New Technologies and Developments in Cryptocurrency Wallets
Advancements in Cryptocurrency Wallets
Today, the veDAO Research Institute will share about a concept familiar to all crypto investors – “crypto wallets”. Crypto wallets are the main access point to the Web3 economy, and they are becoming increasingly important with the development of the Web3 economy and the widespread adoption of Web3 applications. They need to match the progress of Web3, meet users’ diverse needs, and incorporate new technologies and innovations. This is both a challenge and an opportunity brought by the market. This article will help everyone understand the development of crypto wallets, discuss the trends and innovative directions, and share wallet projects with innovative highlights.
Basic Concepts of Crypto Wallets
The function of a traditional electronic wallet is to store assets and enable mobile payments. In addition to storing assets and enabling mobile payments, crypto wallets also have the function of identity identification. This is the entry and authentication that allows users to access various DApps in the Web3. There are many forms of crypto wallets in the current market, and each form has different levels of security and convenience. They can be classified into the following two forms:
Based on whether they can be connected to the internet, they can be divided into cold wallets and hot wallets:
Cold Wallet (Offline Wallet): The keys are stored in hardware devices, including “paper wallets” stored using mnemonic phrases, offline smartphones, hardware wallets, etc. They are only connected when you want to use cryptocurrencies.
Hot Wallet (Online Wallet): The keys are stored in applications or software. The wallet requires internet access when signing transactions with private keys. This includes commonly used wallet apps, web plugin wallets, etc.
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Based on whether the user controls the private keys, they can be divided into custodial wallets and non-custodial wallets:
Custodial Wallet (Centralized Wallet): Private keys are held by trusted third parties and digital assets are securely stored on the blockchain. However, this means that users do not have complete control over their funds. This type of wallet is mainly provided by cryptocurrency exchanges or professional custodial services, such as Binance, Huobi, etc.
Non-custodial Wallet (Decentralized Wallet): A wallet that allows users to have complete control over their keys and funds. Non-custodial wallets can be based on browsers, software, hardware, etc. Examples include popular wallets like MetaMask, TokenPocket, imToken, etc. Non-custodial wallets can be further divided into three categories:
Externally Owned Account (EOA) Wallet: EOA wallets are the most common type of digital wallets for storing and managing cryptocurrencies. EOA wallets are usually provided by centralized exchanges or wallet providers, and users need to hold their own private keys. Examples of EOA wallets include Metamask, BackLianGuaick, Phantom, Rabby, Rainbow, etc.
Smart Contract Wallet: Smart contract wallets are decentralized wallets that use smart contracts to manage assets. Smart contract wallets are more secure and flexible than EOA wallets and support advanced features such as social recovery and multi-signature. Examples of smart contract wallets include Argent, Safe, Sequence, etc.
Multiparty Computation (MPC) Wallet: The MPC wallet uses a technology called threshold encryption to enhance security. The private key required for authorization transactions is divided into multiple parts and distributed to multiple parties, ensuring that no single party can independently access the key. This approach significantly reduces the risk of a single point of failure or attack, making it more difficult for hackers to steal funds. Popular MPC wallets include Fireblocks, ZenGo, Coinbase MPC, and LianGuairticle Network.
Image Source: Huobi Research Institute
Market Status & Pain Points
The current market development of cryptocurrency wallets has the following characteristics:
1. User base continues to grow, market share is also increasing. According to data from Blockchain.com, the average ownership rate of cryptocurrency tokens in 2022 is 3.9%, with over 300 million people worldwide using cryptocurrency assets. The number of users with cryptocurrency wallets reached 68.42 million in 2021, and by July 2022, the number of cryptocurrency wallet users has reached 81 million, showing exponential growth. The development of the Web3 economy and the rise of digital assets have driven traditional funds into the Web3 world, increasing the demand for secure storage of digital assets and on-chain activities. This presents an opportunity for the digital wallet industry, attracting a large number of developers and funds.
