What the experts say… 💬

Insights from Twitter Space on Web3 Wallets hosted by Symbiote 

We recently hosted Ravindra (SelfChain), Yeshu (Transak) and Alaa (Ex Metamask) for a super insightful discussion on “Web3 Wallets - Enter the new-age Web 3.0 vaults”…here are some of the takeaways 👇️ 

💼 Business Model Recommendation: Proposed a strategic model: B2B2C, inspired by Google Pay's success in India. Encompasses both direct-to-consumer and business-to-business channels.

🛠️ Emphasis on User Experience: Stressed UX importance, prioritizing UI elements over iframes. Highlighted seamless KYC for enhanced usability.

"With the movement of RWA (real-world asset) tokenization, I think a wallet that will provide a seamless user experience, low entry point, like smooth onboarding for users, allowing them to invest with the minimum amount of money or frictionless investment, is crucial." - quote from the Space

💰 Investment Opportunities: Explored potential shifts to wallets facilitating easy investments in real-world assets, promoting financial inclusivity.

🔒 KYC Considerations: Discussed nuanced KYC integration as an opt-in feature, recognizing its role in risk mitigation and compliance with standards.

Explored future KYC innovations, including digital identity passports and non-custodial wallets using MPC technology.

"KYC will be required to take malicious actors out of the grid because if you just keep everything anonymous, then you open the doors to a lot of malicious activities like money laundering." - quote from the Space

🌐 Layer 1 vs. User Experience: Advocated for support in enhancing user experience within foundational Layer 1 blockchain, emphasizing balance with infrastructure development.

🚀 Mass Adoption Factors: Speculated user-friendly wallets, not gaming or social apps, as a key catalyst for cryptocurrency mass adoption.

Now let’s do a deep dive into the world of new-age Web3 Wallets (“wallets 2.0”) 👇️ 

Wallet “1.0” and the need for generation “2.0” 💰

The current-gen web3 wallets (let’s call it Wallet 1.0), emerged in response to the need for secure and user-controlled storage of cryptocurrencies, addressing the distrust in traditional financial institutions. These wallets offer decentralization, interoperability, advanced security, and user-friendly interfaces.

The landscape of digital wallets today can be categorized into custodial and non-custodial wallets.

• Custodial wallets rely on third-party companies to manage users' private keys, while

• Non-custodial wallets, further divided into EOA, smart contract, and MPC wallets, provide users with full control over their assets.¹

Categorization of wallets into custodial and non custodial | Source- Token Dispatch ⁵

However, Wallet 1.0 faces challenges, including user accessibility, complex onboarding, and the risk of seed phrase loss. To address these issues, Wallet 2.0 is emerging. It leverages innovations like Account Abstraction, notably ERC 4337, introducing features such as social recovery, atomic multi-operations, and ERC20 fee payments for a more user-friendly experience.¹

“Wallet 2.0” builders aim to make digital wallets accessible, secure, and user-friendly. They are exploring partnerships with centralized exchanges and DeFi protocols to facilitate distribution. The space is highly competitive, and builders must offer unique value propositions to succeed.

"...wallets need to be super simple for people to really not have that friction to get into the space." - from our recent Space on Wallets

While Wallet 2.0 brings significant promise, it also faces challenges such as high gas fees, security risks, and chain compatibility issues. Legal and regulatory concerns are also evolving. In conclusion, Wallet 2.0 represents the future of digital asset management in the Web3 era, offering improvements over Wallet 1.0 and addressing key user concerns.

Let’s look at some of the key advancements which are leading the way for a new generation of Web3 wallet technology - EIP 4337 and Account Abstraction, MPC wallets and Gasless wallets.

Account Abstraction and EIP 4337 💵

One of the key innovations in account abstraction (AA) is ERC 4337, which is a standard that enables users to sign transactions with their username instead of their public address. This makes web3 transactions more user-friendly and intuitive.²

Account Abstraction | Source: https://hackernoon.com/what-is-account-abstraction-and-why-is-everyone-talking-about-it

(For a more detailed dive into AA, we recommend reading this research paper by Visa: https://usa.visa.com/solutions/crypto/auto-payments-for-self-custodial-wallets.html)

Next-gen wallets 🚀 

Smart contract wallets, utilizing Account Abstraction (ERC-4337), are managed by smart contracts rather than a single private key, like EOA wallets (Externally Owned Address).

• These wallets are programmable and enable various new use cases while simplifying complexity without sacrificing security or anonymity. They are pivotal for bringing in the next generation of blockchain users.

• Examples of smart contract wallets using ERC-4337 include Soul Wallet, Candide, UniPass, Castle, and Openfort. Notable exceptions to this standard are Safe and Argent.

