How to Govern Transaction Execution Policies

A Transaction Execution Policy (TEP) is a set of programmable rules that govern the execution of transactions from a smart contract account, often called a smart account. Unlike externally owned accounts (EOAs) controlled by a single private key, smart accounts use policies to define who can initiate transactions, what actions they can perform, when they can act, and how much they can spend. This transforms account security from a binary private key model into a flexible, rule-based system. Common policy types include spending limits, multi-signature requirements, time-locks, and allowlists for specific dApp interactions.

Policies are typically enforced by the account's entry point or a dedicated policy engine. When a user operation (the ERC-4337 standard for a bundled transaction) is submitted, the policy engine validates it against all active rules before execution. For example, a policy could mandate that any transfer over 1 ETH requires a 2-of-3 multi-signature approval, while smaller transfers can be executed by a single signer. This architecture separates the logic of "who can sign" from the logic of "what is allowed," enabling complex governance models without modifying the core account contract.

Implementing a basic spending limit policy demonstrates the concept. Below is a simplified Solidity example for an ERC-4337-compatible smart account using a policy module.

solidityCopy
// SPDX-License-Identifier: MIT
pragma solidity ^0.8.19;
contract SpendingLimitPolicy {
    mapping(address => uint256) public dailySpent;
    mapping(address => uint256) public dailyLimit;
    function validateTransaction(
        address sender,
        uint256 value,
        bytes calldata
    ) external returns (bool) {
        uint256 spentToday = dailySpent[sender];
        require(
            spentToday + value <= dailyLimit[sender],
            "Daily limit exceeded"
        );
        dailySpent[sender] = spentToday + value;
        return true;
    }
    // Function to reset daily counter (callable by a manager)
    function resetSpent(address _user) external {
        dailySpent[_user] = 0;
    }
}

The validateTransaction function is called by the account's entry point before execution, blocking transactions that exceed the limit.

Advanced use cases leverage policy composition and session keys. Policy composition allows multiple policies to be combined, such as requiring both a spending limit and a specific time window. Session keys are temporary signing keys granted limited authority by a policy, perfect for gaming or DeFi sessions where you want to approve a dApp for a set period and budget without exposing your main seed phrase. Projects like Safe{Wallet} (with its Zodiac modules), ZeroDev, and Biconomy offer SDKs and infrastructure to manage these policies, abstracting the complexity for developers.

Governance of these policies is critical. For a multi-signature Safe, adding or removing a policy is a multi-sig transaction itself. For more decentralized organizations, policy updates can be managed via a DAO vote using Snapshot and executed via a DAO module. This creates a hierarchical model: the DAO governs the high-level policy framework, while individual signers operate within those rules. Regular policy audits and simulations using tools like Tenderly or Foundry's forge are essential to ensure rules behave as intended and don't introduce vulnerabilities or lock funds.

To govern transaction execution policies effectively, you must first understand the core components. This involves working with smart contracts that define the rules (the policy) and a governance framework that allows token holders or a multisig to modify these rules. You should be familiar with writing and deploying contracts on EVM-compatible chains like Ethereum, Arbitrum, or Polygon using development frameworks such as Hardhat or Foundry. A basic grasp of Solidity for the policy logic and JavaScript/TypeScript for interaction scripts is essential.

You will need access to and experience with specific governance tooling. For on-chain voting, platforms like OpenZeppelin Governor or Compound's Governor Bravo provide standard contracts to build upon. For off-chain signaling, familiarity with Snapshot is required. You must also understand how to manage private keys and sign transactions, whether through a CLI wallet, a library like ethers.js, or a service like Tenderly for simulating governance proposals before execution. Setting up a local testnet (e.g., with Hardhat) to prototype policies is highly recommended.

Finally, a clear definition of the policy's goal is a critical prerequisite. Are you restricting transaction types (e.g., no transfers to blacklisted addresses), setting gas limits, implementing timelocks, or requiring multi-signature approvals? You must map these requirements to concrete, testable logic within your smart contract. Document the intended behavior and failure modes. Without this clarity, creating a secure and effective governance-controlled policy is impossible, as the contract code must precisely encode the community's intent.

An execution policy is a set of programmable rules attached to a smart account that governs transaction execution. Unlike traditional wallets where a single private key holds absolute authority, execution policies decentralize control by defining who can execute what actions, when, and under which conditions. This is a core component of Account Abstraction (AA) standards like ERC-4337, which separates the logic of transaction validation from the core protocol. Policies can enforce multi-signature requirements, spending limits, time locks, and interactions with specific smart contracts, turning a static keypair into a dynamic, rule-based entity.

Policies are typically implemented as separate smart contracts that the main account contract calls to validate a user operation. For example, a policy could require two out of three designated guardians to sign a transaction exceeding 1 ETH. Another common pattern is a session key policy, which grants a temporary, limited authority to a dApp for a specific set of actions, like performing swaps on a DEX for one hour. Developers define these policies using frameworks like the Safe{Core} Protocol or ZeroDev's Kernel, which provide modular building blocks for permission logic.