2. Cryptocurrency wallets are favored by investment institutions as part of Web3 infrastructure. Cryptocurrency wallets are one of the main investment tracks chosen by institutions in the cryptocurrency field. Data shows that the amount of investment in the wallet field has been steadily increasing over the past five years. In the first half of 2022, the total amount of financing in the wallet field far exceeded other fields, reaching as high as $400 million.
3. Shift from B2C to B2B2C business. Currently, there are primarily two types of cryptocurrency wallets in the market, targeting B2B and B2C respectively. Compared to the B2B sector, the B2C sector is the main source of profit for most cryptocurrency wallets. As trading volume increases with a more mature market, wallet merchants will start building economic moats and barriers to entry, while also profiting from the traffic they generate. This increased bargaining power will make wallet products more attractive as B2B partners for other DApp and DEX protocols, transforming them into a B2B2C business model.
Image Source: 7OclockMedia
Although cryptocurrency wallets have made significant progress in recent years, there are still several challenges that need to be overcome to make them more user-friendly and accessible. The key challenges faced by decentralized cryptocurrency wallets include:
Security: Decentralized wallets have relatively high security, but the biggest challenge currently lies in the custody of users’ own private keys and protection against hacker attacks. The lack of user security knowledge and awareness, as well as poor operating habits, provide excellent opportunities for hackers. For wallet developers, the underlying security of wallets is equally challenging. In addition to open-sourcing wallet code, developers also need to conduct secure code audits for major updates and ensure the secure storage and management of wallet private keys.
Privacy and Regulation: Privacy and regulation have always been unavoidable topics in the Web3 field, and wallets also face these problems, including user data privacy and wallet compliance.
Usability: Every interaction with a wallet requires user operation, which requires users to have a certain amount of basic blockchain knowledge. Whether they are beginners or experienced users, issues such as managing mnemonic phrases or stolen mnemonic phrases exist and cause great annoyance. Although centralized wallets have certain security risks, they are relatively simple to operate and have user-friendly interfaces. If decentralized wallets want to attract more users, they must solve the usability problem.
To address these challenges, wallet manufacturers are exploring new methods and technologies to create user-friendly and secure digital wallets that are more easily adopted by the mainstream. Innovation drives wallet development
Multi-Party Computation (MPC)
A multi-party computation wallet replaces 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 threshold signature schemes (TSS). In this paradigm, we create and distribute key shards so that no individual or machine can fully control the private key – this process is called distributed key generation (DKG). Then, we can merge the key shards to generate a public key without exposing the key shards of each party, achieving the so-called sharing of “secret information”.
Based on this feature, there are more derived functions, such as easier account recovery. Therefore, an MPC wallet is similar to a traditional externally owned account (EOA) account with an invisible private key. In addition, it can also support threshold settings, which means that each transaction requires the participation of a threshold percentage of users to generate a signature transaction.
Abstract Account (AA)
An abstract account is a type of contract account that combines the advantages of current contract accounts and externally owned accounts (EOA). Compared to MPC, it has the advantages of flexible contract design, easy customization of logic, and always being online. An AA wallet performs transaction verification in the entry point contract before entering the transaction execution phase.
The emergence of abstract accounts has brought significant progress to the development of Web3 wallets, introducing on-chain programmability through smart contracts and adding flexibility to Web3 wallets. It supports custom rules, so in addition to the current ECDSA signature algorithm, other signature algorithms such as BLS, EdDSA, etc., can be selected to better meet the needs of specific application scenarios. Through AA, it is even possible to have a separate signature authorization from the account, which means that permissions and identities are isolated and have recoverability. This not only changes the embarrassing situation of “losing the private key is equivalent to losing the identity”, but also further facilitates the design of DIDs.
Highlights Project Sharing
Argent is a Layer2 wallet active on the ETH chain. Its advantages include the ability to easily transfer assets from Layer2 to Layer1 with low cost and fast speed. Its main features include:
Social recovery: Argent’s social recovery feature allows users to recover their wallet by establishing connections with trusted contacts. This makes it easier for users to recover their wallets without having to remember complex mnemonics or private keys.
