Today, veDAO Research Institute will share about the concept that all crypto investors are familiar with - "crypto wallet". Crypto wallet is the main access point of Web3 economy. It is becoming more and more important with the development of Web3 economy and the widespread adoption of Web3 applications. It also needs to match the progress of Web3, meet more diverse needs of users and more new technologies and creations. This is both a challenge and an opportunity brought by the market. This article will take you to sort out the development of crypto wallets, focus on development trends and innovation directions, and share wallet projects with innovative highlights.

Basic concepts of crypto wallet

The functions of traditional electronic wallets are to store assets and make mobile payments. Crypto wallets have added the function of identity identification on the basis of storing assets and making mobile payments. This is also the entrance and authentication for users in Web3 to pass through various DApps.

There are many forms of crypto wallets on the market, each with different levels of security and convenience. They can be mainly classified into the following two forms:

1. According to whether it can be connected to the Internet, it is divided into cold wallets and hot wallets;

  • Cold wallet (offline wallet): The key is stored in a hardware device, including a "paper wallet" that uses a mnemonic phrase, an offline mobile phone, a hardware wallet, etc., and is only connected when you want to use the cryptocurrency.

  • Hot wallet (online wallet): The key is stored in an application or software. When signing a transaction, the private key needs to access the online wallet, including our commonly used wallet apps, web plug-in wallets, etc.

2. According to whether you control the private key, it can be divided into custodial wallets and non-custodial wallets;

  • Custodial wallet (centralized wallet): A trusted third party holds the private key and stores digital assets securely on the blockchain, which also means that users cannot fully control your funds. This type of wallet is mainly provided by entities such as cryptocurrency exchanges or professional custody services, such as Binance, Huobi and other trading platforms.

  • Non-custodial wallet (decentralized wallet): A wallet that allows users to fully control their keys and funds. Non-custodial wallets can be based on browsers, software or hardware, such as the common MetaMask, TokenPocket, imToken, etc. Non-custodial wallets can be further divided into three categories:

  1. External Account (EOA) Wallet: EOA wallet is the most common digital wallet for storing and managing cryptocurrencies. EOA wallets are usually provided by centralized exchanges or wallet providers and require users to hold their own private keys. EOA wallets include Metamask, Backpack, Phantom, Rabby, and Rainbow.

  2. Smart Contract Wallet: Smart Contract Wallet is a decentralized wallet that uses smart contracts to manage assets. Smart Contract Wallet is safer and more flexible than EOA Wallet, and supports advanced features such as social recovery and multi-signature. Smart Contract Wallet includes Argent, Safe and Sequence.

  3. Multi-party computation (MPC) wallets: MPC wallets use a technique called threshold encryption to enhance security. The private key required to authorize a transaction is divided into multiple parts and distributed to multiple parties, ensuring that no single party can access the key independently. This approach greatly reduces the risk of single point failure or attack, making it more difficult for hackers to steal funds. MPC wallets include Fireblocks, ZenGo, Coinbase MPC, and Particle Network.

Market Status & Problem Pain Points

The current market development status of crypto wallets has the following characteristics:

1. The user scale continues to grow, and the market share rises simultaneously. According to Blockchain.com statistics, the average ownership rate of crypto tokens in 2022 is 3.9%, and more than 300 million people worldwide are using crypto assets. Among them, the number of users with crypto wallets reached 68.42 million in 2021, and by July 2022, the number of crypto wallet users had reached 81 million, an exponential growth. The development of the Web3 economy and the rise of digital assets have driven traditional funds into the Web3 world. The market demand for secure storage of digital assets and on-chain activities has increased, and the digital wallet industry has ushered in a development opportunity, with a large influx of developers and funds.

2. Crypto wallets, as a Web3 infrastructure, are favored by investment institutions. Crypto wallets are one of the main tracks for institutions to choose to invest in the crypto field. Data shows that the amount of investment in the wallet field has continued to grow in the past five years. In the first half of 2022, the total amount of financing in the wallet field far exceeded other fields, reaching US$400 million.

3. From B2C to B2B2C business, the current crypto wallets in the market are mainly oriented to To B and To C. Compared with the To B field, the To C field is the source of profit for most crypto wallets. When the transaction volume increases as the market becomes more mature, wallet merchants will begin to build economic moats and entry barriers while profiting from the traffic they generate. This greater bargaining power will make wallet products more attractive B2B partners for other DApps and DEX protocols, transforming them into B2B2C business models.

