One of the most foundational benefits of blockchains is the ability to securely self-custody assets and information.
Yet wallets remain the largest barrier to Web3 adoption.
This piece will focus on features I believe the winning wallets will provide as part of Wallet 2.0.
Blockchains provide a new form of ownership. Through trusting in cryptography instead of institutions, anyone can securely hold their assets and data instead of trusting a network of third-party intermediaries that have demonstrated a history of financial collusion, incompetency regarding data safeguarding and the propensity to sell personal customer data.
This new paradigm, however, remains inaccessible to the average user. Onboarding to crypto wallets is too complex, replete with jargon and lengthy UX flows, and comes with the responsibility of storing a seed phrase that if lost or stolen means irrevocable loss of funds.
Many customers have therefore turned to centralized providers like Coinbase and FTX that enable them to easily onboard and buy / hold / sell assets on the platform. While a simpler experience, assets held in these omnibus walled gardens are incompatible with the broader Web3 ecosystem and more importantly, are held on the provider’s balance sheet, making the customer’s assets only as safe as the solvency of the provider. Although these large, centralized providers seemed trustworthy with their glitzy Super Bowl commercials and celebrity endorsements, we’ve sadly seen many of them default or defraud customers out of billions of dollars.
Beyond the challenges of easy self-custody, however, Wallet 1.0 presents other challenges for users and developers:
- Users need to sign and approve every transaction, even if small, which adds unnecessary friction and reduces user engagement
- Users need native tokens in their wallet to pay for gas (for many chains), complicating onboarding
- Users need different wallets for different assets
- Developers need to integrate multiple wallets into their Apps
- Developers need to create wallets on behalf of users to have native UX and performant apps
Developers in the room may read the above and say, ‘this is solved by Account Abstraction (EIP-4337)”! To which I respond with, “partially”, and “Tech != Products”.
Strategically today, wallets are a utility product with no switching cost for customers. Wallet providers that adopt Wallet 2.0 features will enable their products to be users’ gateway to a multi-trillion dollar industry.
To better understand the wallet opportunity area we organize the stack into four layers across which user value can be created and companies can differentiate and monetize.
|Ecosystem||Integrations to easily get things done, eg fiat onramp, trading, NFTs etc|
|Community||Enable users to engage with native and existing communities|
|UX||Look & feel, usability, and features|
|Key Management||Key recovery, multi-signature, transaction policies, etc|
For example, Metamask and Rainbow wallet have the same key management approach but differentiate in other parts of the wallet stack such as UX or ecosystem integrations. Although some Wallets delivered substantial improvements in different layers of the stack, I don’t think anyone thus far has nailed the complete stack into a simple, compelling experience.
My goal here is not to outline and compare the technology approaches for each layer of the stack but rather to emphasize what capabilities I believe Wallet 2.0 winners will provide. Note there will be horizontal infrastructure winners and consumer-facing providers that ultimately win through user adoption.
1: They will enable users to ‘Bring their own Wallet’ to applications
I went to an NFL game this season where they enabled attendees to claim NFTs. I was delighted. My great loves – Crypto and the Philadelphia Eagles – converged. After the game I logged onto the Ticketmaster website and saw that my NFT was minted on the Flow blockchain, but I couldn’t withdraw the NFT to my own personal wallet and could only sell it on their marketplace.
This version of Web3 is boring and certainly won’t change the world.
Wallets today are vertically integrated.
On one end, as in the case of the NFL, they have custody of my NFT and maintain e2e control of the experience, including asset ownership (via the keys) and the UX. The challenge with this approach is that even if they enable users to withdraw the NFT, we lose one of the core benefits of blockchain – composability. If apps don’t enable users to ‘bring their own wallet’, and instead every company spins up their own native / built-in wallets, we radically reduce the benefits of a shared ledger and instead look like Web 2.0+. Sure it was easy to get the NFT, but users’ assets would be dispersed across many platforms and we wouldn’t benefit from multiple, interoperable asset types on a shared ledger.
