You are currently viewing The Way of the Wallet: Are they here to stay?  |  by Peaze |  Coinmonks |  Oct, 2022

The Way of the Wallet: Are they here to stay? | by Peaze | Coinmonks | Oct, 2022

Quite the tagline for crypto-native folks; I’m sure plenty of controversies have been sparked in the first 5 seconds of seeing this post. The crypto wallet is the conception point for all on-chain interaction; how could it be possible that it gets cut out from the ecosystem? Truthfully, it’s highly improbable. It’s an excellently devised infrastructure that stands for every aspect of a decentralized ethos. However, if the decentralized movement is anything, it is centralized around forcing new users to understand their language — if you don’t say gm to me, ser, how am I supposed to know ur degen like me? This language and technology barrier imposed on new users is responsible for the lack of adoption or curiosity. As a founder, seeking as much user feedback as possible is critical to iterate on your product, improve UX, and ultimately run a self-sustaining company. So, why are we restricting the architecture of our platforms to require users to jump through hops to access this revolutionary technology? Let’s take a second to assess the evolution of wallet infrastructure.

Custodial Wallets

The key differentiator between a wallet and an exchange is that the exchange is the third party a user entrusts to their key management. Unlike a self-custodial or non-custodial wallet, an associated user cannot take full control of their keys, and the user can not operate on-chain due to the nature of the wallet with an exchange user. Exchanges have historically been a massive source of the on-ramping of funds into a user’s wallet by purchasing crypto in the exchange and then transferring it to their hot wallet to operate on-chain.

Alternatively, some solutions like Venly offer a custodial solution that can interact with smart contracts; This solution is the sole entity responsible for user keys and security. Unlike an exchange, a custodial wallet can operate on-chain and interact with smart contracts. These wallets allow users to mint NFTs, buy crypto, and act on-chain without manually signing each transaction. This is possible because the custodian owns the keys and stores them off-chain on a server, which they can call on to sign transactions on the user’s behalf. Although these wallets can function in web3, they are an entirely centralized organization as they can initiate actions, sign contracts without your consent, and own access to your wallet.

Self-Custodial Wallets

Everybody remembers their first seed phrase creation, taking out a notebook to hide the code to your entire net worth and feeling the rush of excitement that you get minting your first monkey jpeg. The Self-Custodial Wallet. Whether you’re an Eth or Sol maxi, you have used Metamask or Phantom. A self-custodial wallet is created by generating a private key to pair with a public key, the wallet address, that allows users to sign transactions on the chain. These browser-based extensions enable users to interact with their wallets on-chain, connecting to your wallet from within a dapp (decentralized application). For less crypto-native readers, think of a self-custody wallet as a personal bank that a customer does not need permission from any entity to access or withdraw funds. Just as users are responsible for their own security, they are also required to sign each individual transaction that is communicated within the application. In web3 dapps, smart contracts are the basis for on-chain interaction, and any associated action with a message or value must be broadcasted to the blockchain. These actions can only be used once the private key has been to approve it. Although fully decentralized and self-monitored, it creates added layers of friction, particularly when playing games or operating in social apps — think of having to approve a “like” every time you like a post on Instagram, and pay for the gas associated with that action.

Non-Custodial Wallets

As wallet developments have begun to unfold, we are beginning to distinguish between two types of “self-owned” wallets, self-custodial and non-custodial. Unlike a self-custodial wallet like MetaMask, users never have their seed phrase exposed to them; Instead, they are stored in an encrypted fashion, allowing users to access their accounts via traditional authentication methods like social login-ins or email. These wallets are still decentralized and not a custodian (holder of your keys) because no single entity has access to the raw data exposing your private keys. Companies like Magic, originally Fortmatic, pioneered a way to onboard a new demographic of users by allowing for a seamless sign-up experience with email authentication, the Magic Link. But, much like traditional wallets, users still need to on-ramp crypto via tools like Wyre or MoonPay, select the operating network, and swap crypto to interact in other ecosystems.

At Peaze, we’re inspired by Ethereum’s EIP 4337 standard and believe this route can be expanded to both onboard and new users into web3; more on that to come 🙂

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