The Future of Web3 Wallets: Innovation, Challenges, and Key Issues

Introduction

This article will delve into the current state of Web3 wallets, the progress of account abstraction (AA), and the ERC 4337 standard that is driving the development of the next generation of wallets. We will also discuss the potential risks and limitations associated with the new generation of wallets.

Considering the rapid development in the Web3 wallet space, this article aims to establish a framework to help builders and investors identify long-term value. The core of this framework will address five key issues:

1. Is this a great business opportunity?

2. Can building a new generation Wallet open up a method that is 10 times better than existing solutions?

3. How can enterprises establish sustainable competitive advantages, especially when heavily relying on first-mover advantages?

4. Can the company find a distribution channel to add smart contract functionality to existing products?

5. What assumptions must we believe in order for the new wallet to be more successful than existing solutions?

Let's first understand the current state of the Web3 wallet space to provide better context.

"Not your keys, not your coins"

The emergence of cryptocurrency has fundamentally changed our perception of money and assets. However, the pervasive distrust of traditional financial institutions has made it necessary to develop reliable and secure storage solutions. Recent failures of some financial intermediaries have highlighted the fact that the safety of customer assets depends on the provider's solvency. As a result, users are increasingly turning to crypto rather than intermediaries for greater security. The emergence of Web3 wallet addresses this issue, allowing users to securely store and manage their crypto assets while maintaining full control over their private keys.

Key Attributes of Web3 Wallet

A Web3 wallet is a digital wallet designed to seamlessly collaborate with decentralized applications (dApps) that use blockchain technology (. Unlike traditional wallets, Web3 wallets allow users to have full control over their assets without the need for a third-party intermediary. Some key features of Web3 wallets include:

• Decentralized: Operates on a peer-to-peer network without relying on centralized servers.

• Interoperability: Compatible with various blockchain protocols and cryptocurrencies.

• Security: Use advanced encryption technology to protect private keys and sensitive information.

• User-friendly: Simple and intuitive design, easy to use.

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The Current State of Wallet 1.0

Currently, digital wallets are mainly divided into two categories: custodial wallets and non-custodial wallets.

Custodial wallets are held and managed by third-party companies like centralized exchanges ), which manage users' private keys.

Non-custodial wallets allow users to have complete control over their private keys. Non-custodial wallets can be further divided into:

1. EOA Wallet: The most common digital wallets, such as Metamask, Phantom, etc.

2. Smart Contract Wallet: Manage assets using smart contracts, such as Argent, Safe, etc.

3. MPC Wallet: Enhances security using multi-party computation technology, such as ZenGo, Coinbase MPC, etc.

In addition, some teams are developing infrastructure to simplify the wallet creation process.

Challenges Facing Current Wallet 1.0

Despite progress, crypto wallets still face some challenges:

• Ordinary users find it difficult to use
• Login settings are complex
• Risk of losing mnemonic phrase
• The fragmentation of the chain increases complexity

Some developers have started to build the next generation of Wallets, focusing on user accessibility, security, and interoperability. They leverage smart contracts to offer features like social recovery, atomic multi-operations, and gas fee sponsorship.

5 Key Questions to Evaluate the Next Generation Wallets

1. Is this a great business opportunity?

Consider factors such as revenue streams, customer acquisition costs, profitability, market size, and competition.

2. Is it possible to open a new method that is 10 times better than the existing solutions?

Will new features like social recovery and atomic multi-operations bring substantial improvements?

3. How to establish a sustainable competitive advantage?

Consider unique distribution channels or embed viral marketing into the product.

4. Is it possible to find distribution channels to add new features to existing products?

Consider collaborating with centralized exchanges or DeFi protocols.

5. What assumptions need to be believed in order to succeed?

Whether users value increased security and transparency, whether a good user experience can be provided, whether the mnemonic phrase issue can be resolved, and whether it can integrate with the ecosystem, etc.

Potential Risks and Limitations

• ERC-4337 cannot solve the high gas issue.
• Introduce new security risks
• Cross-chain interoperability challenges
• Uncertainty in legal and regulatory aspects

Conclusion

The new generation of wallets will completely change the way digital assets are stored and managed. We can expect to see more advanced and user-friendly designs, better key management solutions, and new application scenarios. The integration of new technologies will further enhance its functionality.

Advice for builders in the Wallet field:

1. Focus on building sustainable competitive advantages
2. Prioritize user experience and accessibility
3. Ensure security and usability
4. Look for opportunities to collaborate with existing businesses
5. Keep up with the latest trends and technologies, and maintain innovation.