Today’s other implementation of vertical integration is when the user owns the keys and their choice of UX through which wallet provider they select. This sounds cool, but it means that for every transaction there’s a separate UX flow that brings me out of any crypto application into a generic, separate UX flow. Multiple studies show that context switching and waiting (ie latency) substantially reduces user engagement. This is particularly important for immersive experiences like games. Even account abstraction in its current state falls short because the features like transaction authorizations only occur for wallets the DApp has the private keys to, vs the user being able to apply it to their own wallet. In addition, account abstraction is not compatible with existing contracts, meaning it could be useful for new L2 implementations but not compatible with the existing, gold-standard DApps.
The solution we need is to separate key management and UX. We need a hybrid approach that enables a DApp to build native UX while enabling the user to users to ‘bring their own wallet’, meaning they can connect their wallet and the entity will choose to render assets relevant to the experience to maintain a clean UX, as well as be granted ability to automatically approve certain types of transactions. For example, staked shitcoins won’t show up in their UI, and users can pick up in-game items without signing a separate transaction.
I expect this vision will take time, and in the interim we’ll see more vertical solutions for two reasons. First is that as brands initially move into Web3 they will require owning the experience e2e for brand-risk or regulatory concerns, and second is that the seamless and automated transaction approvals require improvements in security and user education. However over the long-term, the decomposition of vertical experiences is what will drive maximum value for users and brands.
2: They will protect their users
Crypto is not only a Dark Forest but also a dangerous one. The instant finality and irrevocable nature of crypto transactions is both a feature and a bug, and has enabled millions of dollars stolen through hacks, exploits and scams. The risk of operating in Web3 is a core contributor to users choosing centralized experiences that provide a layer of separation between them and the blockchain.
Wallet winners will recognize that providing a safer user experience is P0 to onboard many more users and will lean into safety as a core differentiator. They will use a variety of methods to provide safety for their users including better transaction monitoring, smart contract risk notification, community reviews and rankings, automatic management and revocation of wallet authorizations, and insurance programs to compensate victims of fraud. I also expect that financial products will have longer, more educational onboarding experiences than when a wallet is linked to a social app.
Without some of these core protections the mass market will not self custody.
3: They will become the front-page of crypto
Google started off as an engine to find information but grew into becoming the front page of the internet (sorry Reddit). What’s remarkable is even if users knew the website’s URL, it was often fewer clicks and habitual behavior that kept them accessing websites through Google over the URL bar.
Wallets should be the front page of crypto.
However, today’s wallets remain a single-player, asset-centric financial experience.
The front-page is usually showing the user’s assets, their value, and the ability to transfer or trade.
Winning wallets will expand from this financial paradigm into a super app that includes community and ecosystem integrations, specifically making in-wallet the easiest way for users to interact with their communities and get things done through ecosystem integrations.
Crypto users are social users. Most engage with crypto content many, more times than they view balances or buy/ sell assets, yet wallets today completely miss out on these user journeys. Wallets have the opportunity to make it easier to manage community involvement through both native, wallet community features and external community integrations. Simple examples are enabling users to see upcoming community events, airdrops and other actions they can do with their assets, as well as providing simple news feeds that intersperse content from media and their social connections.
Central to successfully enabling community is to move from identification = address to a form of identity that can span multiple addresses and blockchains, as well as the ability to have multiple identities concurrently. This could be a native solution created by the wallet, or more likely building native integration of DIDs issued by other entities. What most excites me about native identity integration is that now wallets are not only the gateway to crypto, but to our entire digital lives. Users can then access websites through their wallet and share select identity information through the wallet’s browser.
Lastly, I expect winning wallets will integrate common user-journeys natively to further user retention and engagement. Examples include incorporation of native P2P messaging and payments, seamless, universal login, subscription and content management, and improved financial tracking.
We at 6th Man Ventures have made many investments into wallet stack to unlock this future and look forward to partnering with additional buildoors who see wallets not as a financial app, but as a universal app that will increasingly be users’ gateway to Web3.
If you are building in this space we’d love to connect – please reach out through our website, 6thman.ventures.