What does ERC 4337 bring to the table? 🧑‍💻 

ERC 4337 is a significant Ethereum standard today, and introduces essential features:

• Social Recovery: Wallet 2.0 allows multiple owners for social recovery, making it easier to retrieve lost private keys.

• Atomic Multi-Operations: Smart contracts can perform multiple transactions as one atomic operation, simplifying complex transactions and ensuring their accuracy.

• ERC20 Token Fee Payment: Smart contracts can now use ERC20 tokens to pay transaction fees, providing greater payment flexibility.

• Paymaster: Third-party paymasters can sponsor transaction fees for Wallet 2.0 users, optimizing gas usage and enhancing efficiency.

These features enhance the user-friendliness and accessibility of Wallet 2.0, vital for the adoption of Web3 wallets.

MPC Wallets ✨

Multi-party computation (MPC) wallets are a new type of Web3 wallet that uses cryptography to distribute the signing of transactions across multiple parties. This makes MPC wallets more secure than traditional wallets, as it is much more difficult for an attacker to compromise all of the parties involved in signing a transaction.

How MPC Wallets Work | Source: Korea Blockchain Week ⁴

Key management can be challenging, but MPC wallets enhance it by offering a secure and user-friendly solution.

• Reduced Account Loss: With no seed phrases to manage, users are less likely to lose access to their accounts, reducing the risk of misplaced seed phrases.

• Enhanced Security Against Compromised Devices: MPC wallets prevent compromised device vulnerabilities. Users' accounts are shielded from potential frontend vulnerabilities because MPC's joint computation eliminates the need for traditional keys.

• Protection Against Dubious Transactions: A flexible policy engine allows users to set rules, such as daily transaction limits and blacklisting potential scams, helping to safeguard their accounts and assets.

• Efficient User Experience: Expect fluid experiences with MPC wallets, featuring low latency of less than 1.2 seconds for both login and transaction signing. This enables users to focus on engaging with your product without frustrating delays.

• Customizable UX Integration: MPC wallets can be seamlessly embedded into any decentralized application (dApp) or wallet. This means you have control over the user experience, making it consistent with your brand and vision.

• Blockchain Agnostic and Platform Compatibility: MPC wallets are versatile, working across any platform, any chain. They are not limited by specific blockchain protocols, making them adaptable to a wide range of web, mobile, and native applications.

MPC wallets bring a host of benefits, from improved security and user experience to platform flexibility, making them a valuable addition to the Web3 ecosystem.

Here are some examples of the latest MPC web3 wallets:

• ZenGo: ZenGo is a mobile wallet available for Android and iOS with over 800,000 users. It employs a unique security approach by encrypting a portion of the private keys on the mobile device and generating the other part cryptographically during transactions. ZenGo also features three-factor authentication for added security and wallet recovery options.

• Spatium: Spatium is a fee-free MPC wallet available as a mobile app for both iOS and Android. It offers robust security measures, including fingerprint ID, facial recognition, and two-factor authentication. Users can set transaction limits and whitelist specific IP wallet addresses. Spatium supports a wide range of cryptocurrencies, including Bitcoin, Ethereum, and BNB.

• Coinbase Wallet: It is a versatile digital asset management app for institutional clients, separate from the main Coinbase platform. It offers strong security through multi-signature MPC and a Secure Enclave for private keys. It supports various cryptocurrencies, integrates with Coinbase Pro for trading, and allows interaction with DApps. The user-friendly interface includes a 'Collectibles' section for NFT storage and interaction.

• OKX: OKX upgraded its decentralized wallet in April 2023 to incorporate MPC technology. This non-custodial wallet supports numerous blockchain standards and is particularly suitable for active traders who frequently swap tokens and earn yields. Additionally, the OKX wallet includes a bridge aggregator that connects to over 200 decentralized exchanges (DEXs).

MPC wallets are still a relatively new technology, but they are rapidly gaining popularity due to their security and convenience. As the Web3 space continues to grow and evolve, it is expected that MPC wallets will become the standard for Web3 wallet security.

Gasless Wallets 🆓

Gasless wallets are a new type of Web3 wallet that allows users to interact with decentralized applications (dApps) and smart contracts without having to pay for gas fees. This is a significant advancement, as gas fees can be a major barrier to entry for new users and can also make it expensive to use dApps frequently.

How do they work?

There are a few different ways that gasless wallets work.

One common approach is to use a relayer service. A relayer is a third-party service that pays the gas fees for users in exchange for a small fee. When a user wants to make a gasless transaction, they send the transaction to the relayer, who then pays the gas fees and forwards the transaction to the blockchain.

