What is Spending Cap? (Approval Allowance)

What are Spending Caps in Web3 Wallets?

The world of blockchain has been gaining a lot of attention lately, and with it, the use of web3 wallets has become increasingly popular. However, as the number of DeFi scams and fraudulent activities rises, it's important to take measures to protect yourself.

One such measure is setting a spending cap on your web3 wallet. In this article, we'll explain what a spending cap is, how it works, and why it's beneficial to use one.

What is a Spending Cap?

A spending cap, also known as an allowance, is a limit that you set on the amount of a specific token that a dApp can access from your web3 wallet. It's like giving a dApp a prepaid card with a fixed value, instead of handing them your whole debit card. This helps you control your spending and protect yourself from accidentally approving large transactions or scams.

How Does it Work?

Connecting to a dApp

When you first interact with a dApp, it will ask you to connect your web3 wallet. This allows the dApp to access your wallet and perform actions like transferring tokens.

Approval request

Before the dApp can move your tokens, it needs your permission. This is where the spending cap comes in. The dApp will ask you to approve a certain amount of tokens for it to use.

Setting the cap

You have three options:

Custom amount

Enter the exact amount you're comfortable letting the dApp spend.

Max

Approve the dApp to spend your entire balance of that token.

Use site suggestion

The dApp might recommend an amount based on your intended use. Review it carefully before approving.

Confirmation

Once you set the spending cap and approve, the dApp can use your tokens up to that limit.
However, it can't go beyond that without requesting another approval from you.

Benefits of Using Spending Caps:

Setting a spending cap on your web3 wallet provides increased security by protecting you from accidentally approving large transactions. It also gives you more control over your finances by allowing you to decide how much each dApp can access. Additionally, it serves as a preventative measure to help you avoid overspending, particularly when dealing with volatile tokens. With spending caps, even if someone hacks your wallet, they can only steal the approved amount.

Remember, spending caps are not foolproof. Always research dApps before connecting your wallet and be cautious about what you approve. Learn more.

Updated on: 14/10/2024

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