Crypto wallets: A barrier to Web3 adoption?
A deep dive into crypto wallets and it's role in web3
While crypto wallets have improved hugely since the days of downloading a full Bitcoin client to simply make a transfer, they still have a long way to go before mainstream adoption. For the average user, they’re just too complex, too technical, and too risky. However, crypto wallets are also the gateway into the world of decentralized finance and Web3.
So how can we change this? Let’s look in-depth at what exactly a cryptocurrency wallet is and the barriers they pose to Web3 adoption.
What is a crypto wallet?
Rather than a crypto wallet storing your coins or tokens, a crypto wallet stores your keys. Your funds live on the blockchain. Your keys allow you to access and use your cryptocurrency.
Think of it as similar to Apple Pay or Google Pay on your phone. Your money isn’t stored inside your phone—that’s hopefully sitting safely in a bank account somewhere—but your phone lets you access and spend it.
Your wallet contains two keys—private and public. They are a string of letters and numbers produced by cryptography (here’s where cryptocurrency gets its name—” currency” secured by “cryptography”).
Private key
A private key is used to send or spend your funds. It’s important never to share this with anyone; it’s like a password for your assets. If you lose it, you lose access to your cryptocurrency. Likewise, if anyone else gains your private key, they can access all your funds.
Public key
A public key is similar to an IBAN or bank account number. You can safely share your public key with anyone who wants to send you a payment.
Key takeaway: A crypto wallet holds the keys to your cryptocurrency and keeps them and your assets secure.
Why do we need them?
Cryptocurrency was initially designed as a way to securely send money or assets to another individual without the need for a bank or other institution to facilitate the payment. A crypto wallet is how users can safely send funds to each other. Everything is encrypted for security, and your crypto wallet gives you access to this peer-to-peer payment network.
Since the early days of cryptocurrency, the uses of a crypto wallet have evolved. Not only can you use it for payments, but you can also use it to access different applications, services, protocols, the metaverse, and more. A crypto wallet allows you to connect to Web3—the new decentralized internet.
Types of crypto wallets
A crypto wallet can come in different forms—software, hardware, and even a piece of paper! Each one has its own advantages and disadvantages, and the perfect wallet for you might not suit someone else.
Hot wallet
A software or “hot” wallet is the most accessible wallet for beginners. Your keys are stored online, and you can usually access them by logging in using a username and password. It’s easy to use and can often be a good starting point for someone who hasn’t used cryptocurrency before. However, as your keys are stored online, it’s also the most vulnerable to hacking. Popular options include Metamask and TrustWallet.
Cold wallet
A hardware or “cold” wallet is a physical device that stores your keys offline. If you want to use it, you can connect it to your phone or computer temporarily. This method keeps your keys safe from hackers. While they involve a little more technical knowledge, they’re a better option for securing your assets. Popular options include Trezor and Ledger.
Key takeaway: A hot wallet stores your keys online, while a cold wallet stores your keys offline.
Custodial vs. self-custody
One of the main barriers to crypto adoption is the steep learning curve. For many, the idea of keys, seed phrases, and signing transactions is a significant barrier to crypto adoption. Add that to the fact that if you lose access to your wallet, your funds will be irretrievable, and it’s enough to turn many off the whole idea.
Many exchanges and companies offer a hot “custodial” wallet as a solution. With a custodial wallet, a third party manages your keys and most technical aspects. All you need are your login details. If you open an account on an exchange, this will usually come with a custodial wallet that allows you to trade cryptocurrencies easily.
Custodial wallets are a simple entry point into the world of crypto. They’re easy to use, and as a third party holds your keys, your funds might not be gone forever if you lose access.
However, this comes with its own drawbacks. As you don’t own your keys, you don’t have control over your assets. The wallet provider could withhold your access temporarily or even permanently. Many exchanges and protocols have paused withdrawals or access during times of illiquidity or difficulty.
That’s why there’s a popular saying, “Not your keys, not your crypto.” Many prefer to use a “self-custody” wallet for complete control of their keys and assets.
Key takeaway: Hot custodial wallets are the easiest solution, while cold self-custody wallets are the most secure.
Crypto wallets and Web3
Crypto wallets allow you access to more than just trading and payments. You can connect to the world of Web3 with your wallet.
Web3 is a new iteration of the internet that prioritizes decentralization and ownership of our own data. The internet we use today (Web2) is platform-based and centralized. Our data is sold and shared online. Web3 aims to change this and uses blockchain technology as its foundation. Different elements of Web3 include decentralized apps (dApps) and the metaverse.
Your crypto wallet acts as your identity in Web3. Any action you take can be traced back to your specific wallet. Your private key proves ownership of any digital assets, such as an NFT.
If you want to play a blockchain game, borrow crypto from a lending platform, or trade crypto assets on a decentralized exchange like Uniswap, you’ll need to connect your crypto wallet. Every wallet action you take on a Web3 application needs to be signed by your private key.
