Token Approvals – Understanding the Risks in Transactions and Security

The private key isn't ever revealed, ownership is proven through a digital signature that proves that the owner knows the private key without actually revealing it.

Here is an overview:

• Bob asks his wallet software to create a transaction from his address to Alice's
• Bob's wallet software digitally signs his transaction with Bob's private key
• Bob's wallet software publishes the signed transaction to another Ethereum node, which passes it on to another node, and so on until a mining node hears about it and includes it into a block.

The digital signature on Bob's transaction, crucially, allows everyone to verify that Bob's private key has "endorsed" the transaction, without him ever needing to reveal the private key itself.

But the question here is, technically, what exactly are we signing away when we approve a collection contract for listing and trading on OpenSea? Approving "All of your NFT" sounds like anything that we own from a specific collection can just be taken out of our wallet without asking us for a MetaMask signature, even though we came to it only to list a NFT for sale.

This is exactly it. You're allowing an address (Usually a smart contract, but nothing prevents you from approving a user, which could then transfer your NFTs out of your wallet as it if was theirs) to spend all your tokens from a specific collection.

Please provide a list of what ApproveForAll() actually encompasses in terms of potential events, versus the specific event (e.g. list the NFT for sale) we might have come to use it for.

Well if you're interacting with a smart contract that isnt malicious, and is well designed, the answer is : nothing. Let me explain. While you are actually giving permission to that contract to do literally anything with your tokens, it cannot do anything it hasnt been programmed to do.

Let's take this very simple example contract :

contract TransferNFT {
  
  function makeTransfer(address collection, address to, uint tokenId) public {  
    IERC721(collection).transferFrom(msg.sender, to, tokenId);
  }
}

While, by calling setApprovalForAll(myContractAddress) on an NFT contract (let's say, BAYC), you're allowing my contract to transfer all of your BAYC tokens, to any address, the only situation where it would actually be able to transfer your tokens would be when you're calling makeTransfer(), only from the wallet that holds the tokens, only to the address you specified as input, and only the token you specified. (in the case of OS, it's a bit more complex obviously, they ask you for approval when you list your token so they can transfer it later when the sale is fulfilled, but it's the exact same idea)

In other words, it is perfectly safe. So safe that most dApps asks you to set approval for all of your tokens from a collection eventhough you're trying to list/transfer only one of them instead of asking you for only the one token you want to move, just to avoid asking you again for approval if you want to move more of these tokens with that smart contract in the future.

Now, if you're setting approval to a malicious address, well you just allowed them to transfer all of your tokens on your behalf, so that's what they're usually gonna do. And as soon as they do that, your tokens are gone and you'll never see them again.

And is there any situation where the prompt would instead read "Give permission to access all of your funds"?

Nop, that can't happen. 1 setApprovalForAll transaction = approving all of the tokens from ONE collection, to ONE address only.

ERC20 has a similar mechanism, btw. That's why you have to make an approval transaction when you're swapping tokens on a DEX for the first time, for example.