeated operations within pre-approved limits, rather than making multiple transactions.
4. Approval Management Tools
Approvals can be managed by users through the help of platforms including:
Etherscan Token Approval Checker
Zapper Finance
Debank
These enable the monitoring, altering, or revoking of allowances for security reasons.
History Lessons and Security Incidents
Even audited protocols have been at risk because of inappropriate handling of approval.
Infinite approval exploits: There were some old hacks on DeFi applications that occurred because of infinite approvals that were requested and granted for contracts that were eventually hacked.
Phishing Attacks: These websites trick users into accepting token transactions, causing instant loss of funds.
Forgotten Approvals: Users tend to leave their "old" approvals active, leaving the token vulnerable long after the first
Such incidents underscore the need for careful handling of approvals.
Safe Management and Revocation of Approvals
Users must be responsible with their approvals:
Review Active Approvals: Check all active approvals.
Revokes Unused Approvals: Remove approval permissions from unused or untrusted contracts.
Prefer Limited Approvals: One-time approvals should be used for small and isolated transactions.
Trust Verified Platforms Only: Avoid approving tokens for unknown or unaudited contracts.
Monitoring Infinite Approvals: Reserve their use for trusted frequently used platforms.
Such an active strategy significantly decreases risks without convenience.
Real-World Example: A DeFi Token Swap
For example, assume you are interested in exchanging 100 USDC for ETH on Uniswap:
You allow the Uniswap contract to spend 100 USDC.
The contracts checks your allowance
Upon confirmation, the contract exchanges the USDC for ETH.
A benefit offered by infinite approval is that you can swap things repeatedly without needing approval every time.
This shows how approvals make way for secure, seamless, and automated transfers within DeFi.
Conclusion
Smart contracts require approval to work correctly because smart contracts cannot interact with the token without the approval of the users. This approval helps to enable the smart contract to perform complex transactions while giving control to the users. Whether it is limited or infinite approvals, the recognition of this system, careful management of allowances, and only engaging with verified smart contracts are critical for safe interaction and effective utilization in DeFi, NFTs, or Web3. Token allowance is more than a technical aspect, it is actually a basis for safety, automation, or decentralization on a blockchain.
FAQs About Token Approvals
Q1: What if I don’t approve a token?
The smart contract cannot execute actions involving that token.
Q2: Are token approvals permanent?
No, they can be revoked at any time unless already consumed.
Q3: Does approving a token mean it is transferred?
No. Approval only grants permission; tokens transfer only when the contract executes the action.
Q4: Are approvals safe?
Yes, when granted carefully to verified contracts. Risks arise from careless or malicious interactions.
Q5: Do approvals cost gas?
Yes, approvals are on-chain transactions and require gas.