The easiest way to connect to the metaverse and other Web3 protocols is to use a self-custody hot wallet. Extensions like Metamask make this process simple—you’re connected with just a few clicks.
Although you can use a custodial wallet for some Web3 projects, you will need a self-custody hot wallet to interact with the broader Web3 ecosystem of dApps, exchanges, DeFi, social media, and games. As it functions similarly to an identity, it’s vital that you have full control over both your Web3 identity and your assets.
Many Web3 use and crypto investors employ a combination of wallets. They use a self-custody hardware wallet where you control your keys for storing the bulk of their funds and a hot self-custody wallet for accessing Web3 and the metaverse. They might also use a custodial wallet for easy trading on popular exchanges, although many now offer a non-custodial option or allow you to connect your own wallet.
Key takeaway: A hot self-custody wallet is your entry pass into Web3 and the metaverse.
The issues with Web3 wallets today
While 1 in 5 Americans have owned cryptocurrency, we’re still a while away from mainstream adoption of Web3. For many, crypto is simply a speculative asset rather than a vital component of the decentralized internet.
However, to participate in Web3, users need to be able to handle crypto wallets and use them safely. There are several significant issues plaguing both crypto wallets and the broader crypto landscape that are proving to be hurdles for the growth of Web3.
Difficulty of use
As you might have gathered, it’s not always simple to use cryptocurrency or interact with Web3. Simply setting up a crypto wallet to connect to Web3 can be a complex task. There are multiple platforms, wallets, and currencies, all involving their own techniques and intricacies. For most newcomers, it’s a steep learning curve if they want to learn how to use cryptocurrencies safely.
For example, transaction addresses are a non-English mix of letters and numbers, and the format varies depending on what assets and blockchain you’re using. Getting a single character wrong can result in your assets being sent to a non-existent address. In that case, your transaction may not go through, or, even worse, your assets will be “burnt,” i.e., gone forever. Many platforms now offer QR codes to reduce the chances of human error.
However, crypto wallets have the potential to offer a simplicity and speed that traditional finance can’t match. Transactions can be settled in minutes and through a peer-to-peer network rather than banks. Unlike a bank account, they’re multi-purpose. One crypto wallet can work as your login details for all of Web3, a way to store your assets, and your ticket into decentralized communities and organizations.
On-ramps and off-ramps
One of the first things you’ll want to do when getting started is to buy cryptocurrency. This can be done with fiat money through an exchange. However, not every exchange supports this. Some are crypto only, and others only accept certain fiat currencies. If you use a hardware wallet, you might have to buy crypto using a software wallet and then transfer it to your hardware wallet.
Also, if you want to withdraw your crypto and exchange it for fiat, you’ll need to use an off-ramp, such as an exchange that will sell you fiat for crypto. This process can take time and incur hefty fees. And many exchanges don’t support this process. Depending on the cryptocurrency you hold, you may have to transfer it from different platforms and trade it for other cryptocurrencies until you hold one that you can sell for fiat.
Technical knowledge
You’ll need to have at least a basic knowledge of how cryptocurrency works and the underlying tech to navigate the world of crypto safely. Even with a basic understanding, you may still make a mistake or fall prey to a scam and lose all your assets. This is a huge barrier to mainstream adoption as most people simply don’t want to learn all this.
Simply using a crypto wallet requires users to understand seed phrases, signing transactions, and how to handle different assets. Any mistakes can result in significant financial loss. Even looking at transaction histories can be challenging. While every transaction is recorded onto the blockchain, you’ll need the technical know-how to read and understand these transactions.
Every transaction is tied to your wallet address (generated from your public key). However, you’ll need to use a blockchain explorer or scanner to trace both your and other users’ transactions. This can often be too complex for users and place them at risk of scams involving faulty addresses.
Security
Crypto scams and hacks are big business. Crypto crime totaled $20.6 billion last year, and it doesn’t seem to be slowing down. This is partly to do with a lack of knowledge on how to keep your assets safe and recognize scams but also due to the over-complication of cryptocurrency and people developing vulnerable protocols and platforms.
Although you need a hot wallet to interact with Web3 protocols, as your keys are stored online, this makes them particularly vulnerable to hacks. Phishing scams, fake airdrops, faulty smart contracts, and improper security practices can all put your wallet at risk.
Many users also store their login details or seed phrases on their phones or computer, where malicious actors can easily access them.
Even by taking precautions, you may still be at risk of security vulnerabilities in the wallet software itself, as we saw in the Solana hack last year. Crypto holders being plagued by scams and security issues can create an air of suspicion around the broader Web3 ecosystem that needs to be tackled.
Key takeaway: Crypto is too complicated and risky for the average person.
So how can we improve this?
Although crypto wallets open the door to Web3, they’re still too complicated and inconvenient for many users. So, how do we change this? How do we get to 1 billion Web3 users?
In our next post, we’re going to look at possible solutions to these problems and why we need to focus on making Web3 more accessible, not making the average user more tech-savvy.
What do you see as the barriers to 1 billion Web3 users?