No need for ETH as gas fee: Argent uses MetaTransaction technology to allow users to send transactions without owning ETH. Specifically, Argent pays the gas fee for users through the intermediate layer service of the “Gas Station Network (GSN)” and deducts the corresponding fee from the user’s account.
Attack detection: Argent wallet uses its self-developed “Guardians” smart contract to automatically detect and prevent phishing attacks, malicious software attacks, replay attacks, etc. For example, when a user receives an email or message that appears to be from the Argent wallet, the Guardians contract detects whether the information is from the official Argent channel. If it is determined that the information is not from the official channel, the Guardians contract will automatically block the user from executing any transactions related to that information.
In terms of financing, Argent has completed a total of 56 million US dollars in three rounds of financing. In 2018, it completed a $4 million seed round of financing with participation from Index Ventures, among others. In 2020, it completed a $12 million Series A financing round led by LianGuairadigm. In April 2022, it completed a $40 million Series B financing round led by Fabric Ventures and Metaplanet.
Argent starts with the most important security of the encrypted wallet, cancels the concept of private keys and mnemonics, and uses features such as social recovery to ensure user ownership of the wallet, thereby reducing the usage threshold. However, compared to other wallets, Argent wallet users cannot easily switch between most commonly used EVM networks, which to some extent limits its use cases and makes it difficult to establish user stickiness. At the current stage, Argent wallet has a relatively small user base, mainly due to the stability of the ZK network and the lack of support for storing and trading multiple cryptocurrencies.
UniLianGuaiss is an encrypted wallet that allows users to not remember mnemonics. Its Email-based social recovery solution allows users to easily regain access when they lose or are threatened, aiming to provide a familiar user experience from Web2 and better access to the Web3 world. Its features include:
ERC-4337 compatibility: Users can activate the ERC-4337 compatibility mode by adding the 4337 module transaction in the MainModule. After activation, the transactions initiated by users will be submitted to the Bundler through standard ERC-4337 verification. Users can also sign UniLianGuaiss tx and submit it to the Relayer for on-chain processing.
Email Recovery: Users can set multiple internet mailboxes as guardians of their accounts. By submitting an email to the on-chain smart contract, users can help recover their wallet private keys. When users have more than 2 guardian mailboxes (including the primary mailbox), they can use these two mailboxes to submit an account recovery email and restore their account immediately. When users only have one guardian mailbox, they usually need to wait for a 48-hour lock-in period to recover the account.
Gas-Free Experience: UniLianGuaiss provides a default relay node that accepts Gas payments in the form of native tokens and mainstream stablecoins.
ZenGo, as the first keyless cryptocurrency app wallet, has advanced technology in security and biometric authentication. Unlike other virtual currency wallets, ZenGo eliminates technical barriers and allows users to log in without a key – only an email address and fingerprint lock are required to set up the wallet.
ZenGo operates as a keyless non-custodial wallet through various security tools, including biometric encryption, three-factor authentication, and multi-party computation encryption. This keyless security system ensures that there is no single point of failure, and even if there is a problem with one of the shared multi-party computation encryptions, the user’s encrypted assets remain secure.
In terms of financing, in February 2023, ZenGo completed a $10 million Series A expansion financing through the issuance of convertible bonds and plans to conduct Series B financing later this year. After the Series A expansion financing, ZenGo’s valuation is $100 million, the same as after the Series A financing two years ago. In April 2021, ZenGo completed a $20 million Series A financing, with investors including Insight Partners, Austin Rief Ventures, and Samsung Next.
However, for some traders, the lack of private keys is a major source of controversy, and not all features of ZenGo are available globally. Third-party payment provider functions, etc., are specific to certain regions.
