Web3 Mass Adoption: Crypto Wallets

This article explores four types of crypto wallets available in the market and what problems they are facing against web3 mass adoption. Essentially, it boils down to security and...

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Web3 Mass Adoption: Crypto Wallets

This article explores four types of crypto wallets available in the market and what problems they are facing against web3 mass adoption. Essentially, it boils down to security and user-friendly interface. As we probe further, solutions tackling these challenges have emerged, and they will feature prominently in KBW 2023 discussions.

What is a ‘Crypto Wallet’?

A crypto wallet is a software application, similar to Paypal, but designed to enable users to securely store, manage, and engage with their cryptocurrencies and assets based on blockchain technology.

When creating a crypto wallet, users receive a private key and a public key associated with their wallets (1).

  • The private key, akin to a password, is generated from mnemonic phrases or seed phrases, consisting of a string of letters and numbers that grants access and control over the crypto funds.
  • The public key serves as an address, like an email address, which users can share with others to receive funds.

Figure 1. The Role of Each Key in a Crypto Wallet
Source: Simplilearn

Crypto wallets come in four primary forms: Custodial, Non-custodial (Conventional), Smart Contract and Multi-Party Computation (MPC) with the latter types developed to address the shortcomings of their predecessors (2).

Figure 2. The Web3 Wallet Landscape, by Amanda Young via Medium
Source: thirdweb


In a custodial wallet, a third party like an exchange controls the user's private keys, exchanging full user control for convenience. Despite the user sharing the responsibility of securing their funds with the custodian, these wallets, especially email wallets which allow different devices’ log-in without using seed phrases, have made user integration with web3 products simpler, providing an easier entry point into the blockchain realm.

Non-custodial (Conventional)

Non-custodial wallets give users complete control over their funds and private keys, without relying on intermediaries like centralized exchanges. They also come in two types:

  • Hot wallets (software wallets) are connected to the internet, providing easy access but making them more susceptible to security risks. They are suitable for storing smaller amounts of cryptocurrency used for frequent trading.
  • Cold wallets (hardware wallets) are offline devices, like USBs that store private keys. They offer a high level of security for long-term storage of larger amounts, as they are less vulnerable to hacking attempts.

Discussing the remaining two wallets types (Smart Contract and MPC) would become more relevant when viewed in light of the current challenges users face with wallet usage.

The Key to Mass Adoption Lies in Security and Onramp UX/UI

Since wallets safeguard users' assets and serve as a gateway to their Web3 identity, this stresses the fact that the key to mass adoption of web3 lies in balancing security and user-friendly experiences, including easy recovery options when seed phrases are lost.

Figure 3. Vitalk and Jordi, 2 Ethereum devs, struggled with Metamask navigation on a livestream.
Source: Twitter account @tomuky

UX/UI: Wallet Recovery

Securing seed phrases cannot be overstated since losing them can result in permanent fund loss. A potential solution could be seed phrase recovery, similar to ‘Forgot your password’ features in web2. Ledger offers such optional Recovery Phrase feature, which has received some concern over self-custody compromising although users can choose to opt in or out.

Another solution is soulbound tokens (SBTs) which are encoded with users’ credentials, establishing their identity within their trust networks. For key recovery, a representative majority from the user's network, either on-chain or off-chain, would need to provide consent, following the community recovery method (3).

Another solution is provided by account abstraction wallets, a topic we will delve into in the subsequent section.

Figure 4. SBT community recovery
Source: Decentralized Society: Finding Web3’s Soul

UX/UI: Gas Fee Payment and Private Key Log-In

Users can lower gas fees by accessing Advanced options in wallets like MetaMask, but even if a transaction fails due to being "out of gas," users are still charged the fee. This is because they must pay for the computational resources used, regardless of transaction outcome. Refunds are not possible since the wallets do not retain the fee (4). Crypto wallets should incorporate clear functions to prevent user confusion and avoid such issues going forward.

Another issue linked to gas fees is maintaining sufficient ETH in your EOAs, as it solely accepts ETH for gas payments. The answer calls for Contract Accounts (CAs).

Most conventional web3 wallets are Externally Owned Accounts (EOAs) controlled by a private key. In contrast, CAs are based on smart contract logic, not private keys since they hinge on account abstraction technology (2).

Essentially, account abstraction enables users to log in or sign a wallet using biometric data like fingerprint or Face ID; no private keys needed. Transactions can be made even with insufficient ETH, by using alternative tokens, or even USD, to pay for gas fees. If a private key is lost or compromised, a new one can be created via social recovery methods like email or phone. It also enables multi-factor authentication similar to web2's two-factor authentication. Moreover, users can execute multiple transactions in one operation, saving time and gas on individual transactions.

Yet, two minor cons to consider when it comes to an CA are unlike free-to-create EOAs, CAs involve creation costs and can only transact after receiving another transaction (5).

Security: Phishing Scams/ Hack

While blockchain technology provides enhanced security, it is not completely immune to fraud and security issues. As a result, the second concept of CA emerged: Multisig, and followed by the fourth type: MPC. Multisig and MPC wallets both bolster security through requiring multiple authorizations. While multisig distributes control by separating private keys and putting them into the hands of different key holders (6), MPC splits a single private key into multiple shares, allowing no single entity access to the complete private key, which secures privacy.

Can Crypto Wallets Bootstrap Itself Into Mass Adoption?

These are just a few of the challenges crypto wallets currently face. Others include: non-EVM chains’ new wallet and seed phrase creation due to structural differences, "not your keys, not your coins" of custodial wallets, the absence of customer support in decentralized systems, security issues tied to dubious bot-sent verifications and inattentive transaction signing. Despite these hurdles, solutions are emerging to counter these challenges, from Smart Contract wallets to account abstraction. With time and continued development, we can look forward to a future where crypto wallets are user-friendly, secure, and integral to our everyday lives.


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Established in 2022, M3TA is an AI-enabled data analytics platform dedicated to Web3 & emerging blockchains. Our team, composed of experts from Stanford, MIT, and Fortune 300 companies and seasoned in Defi, NFT, Metaverse & Gaming and Web3, distills over 10TB of data, covering 500+ projects and 5K+ tokens to produce clear insights for all audience levels. Boasting a robust presence in Korea, Vietnam, and South-East Asia, and spanning an evolving partner network, most currently with Google Cloud and FactBlock, M3TA is your trusted partner in unraveling blockchain complexities.

Writer & Reviewer: Research Analysts & Content Writers at M3TA Analytics

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