TLDR: A Smart Wallet is a smart contract-based wallet that enables easier position management and various complex operations. It is essentially your DeFi Saver/ETH Saver account, as it keeps all your positions created using both apps.
Why is it needed?
DeFi protocols support simple, straightforward operations inside a single transaction. For example, you can execute a simple ETH supply on Aave. However, in order to do a complex task such as leveraging ETH to borrow DAI and sell it for more ETH, you would have to execute at least 3 separate transactions.
What smart contract-based wallets enable you is to execute multiple things inside a single transaction (for the techies: they do this by providing an execution context using `delegatecall`). Thus, instead of 3 separate transactions, you would execute a single one.
Once you have this flexibility, you are able to do all sorts of things such as easily creating leveraged positions, shifting them effortlessly between protocols and assets, or creating completely custom-tailored recipes for your specific use case.
Some of these operations would be significantly less safe to do over separate transactions. For example, executing a position Repay when you're near liquidation (withdraw some collateral, swap, and pay back some debt) would be risky, as it would temporarily decrease your liquidation ratio even further. Executing all the steps at once, atomically, is a safer and easier way to do it. Additionally, many of these operations wouldn't even be possible without a Smart Wallet. Anything that uses flash loans is a good example of this. A flash loan would allow you to repay a large chunk of a position even when you don't have enough unutilized collateral to use as liquidity. Learn more about flash loans.
Is a Smart Wallet safe to use?
In addition to added flexibility, these wallets represent an additional layer of safety by providing a layer of separation between your main wallet (often referenced as an Externally Owned Account - EOA) and the DeFi protocols you use. Token approvals are never given directly to the protocol, but instead proxied through the Smart Wallet.
The wallet itself is fairly minimal and has been battle-tested since 2018. In technical terms, it is MakerDAO's DsProxy. In fact, if you ever used the Maker protocol in the past, you already have a Smart Wallet that will be used in DeFi Saver (and vice-versa). ETH Saver uses a separate registry for technical reasons (in order to support multiple positions per protocol, as well as advanced profit tracking), but the actual wallets are exactly the same.
Is the DSProxy Smart Wallet cross-compatible?
We decided to use Maker's DSProxy as a basis for DeFi Saver in the beginning as it was and is a thoroughly tested and well-audited piece of open-source code that's perfectly capable of doing everything we have imagined and created as of now. Additionally, this being an open standard and registry, we hoped other protocols and interfaces would adopt it, seeing it as a key to DeFi's interoperability. However, the ecosystem diverged over time, with protocols implementing an EOA-only or a protocol-specific bundling approach, and different interfaces developing walled gardens using proprietary, closed-off, allowlist-based wallets.
DeFi Saver's team remains committed to supporting an open ecosystem, using open and permissionless standards. We hope to see a unified approach adopted across DeFi in the future, and we are actively following and supporting efforts to do so, account abstraction being one of them.
What this means for you in the meantime, is that positions created in DeFi Saver will most often not be accessible using other interfaces. MakerDAO CDPs are an exception, as they started off on an open standard from the get-go, and are for the most part still created on DSProxy-based wallets in the wild.
Additionally, as mentioned above, in order to support multiple Smart Wallets per EOA (multiple positions per protocol), as well as precise profit tracking, ETH Saver uses a separate registry from the original MakerDAO one. This means that your Smart Wallets don't carry over between DeFi Saver and ETH Saver.