4. OKX Web3 Wallet
The technological innovation progress of OKX Web3 Wallet in 2023 is evident. The MPC keyless wallet was launched in April, and the AA smart contract wallet was launched in August. Jason Lau, Chief Innovation Officer of OKX, stated that OKX’s goal is to provide users with the most convenient, secure, and powerful Web3 platform, and OKX MPC keyless wallet and AA smart contract wallet will play an important role in achieving this goal.
OKX MPC wallet has significant advantages in security, with specific benefits including:
Resistance to hacker attacks: OKX MPC wallet splits the private key into three fragments, with only one fragment stored on the mobile phone. Therefore, even if a hacker steals the private key, they cannot steal the complete private key at once, thereby protecting the security of user funds.
Decentralized Asset Storage: Since OKX only holds a fragment of the user’s assets and the exchange itself does not have permission to use the user’s assets without authorization, it is a truly non-custodial wallet.
Excellent Private Key Security: Although OKX holds a portion of the private key fragments, even in the event of an accident, users can still assemble the complete private key and retrieve the assets in the wallet through fragment 2 on their mobile phones and fragment 3 on iCloud, without the need for the exchange’s consent or assistance.
Convenient Transfers: When using the wallet in daily transactions, users can easily transfer funds using fragment 1 from the exchange and fragment 2 on their mobile phones.
Easy Recovery of Mnemonic Phrases: With OKX MPC Wallet, even if your phone is lost or damaged, you can still recover your mnemonic phrases at any time using fragment 1 stored by OKX and the fragments 3 backed up on iCloud or Google Drive, thereby restoring your wallet and assets.
OKX AA Smart Contract Wallet, built on account abstraction technology, simplifies the complexity of blockchain transactions. One of the biggest pain points for users is the need to go through complex transaction processes and understand technical terms such as “Gas Fees” and “Gwei”. The AA Smart Contract Wallet solves this pain point by reducing the token exchange or transaction steps to just one click. It has the following advantages:
Convenient Gas Fees: Users do not need to use native tokens of the public chain for payment, but can use stablecoins such as USDC/USDT. When interacting with DApps on the Discover browser and web version, the AA wallet can also achieve third-party payment of Gas Fees.
Simplified Steps: The AA Smart Contract Wallet combines multiple stages of on-chain DEX, DeFi exchanges, and staking processes into one step, allowing users to complete token exchanges and staking to earn interest with just one click.
More User-Friendly and Intuitive Wallet Experience: Through the AA Smart Contract Wallet, users can interact with multiple contracts in a single transaction, greatly enhancing the multi-level needs of advanced users while also increasing convenience for beginners.
More new features, such as social recovery, will be supported in the future. This means that even in the event of losing the private key, users can recover their accounts through trusted individuals in their social network. OKX Web3 Wallet is not only the first wallet to support account abstraction technology for Ethereum, Polygon, Arbitrum, Optimism, BNB Chain, Avalanche, and OKTChain, but also the first wallet to support MPC technology on 37 public chains. It divides the user’s private key into three parts, eliminating the need for traditional written records of private keys and mnemonic phrases, greatly improving security and eliminating single points of failure.
HyperLianGuaiy is the world’s first multi-ecosystem digital asset wallet that integrates custodial wallet, decentralized self-managed wallet, HyperMate hardware wallet, and co-managed wallet. It provides users with one-stop services such as asset custody, wealth management and appreciation, and payment for consumption. So far, HyperLianGuaiy wallet supports 57 public chains for custodial wallets, 34 public chains for self-managed wallets, and 17 public chains for HyperMate hardware wallets. HyperLianGuaiy wallet has over one million users, with over 1 billion USD in asset management scale and over 310 million transfers made.
HyperLianGuaiy mainly ensures the security of users’ assets from four dimensions, including the security of the wallet itself, the security during user usage, the security of the servers, and the security of the technical development personnel. HyperLianGuaiy’s wallet hosting service provider, HyperBC, has obtained the Lithuanian cryptocurrency custody license. The funds in the HyperLianGuaiy wallet hosted on the HyperBC platform will be regulated by financial institutions.