Wallet Wars: The Self-Custodial Wallet

Introduction

A self-custodial wallet has become the primary requirement for accessing a variety of decentralized applications and blockchains as cryptocurrency usage increased in the middle of the 2010s. But even as these wallets spread, attracting millions of users and billions in investment, they encountered both recent and historical difficulties. In particular, the re-emergence of self-custodial wallets highlighted the necessity to strike a balance between accessibility and security while enabling smooth cross-chain communication.

Applications for Decentralization (dApps)

The launch of Ethereum in 2015 showed that blockchain technology could be used for much more than just Bitcoin. Ethereum was a distributed computer, not merely a ledger of financial transactions. It lets programmers design smart contracts that can be programmed to perform any task, including lending, borrowing, staking, and playing games.

One of the top Defi apps available now is Uniswap.

Decentralized applications (dApps) created on the Ethereum blockchain started to draw sizable audiences in 2017. They ranged from “play to earn” video games that incorporated financial incentives into routine activity to DeFi (Decentralized Finance) services that let anyone on the internet lend or borrow millions of dollars. Early 2021 saw the emergence of non-fungible tokens (NFTs), works of digital art whose provenance was protected by the blockchain, as well as DAOs, or decentralized autonomous organizations, which reinvented the modern company.

Users could typically only access these decentralized programs using self-custodial wallets (Dapper and Flow serve as an exception). Many of the more engaging web3 experiences demand users to have a self-custodial wallet (where no one other than the user holds the private key), but this is where first-timers frequently drop off, according to one crypto VC, Mahesh Vellanki. He advised users to initially open a custodial wallet using a standard username and password login procedure before switching to web3 wallet development later on. Such customers may begin on Coinbase, become familiar with cryptocurrencies, and eventually move their money to a self-custodial wallet like MetaMask or a Coinbase self-custodial wallet where they could engage with the web3 ecosystem.

The Evolution of Metamask

A self-custodial wallet for Ethereum/EVM chains called MetaMask was released as a browser extension in 2016. Ironically though, its ease of use as an extension, native to the entire browser rather than just one specific website, became a key component of its strength. Users could browse Ethereum-enabled websites and conduct trades and swaps; these websites could access the Ethereum blockchain utilizing web3 APIs and message/transaction signing thanks to the MetaMask web plugin. The wallet would execute the transaction on the blockchain if successful verification in the form of a signature was obtained via the web extension when conducting transactions.

The market’s top self-custodial wallet is Metamask.

In this sense, MetaMask has expanded the notion of a wallet; it was more than simply a place to store money; it was also a tool for using money. It enabled users to communicate with third parties to obtain a flash loan on the dYdX Exchange, buy an NFT on OpenSea, or lend their cryptocurrency through Aave. The development of these decentralized applications sparked MetaMask’s expansion; now, it has over 30 million active monthly users.

The non-custodial wallet wars have officially begun as a result of MetaMask’s popularity. In 2018, Coinbase introduced Coinbase Wallet, a self-custodial alternative to the main Coinbase platform that enables users to store NFTs and engage with thousands of ERC-20 tokens. Players like Rainbow, Phantom, Glow, and other players followed across chains. More recently, gaming businesses like Gamestop and FinTech players like Robinhood began to enter the industry by introducing their own self-custodial wallets.

Alternatives to Ethereum Begin to Emerge

The cost of conducting business on Ethereum had increased in parallel with the emergence of more decentralized applications. 2020 will see a more than 20-fold spike in Ethereum gas expenses because of DeFi applications and NFT marketplaces. Alternative blockchains and layer 2 scaling solutions have now been given a chance to flourish, offering consumers benefits like lower gas costs, quicker transactions, and scalable dApps.

Avalanche (Avax), an open-source blockchain with proof-of-stake and EVM compatibility

Avalanche, an open-source proof-of-stake blockchain that was introduced in 2020 and can execute 4,500 transactions per second—200 times more than Ethereum—was one such chain that became live. Like Ethereum, Avalanche’s transaction fees were dynamically determined based on network usage; however, unlike Ethereum, Avalanche burns the fees it collects to reduce circulation. Avalanche is just one illustration. Solana and Cosmos, two other Ethereum rivals, also gained market share, and new Move-based contenders like Aptos and Sui will launch in the coming months.

Phantom is the most famous wallet on Solana.

Users had to purchase a self-custodial wallet that interacted with that particular chain rather than simply using Metamask to access some of these competing layer 1 (L1) blockchains. For instance, Kepler and Phantom Wallet both gained sizable market shares within the Cosmos chains and the Solana ecosystem, respectively. The emergence of more profitable chains has sparked a wallet war not just within Ethereum but also within each chain individually, occasionally across chains, and among a subset of L2 solutions.

The emergence of more profitable chains has sparked a wallet war not just within Ethereum but also within each chain individually, occasionally across chains, and among a subset of L2 solutions.

Too many bracelets and wallets

If blockchains for cryptocurrencies are kingdoms, wallets are the entrances. But because there are so many chains and corresponding wallets, the current state of wallets is siloed and challenging to utilize.

In his email newsletter, Fred Wilson noted the following illustrative anecdote:

On the Jumbotron, they were advertising Knicks NFTs when my kid went to see the Knicks play on Saturday. I requested that he get me one. To avoid expenses, he did and purchased it through the Polygon network. He sent it to my self-custody wallet, and I can see the NFT there when I switch networks to Polygon.

These L1s and L2s function in self-custody wallets in this way at the moment. They won’t always operate in that manner, in my opinion.

I believe that developers will eventually cover up a lot of the Web3 “plumbing” that is currently exposed to consumers in wallets and dApps, so users won’t have to worry about which network their assets are on. They won’t have to be aware of which chain they are working with in order to locate, use, transfer, sell, etc., these items.

Wilson’s son was fortunate that the NFT he bought actually turned up in his wallet. Such is the vulnerability of asset transfers in cryptocurrency at the moment. Error-prone activities include switching between several wallets, memorizing various workflows, preserving numerous seed words, and keeping track of how money is being allocated. Additionally, there is a lot at stake with crypto failures. If you send cryptocurrency to the incorrect Solana account, you’re out of luck. Wilson claims that removing these specifics will be essential for advancing cryptography’s next stage of development.

The conclusion of the beginning

Although the sheer number of wallets over the previous few years seems to indicate some maturing, the truth is that crypto wallets are still extremely young. Because specific chains are frequently not supported by specific wallets and because keys and recovery are still in their infancy, sending large transactions through Chrome extensions still feels brittle and hazardous. Users now have privacy and security thanks to the resurgence of self-custodial wallets, but usability development is still in its infancy.

Therefore, it makes sense that the next generation of wallets would concentrate on giving self-custodial wallets a sleek, user-friendly UI, design, and documentation experience. The wallet wars have essentially just begun.