Understanding Token Approvals: A Complete Guide

What Are Token Approvals?

When you interact with a decentralized application (dApp) that needs to move your tokens, you must first grant it permission. This permission is called a "token approval" or "allowance."

How Token Approvals Work

The ERC-20 Approve Function

The ERC-20 token standard includes an approve() function that lets you authorize another address (usually a smart contract) to spend a specified amount of your tokens.

approve(spender, amount)

When you call this function, you're essentially saying: "I allow this address to spend up to X amount of my tokens."

The Problem with Unlimited Approvals

Many dApps request "unlimited" approvals for convenience. This means you approve the maximum possible amount (2^256 - 1), so you don't need to approve again for future transactions.

The risk? If that smart contract is compromised or malicious, it can drain all of your approved tokens at any time.

Real-World Risks

Case Study: The Badger DAO Hack

In December 2021, the Badger DAO protocol was exploited for over $120 million. Attackers manipulated the frontend to inject malicious approval requests, which users unknowingly signed, giving hackers access to drain their funds.

Unlimited Approval Exploits

Numerous protocols have been exploited through their smart contracts. Users who had granted unlimited approvals lost tokens even if they hadn't interacted with the protocol recently.

Best Practices for Token Approvals

1. Approve Only What You Need

Instead of unlimited approvals, approve only the exact amount needed for your transaction. Yes, it means more transactions, but it significantly reduces your risk.

2. Regularly Review Your Approvals

Use tools like our Approval Manager to see all active approvals on your wallet. Revoke any that you no longer need or don't recognize.

3. Be Cautious with New Protocols

New and unaudited protocols carry higher risk. Be especially careful with approvals on platforms that haven't been thoroughly vetted.

4. Use a Separate Wallet for DeFi

Consider using a dedicated wallet for DeFi interactions, keeping only what you're willing to risk. Store the majority of your assets in a separate, secure wallet.

How SVGN Helps

Our Approval Manager tool makes it easy to:

View all your current token approvals across multiple chains
Understand the risk level of each approval
Revoke unnecessary approvals with one click
Monitor for new approvals in real-time

Conclusion

Token approvals are a fundamental part of interacting with DeFi, but they come with real risks. By understanding how they work and following best practices, you can significantly reduce your exposure to approval-based attacks.

Stay safe, and always think twice before clicking "Approve."