About the Permitted Transfer Rule in Ethereum

When you deploy a non-transferable ERC-20 token contract on the Ethereum blockchain and grant it permission to use your digital wallet funds for specific purposes, including transferring a certain amount of tokens, there are rules that must be followed. In this article, we will explore what happens when these conditions are met and when transactions that result in permitted transfers can occur.

The Permission Transaction

To initiate a permitted transfer, you must follow the following steps:

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  Granting Permission: Grant your contract permission to use your wallet funds for a specific purpose.

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  Creating a Permission: Your contract creates a “permission” that specifies the amount of tokens and the recipients who are allowed to spend those tokens.

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  Transfer of funds: The recipient of the approved transfer is asked to sign the authorization, which serves as proof that they have received the approved tokens.

Moving tokens before transfer

Now, let's say you move your 20 ERC-20 tokens from one wallet to another before transferring them via transferFrom. Here's what might happen:

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  Transaction creation: The transfer of funds (the 20 tokens) is recorded in a transaction ledger.

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  Verification and approval: The recipient's wallet verifies the signature on the permission, which was signed by your contract. If everything is valid, they approve the transfer.

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  Permission update: Your contract's permission to spend these tokens remains active, but you no longer have direct access to them.

When Allowed Transfers Occur

Allowed transfers can occur in several scenarios:

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  Approved Transactions: The recipient wallet signed the permission and approved the transfer when they moved your tokens.

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  Recipients Sign the Permission: The recipient wallets verify their signatures on the Allowed Transfer Permission before approving the transaction.

Potential Issues and Mitigations

While allowing transfers can be useful for token management, there are scenarios where it may not work as expected:

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  Wallet Signing Permissions: If multiple wallet owners sign the Allowed Transfer Permission, this may cause inconsistencies in token balances.

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  Unapproved Recipient Wallets
  
  
  
  : If a recipient wallet does not verify or approve the transferred tokens, the transaction will fail.

Risk Mitigation

To avoid potential issues with permitted transfers:

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  Verify Signatures: Always verify that the recipient's signature on the permit is valid before approving the transfer.

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  Monitoring Wallet Activity: Regularly review recipient wallet transactions for inconsistencies or suspicious activity.

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  Implement Token Management: Use a token management system to maintain accurate and up-to-date information about your tokens.

By understanding the permitted transfer rule in Ethereum, you can better manage your ERC-20 tokens and ensure they are being used as intended. While there may be scenarios where permitted transfers do not work as intended, there are steps you can take to mitigate potential risks and maintain transparency throughout the process.