Smart wallets are the wallets created by the LSD Network for their node operators. A smart wallet is unique to every node operator. This means that in an LSD Network, if a node operator wants to run 10 validators, then all the 10 validators will be associated with the same unique smart wallet. If the same node operator is part of 2 different LSD Networks, then the node operator will have one smart wallet in each of the networks.
To create a smart wallet a node operator must interact with the Liquid Staking Manager of the respective LSD Network, provide at least one BLS public key along with at least 4 ETH. 4 ETH per validator must be deposited by the node operator. All the ETH deposited by the validator directly goes to their smart wallet which will later be used for staking.
Every smart wallet in an LSD is owned by the Liquid Staking Manager. This is to make sure that a node operator does not turn malicious after getting funds from the pools.
This is to reduce griefing attacks because the smart wallet is the address that initiated the staking and provided 32 ETH. If a node operator were to have ownership of the smart wallet then the funds would have been at risk. Hence, all the smart wallet operations are carried out strictly by the Liquid Staking Manager.
A node operator can withdraw their deposited 4 ETH as long as the associated BLS public key has not been staked. Withdrawing 4 ETH would mean that the node operator does not want to run that BLS public key as a validator and hence the Liquid Staking Manager will mark this BLS public key as banned and hence cannot be later used in the network to stake a validator. All the existing users that have received LP tokens for this particular BLS public key will be provided with an option to mint new LP tokens by burning their older ones. Hence, as long as a user holds LP tokens they have security over their deposit and if a BLS public key is withdrawn then the users can just rotate their LP token to a new BLS public key. In other words, until a validator is staked, users can always claw back the deposited ETH.