Although crypto wallets have made significant progress in recent years, there are still several challenges to be overcome to make them more user-friendly and accessible. The key challenges currently facing decentralized crypto wallets include:

1. Security: The security of decentralized wallets is relatively high. The biggest challenge at present is the safekeeping of users' own private keys and the prevention of hacker attacks. The lack of user security knowledge and awareness and bad operating habits will create excellent opportunities for hackers. For wallet developers, the security of the underlying wallet is also full of challenges. In addition to open source wallet code, developers must also do a good job of code security audits for each major update, storage and management of wallet private keys, etc.

2. Privacy and regulation: Privacy and regulation are topics that cannot be avoided in the Web3 field. This is also a problem that wallets encounter, including user data privacy and wallet business compliance.

3. Ease of use: Every step of the wallet interaction requires the user to operate it personally, which requires the user to have a certain amount of basic blockchain knowledge. Whether it is a novice or an old player, problems such as managing mnemonics or mnemonics being stolen exist and make them extremely troubled. Although centralized wallets have certain human security risks, they are relatively simple to operate and have a user-friendly interface. If decentralized wallets want to attract more users, they must solve the usability problem.

To address these challenges, wallet manufacturers are exploring new approaches and technologies to create user-friendly and secure digital wallets that are more likely to be adopted by the mainstream.

Innovation drives wallet development

Multi-party computing (MPC)

Multi-party computation wallets replace traditional private keys with "secret information" shared between your device and one or more other devices. MPC wallets eliminate single points of failure by using a threshold signature scheme (TSS). Under this paradigm, we create and distribute private key shards so that no single person or machine has full control of the private key - a process called distributed key generation (DKG). We can then jointly generate a public key by merging the key shards without exposing the key shards of each party, which is what is called sharing "secret information".

Based on this feature, there are more derived functions, such as it can restore accounts more easily. Therefore, the MPC wallet is similar to a traditional EOA account with an invisible private key. In addition, it can also support the threshold setting function, that is, each transaction requires at least a threshold percentage of participating transaction users to jointly generate a signature transaction for it to take effect.

Abstract Account AA

An abstract account is a type of contract account that combines the advantages of the current contract account and external account (EOA) into one. Compared with MPC, it has the advantages of flexible contract design, easy customization of logic, and always online. The AA wallet will first perform transaction verification on the contract at the entry point, and then enter the transaction execution stage after the transaction verification.

The emergence of abstract accounts has brought significant progress to the development of Web3 wallets. The introduction of on-chain programmability through smart contracts has increased the flexibility of Web3 wallets. It supports custom rules, so in addition to the current ECDSA signature algorithm, other signature algorithms can also be selected, such as BLS, EdDSA, etc., to better meet the needs of specific application scenarios. Through AA, there can even be a signature authorization separate from the account, which means that permissions and identities are isolated and have recoverable characteristics, which can not only change the embarrassing situation of "losing private keys means losing identity", but also further facilitate DID design.

Highlight Project Sharing

1. Money

Argent is a Layer2 wallet active on the ETH chain. Its advantage is that it can easily transfer Layer2 assets to Layer1 with low cost and high speed. Its main features include:

  • Social Recovery: Argent’s social recovery feature allows users to recover their wallets by connecting with trusted contacts. This makes it easier for users to recover their wallets without having to remember complex mnemonics or private keys.

  • No need to use ETH as gas fee: Argent uses MetaTransaction technology to enable users to send transactions without owning ETH. Specifically, Argent pays gas fees for users through the middle layer service of "Gas Station Network (GSN)" and deducts the corresponding fees from the user's account.

  • Attack Detection: Argent Wallet uses its self-developed "Guardians" smart contract to automatically detect and prevent phishing attacks, malware attacks, replay attacks, etc. For example, when a user receives an email or text message that appears to be from the Argent Wallet, the Guardians contract will detect whether the information comes from the official Argent channel. If it is detected that the information is not from the official channel, the Guardians contract will automatically prevent the user from performing any transactions related to the information.

In terms of financing, Argent has completed three rounds of financing totaling US$56 million. In 2018, it completed a US$4 million seed round of financing, with Index Ventures and others participating in the investment; in 2020, it completed a US$12 million Series A financing, led by Paradigm; in April 2022, it completed a US$40 million Series B financing, led by Fabric Ventures and Metaplanet.