Setting up an execution policy involves deploying the policy contract and linking it to your account. Using a framework like Safe, you might interact with its ModuleManager to enable a policy module. A basic Solidity policy contract has a validateTransaction function that returns a boolean. For instance, a DailyLimitPolicy would check if the transaction value is below a daily cap stored in the contract's state. Failed validation reverts the entire user operation, preventing execution. This programmability allows for complex, non-custodial security models that are transparent and verifiable on-chain.

Execution policies enable several critical use cases in decentralized governance and institutional finance. Multi-signature vaults use them to require approvals from a committee. DeFi managers can implement policies that only allow interactions with pre-approved, audited protocol addresses to mitigate phishing. Recovery scenarios are also governed by policies, such as a social recovery module that activates after a 7-day timelock. By codifying rules directly into the account's operation flow, execution policies reduce reliance on off-chain processes and centralized intermediaries, enhancing both security and operational efficiency.

When designing policies, key considerations include gas efficiency (as validation runs on-chain), policy composability (stacking multiple rules), and upgradability. A poorly designed policy can create denial-of-service vectors or unintended restrictions. It's crucial to audit policy logic thoroughly. The ecosystem is evolving with standards like ERC-6900, which aims to modularize and standardize policy interfaces across different account abstraction implementations, promoting interoperability and safer development patterns for this foundational governance layer.

The first step is to define the policy's scope and objectives. Are you governing gas fees, transaction ordering, access control, or specific smart contract function calls? For example, a DAO treasury might implement a policy requiring multi-signature approval for any transfer exceeding 10 ETH. In a rollup, the policy could enforce a maximum transaction size of 120KB to optimize data availability costs. Clearly document the desired outcomes, such as reducing spam, enforcing compliance, or managing operational risk, before writing any code.

Next, implement the policy logic within smart contracts. Use function modifiers and access control patterns like OpenZeppelin's Ownable or AccessControl to enforce rules. For gas policies, you can use require(tx.gasprice <= maxGasPrice, "Gas price too high"). To manage execution flow, consider using a policy registry contract that holds the current rules, which other contracts query. A common pattern is the Policy Pattern, where a dedicated PolicyManager contract validates transactions against a set of rules before they are forwarded to the target contract via delegatecall or a similar mechanism.

For dynamic policies that need to change over time, you must implement a governance mechanism. This typically involves a governance token and a voting contract, such as a fork of Compound's Governor. Proposals to update policy parameters (e.g., changing a fee percentage or whitelisted address) are submitted, voted on by token holders, and, if passed, executed to update the policy contract's state. Ensure there is a timelock between a proposal's approval and its execution to give users time to react to changes. The OpenZeppelin Governor library provides a robust foundation for this.

Finally, monitor and analyze policy effectiveness. Use off-chain indexers or subgraphs to track metrics like transaction success/failure rates, average gas costs, and policy violation events. Tools like Tenderly or OpenZeppelin Defender can send alerts when a policy rule is triggered. Regularly review these metrics with your community or governance body. Policies are not set in stone; be prepared to iterate based on network conditions and user feedback, using the established governance process to propose and enact improvements.

Transaction execution policies are a powerful tool for programmable security and gas optimization. By defining rules for gas limits, allowed contracts, spending caps, and transaction batching, you can create a tailored security model for your smart accounts or dApps. This moves beyond simple signature verification to enforce logic that protects user assets and streamlines operations. The key is to design policies that balance security with usability, preventing malicious actions without hindering legitimate use.

To implement a policy, start with a clear security model. Define what actions are permissible and what constitutes a risk. For example, a policy for a DeFi user might allow unlimited swaps on Uniswap and Aave but cap total daily withdrawals. Use the Policy interface from libraries like Safe{Core} Protocol or ZeroDev's Kernel to encode these rules. Your policy contract's validateUserOp function will be called by the account's EntryPoint to approve or reject each user operation before execution.

Here is a basic template for a time-lock policy that restricts transactions to specific hours:

solidityCopy
contract TimeLockPolicy is IPolicy {
    uint256 public startHour;
    uint256 public endHour;

    constructor(uint256 _start, uint256 _end) {
        startHour = _start;
        endHour = _end;
    }

    function validateUserOp(
        UserOperation calldata userOp,
        bytes32 userOpHash,
        uint256
    ) external view override returns (bool) {
        uint256 hour = (block.timestamp / 3600) % 24;
        require(hour >= startHour && hour < endHour, "TimeLockPolicy: tx outside allowed window");
        return true;
    }
}

For next steps, explore policy composition. Complex rules are often built by combining smaller, modular policies using a PolicyManager or through ERC-7579 compliant modules. Test your policies thoroughly on a testnet like Sepolia using frameworks like Foundry or Hardhat. Simulate attack vectors to ensure your logic is robust. Finally, consider gas implications; complex validation can increase gas costs for users, so profile and optimize your policy's validateUserOp function.

The ecosystem for transaction policies is rapidly evolving. Stay updated by following the ERC-4337 account abstraction standards, the Safe{Core} Protocol documentation at docs.safe.global, and projects like ZeroDev, Biconomy, and Alchemy's Account Kit. Experiment with different policy types—from social recovery and session keys to spend limits and contract allowlists—to build more secure and user-friendly Web3 applications.