Another approach to gasless wallets is to use a social recovery feature. Social recovery allows users to designate a group of trusted friends or family members who can help them recover their account if they lose their seed phrase. When a user wants to make a gasless transaction, they send the transaction to their social recovery group, who then sign off on the transaction and pay the gas fees.

Examples

Here are some examples of gasless wallets/infra providers that are incorporating these advancements:

MetaMask:

MetaMask is one of the most popular Web3 wallets, and it recently added support for gasless transactions on Ethereum. It is also working to add support for gasless transactions on other blockchains.

• MetaMask can be used with third-party services that enable gasless transactions.

• As discussed, gasless transactions are a type of meta-transaction, which is a technique that allows users to interact with the blockchain without paying gas fees or holding native tokens.

• Instead, the gas fees are sponsored by a third-party service, such as Biconomy or Gelato, which can also provide other features such as automation, social login, and fiat on-ramping.3

Argent:

Argent is a non-custodial Web3 wallet that offers gasless transactions on Ethereum.

• Argent uses a social recovery feature to pay gas fees on behalf of its users.

• When a user wants to make a gasless transaction, they send the transaction to their social recovery group, who then sign off on the transaction and pay the gas fees.

• Argent is currently the only gasless wallet that does not require users to connect to a relayer service.

Dharma:

Dharma is a decentralized lending and borrowing protocol that offers gasless transactions.

• Dharma uses a unique system called "flash loans" to pay gas fees on behalf of its users.

• Flash loans are short-term loans that are repaid within the same transaction in which they are taken out.

• This allows Dharma to pay gas fees without having to charge its users any additional fees.

Sequence:

Sequence is a smart wallet that offers gasless transactions on Ethereum and Polygon.

• Sequence uses a relayer service called the Sequence Relayer to pay gas fees on behalf of its users.

• Sequence also offers a number of other features that make it easy to use, such as a fiat onramp and a built-in NFT marketplace.

Biconomy:

Biconomy is a gasless infrastructure provider that offers a variety of solutions for gasless transactions.

• Biconomy's gasless wallet SDK can be used to integrate gasless transactions into any Ethereum dApp.

• Biconomy also offers a relayer service that can be used to power gasless transactions for dApps on other blockchains, such as Polygon and Avalanche.

Gasless wallets are still in their early stages of development, but they have the potential to revolutionize the way that people interact with the Web3 ecosystem. By making it easier and more affordable for users to make transactions, gasless wallets can help to onboard new users and make Web3 more accessible to everyone.

Conclusion: Web3 Wallet Insights ✨ 

Let’s recap some of the highlights from this deep dive into Web3 wallets 👇️ 

1. Business Model: Experts suggest a B2B2C model for Web3 wallets, integrating direct-to-consumer and business channels.

2. UX Priority: Emphasis on seamless KYC and prioritizing user experience to boost adoption.

3. Investment Evolution: Web3 wallets shift toward enabling easy investments in real-world assets for financial inclusivity.

4. KYC Innovation: Opt-in KYC features discussed, with potential innovations like digital passports and MPC technology.

5. Layer 1 and UX Balance: Crucial need for balancing user experience and Layer 1 blockchain development.

6. Wallet Evolution: Transition from Wallet 1.0 to 2.0 using innovations like ERC 4337 for improved accessibility and security.

7. Key Advancements: EIP 4337, MPC, and Gasless Wallets pivotal for social recovery, atomic multi-operations, security, and fee-free transactions.

In summary, Web3 wallets are evolving to tackle challenges, innovate, and deliver a user-friendly experience, driving broader blockchain adoption.

References

1 - “Exploring The Future of Web3 Wallets: Innovations, Challenges, and Key Questions to Ask” by Shaun Heng - https://medium.com/@shaunhengcj/exploring-the-future-of-web3-wallets-innovations-challenges-and-key-questions-to-ask-b475113deee1

2- “Auto Payments for Self-Custodial Wallets” by VISA - https://usa.visa.com/solutions/crypto/auto-payments-for-self-custodial-wallets.html 

3- “How to do Gasless Transactions on Ethereum” by Moralis - https://moralis.io/how-to-do-gasless-transactions-on-ethereum/ 

4- “An Intro to MPC Wallets” - Korea Blockchain Week

http://koreablockchainweek.com/blogs/kbw-blog/an-intro-to-mpc-wallets

5- Crypto Wallets: Passport to Web3, The Token Dispatch

http://www.linkedin.com/pulse/crypto-wallets-passport-web3-nameet-potnis