Argent starts from the most important security of crypto wallets, cancels the concept of private keys and mnemonics, and uses functions such as social recovery to ensure user ownership of wallets, thereby lowering the threshold for use. However, compared with other wallets, Argent wallet users cannot switch most commonly used EVM networks freely, which will limit its usage scenarios to a certain extent and make it difficult to establish user stickiness. At present, the user group of Argent wallet is relatively small, mainly due to the stability of the ZK network and the lack of support for the storage and trading of multiple cryptocurrencies.

Related website: https://app.vedao.com/projects/f6b1e727985306e0a486e5ce72b9f5c35608550508ea21652c47b014bba391fb  

2. Unipass

UniPass is a crypto wallet that eliminates the need for users to remember mnemonics. Its email-based social recovery solution will allow users to easily regain access when lost or threatened. It aims to provide a familiar user experience for Web2 users and better access to the Web3 world. Its features are as follows:

  • Compatible with ERC-4337: Users can activate ERC-4337 compatibility mode by adding a 4337 module transaction in MainModule. After activation, transactions initiated by users will be submitted to Bundler and verified by standard ERC-4337 methods. Users can also sign UniPass tx and submit it to Relayer for on-chain processing.

  • Email recovery: Users can set up multiple Internet mailboxes as guardians of their accounts. Simply submitting emails to the on-chain smart contract can help users recover their wallet private keys. When a user has more than two guardian mailboxes (including the primary mailbox), the user can use these two mailboxes to submit account recovery emails and restore the account immediately. When a user has only one guardian mailbox, it is usually necessary to wait for a 48-hour lock period before the account can be restored.

  • Gas-free experience: UniPass provides a default relay node that accepts gas payments in the form of native tokens and mainstream stablecoins.

Related website: https://app.vedao.com/projects/c2ab33d4aefdf9e6e26c0562cadc0893d9bd08b4813e472081c555f6cf6ff472

3. ZenGo

As the first keyless cryptocurrency App wallet, ZenGo has leading technology in security and biometrics. The biggest difference from other virtual currency wallets is that ZenGo eliminates technical barriers and can log in without a key - only an email address and fingerprint lock are needed to set up the wallet.

ZenGo can operate as a keyless non-custodial wallet through various security tools, including biometric encryption, three-factor authentication, multi-party computing encryption, etc. This keyless security system ensures that there is no single point of failure, and even if one of the multi-party computing encryption shares has a problem, the user's crypto assets are safe.

In terms of financing, ZenGo completed a $10 million Series A extension financing by issuing convertible bonds in February 2023, and plans to conduct a Series B financing later this year. After the Series A extension financing, ZenGo's valuation was $100 million, the same as after the completion of the Series A financing two years ago. ZenGo completed a $20 million Series A financing in April 2021, with investors including Insight Partners, Austin Rief Ventures and Samsung Next.

However, for some traders, not having private keys is a big source of controversy, and not all features of ZenGO are available globally. Features such as third-party payment providers are region-specific.

Related website: https://app.vedao.com/projects/c17fefd234405be1094f947e0cd8cf1909ce2e72b69aabf0841cffec15971b20

4. Hyperpay

Hyperpay is the world's first multi-ecological digital asset wallet that integrates a custodial financial management wallet, a decentralized self-managed wallet, a HyperMate hardware wallet, and a co-managed wallet, providing users with one-stop services such as asset custody, financial value-added, and consumer payment. To date, HyperPay wallet custodial wallets support 57 public chains, self-managed wallets support 34 public chains, and HyperMate hardware wallets support 17 public chains. HyperPay wallets have more than one million users, with an asset management scale of more than US$1 billion and more than 310 million transfers.

HyperPay mainly protects the security of users' assets from four dimensions, including: the security of the wallet itself, the security of users during use, the security of the server, and the security of technical developers. HyperBC, the custodian of HyperPay wallets, has obtained the Lithuanian crypto asset custody license. The funds of HyperPay wallets held on the HyperBC platform will be supervised by financial institutions.

Related Links:

https://app.vedao.com/projects/0827e11fbebe1be45ac403e1cdf5de0b9dabfb73c7b4bc2c79947d4ffefe3a20 

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