Original Title: "The Advancing Wallet - Introducing You to the New Technologies and Developments in Cryptocurrency Wallets"

Original Source: veDAO

Today, the veDAO Research Institute will share insights on a concept familiar to all cryptocurrency investors - "cryptocurrency wallets". Cryptocurrency wallets are the main entry point for the Web3 economy, and they have become 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 the diverse needs of users, and incorporate new technologies and innovations. This presents both challenges and opportunities in the market. This article will take you through the development of cryptocurrency wallets, discuss trends and innovative directions, and share wallet projects with innovative highlights.

Basic Concepts of Cryptocurrency Wallets

The traditional electronic wallet is designed to store assets and facilitate mobile payments. In addition to these functions, the encrypted wallet also includes identity verification, which serves as the gateway and authentication for users to access various DApps in Web3. There are many different types of encrypted wallets available on the market, each with varying levels of security and convenience. They can be broadly classified into two categories:

According to whether they can be connected to the internet, wallets can be divided into cold wallets and hot wallets:

Cold wallet (offline wallet): The private key is stored in a hardware device, including "paper wallets" kept with mnemonic phrases, offline mobile phones, hardware wallets, etc. It is only connected when you want to use cryptocurrency.

Hot Wallet (Online Wallet): The private key is stored in the application or software, and the wallet needs to be connected to the internet when signing transactions. This includes commonly used wallets such as wallet apps and web plugin wallets.

According to whether the private key is controlled by the user, wallets can be divided into custodial wallets and non-custodial wallets.

Hosted Wallet (Centralized Wallet): Private keys are held by trusted third parties and digital assets are securely stored on the blockchain, which also means that users do not have complete control over their funds. This type of wallet is mainly provided by entities such as cryptocurrency exchanges or professional custody services, such as Binance, Huobi and other trading platforms.

Unmanaged Wallet (Decentralized Wallet): A type of wallet that allows users to have complete control over their own keys and funds. Unmanaged wallets can be based on browsers, software, or hardware, such as MetaMask, TokenPocket, and imToken. Unmanaged wallets can be further divided into three categories:

External Account (EOA) Wallet: EOA Wallet is the most common digital wallet used for storing and managing cryptocurrencies. EOA Wallets are usually provided by centralized exchanges or wallet providers and require users to hold their own private keys. Some examples of EOA Wallets include Metamask, Backpack, Phantom, Rabby, and Rainbow.

Smart Contract Wallet: A smart contract wallet is a decentralized wallet that uses 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. Smart contract wallets include Argent, Safe, and Sequence, among others.

Multi-Party Computation (MPC) Wallet: The MPC wallet uses a technology called threshold encryption to enhance security. The private key required for authorized transactions is divided into multiple parts and distributed among multiple parties, ensuring that no single party can independently access the key. This method greatly reduces the risk of single point failures or attacks, making it more difficult for hackers to steal funds. MPC wallets include Fireblocks, ZenGo, Coinbase MPC, and Particle Network, among others.

Source: Huobi Research Institute

Market Status & Pain Points

The current market development status of the encrypted wallet has the following characteristics:

1. The user base continues to grow, and market share is rising in sync. According to data from Blockchain.com, the average ownership rate of encrypted tokens in 2022 is 3.9%, with over 300 million people worldwide using encrypted assets. Among them, the number of users with encrypted wallets reached 68.42 million in 2021, and by July 2022, the number of encrypted wallet users had 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, and the digital wallet industry has ushered in a development opportunity, with a large number of developers and funds pouring in.

2. As a fundamental infrastructure of Web3, encrypted wallets are favored by investment institutions. Encrypted wallets are one of the main investment tracks for institutions in the field of encryption. Data shows that the amount of investment in the wallet field has continued to grow in the past 5 years. In the first half of 2022, the total financing amount in the wallet field far exceeded other fields, reaching as high as 400 million US dollars.

3. From B2C to B2B2C business, there are currently two main types of encrypted wallets in the market: those targeting To B and To C. Compared to the To B field, the To C field is the main source of profit for most encrypted wallets. As transaction volume increases with a more mature market, wallet merchants will begin to build economic moats and barriers to entry, while also profiting from the traffic they generate. This greater bargaining power will make wallet products more attractive as B2B partners to other DApp and DEX protocols, transforming them into a B2B2C business model.

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Source: 7OclockMedia

Although encrypted 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 currently facing decentralized encrypted wallets include:

Security: The security of decentralized wallets is relatively high, and the biggest challenge currently lies in the storage and prevention of user's own private keys from hacker attacks. The lack of user security knowledge and awareness, as well as bad operating habits, can create excellent opportunities for hackers. For wallet developers, the security of the wallet's underlying technology is also full of challenges. In addition to open-sourcing wallet code, developers must also conduct secure code audits for every major update, as well as manage the storage and management of wallet private keys.

Privacy and Regulation: Privacy and regulation have always been a topic that cannot be avoided in the Web3 field, and this is also a problem that wallets face, including user data privacy and wallet business compliance.

Usability: Every interaction with a wallet requires user action, which means users need to have a certain basic knowledge of blockchain, regardless of whether they are beginners or experienced players. Issues such as managing mnemonic phrases or having them stolen can cause great frustration. Although centralized wallets have certain security risks, they are easier to operate and have a user-friendly interface. If decentralized wallets want to attract more users, they must solve the usability problem.

In order 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 is driving the development of wallets.

Multi-Party Computation MPC

The multi-party computation (MPC) wallet replaces traditional private keys by sharing "secret information" with one or more other devices using your device. The MPC wallet eliminates single points of failure by using threshold signature schemes (TSS). In this paradigm, we create and distribute private key fragments so that no one person or machine can fully control the private key - this process is called distributed key generation (DKG). Then, we can merge key fragments to jointly generate a public key without exposing each party's key fragment, achieving the so-called sharing of "secret information".

Based on this feature, there are more derived functions, such as making it easier to recover accounts. Therefore, the MPC wallet is similar to a traditional EOA account with an invisible private key. In addition, it also supports threshold setting function, which requires at least a certain percentage of participating users to set the threshold for each transaction, and generate signature transactions together to make it effective.

Abstract Account AA

Abstract account is a type of contract account that combines the advantages of the current contract account and external account (EOA) types. Compared to MPC, it has the advantages of flexible contract design, easy customization of logic, and always online. The AA wallet will first verify the transaction 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, adding flexibility to Web3 wallets by introducing on-chain programmability through smart contracts. 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, there can even be a separate signature authorization from the account, which means that permissions and identities are isolated and have recoverable features. 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 DID.

Highlight Project Sharing

1.Argent

Argent is a Layer2 wallet that operates on the ETH chain. Its advantage lies in its 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 connecting with trusted contacts. This makes it easier for users to recover their wallet without having to remember complex mnemonic phrases or private keys.

No need to use 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 service of "Gas Station Network (GSN)" and deducts the corresponding fee from the user's account.

Attack Detection: The Argent wallet uses its self-developed "Guardians" smart contract to automatically detect and prevent phishing attacks, malware attacks, replay attacks, etc. For example, when a user receives an email or text message that appears to be from the Argent wallet, the Guardians contract will check whether the information comes from the official Argent channel. If the information is found to be not from the official channel, the Guardians contract will automatically block the user from executing any transactions related to that information.

Regarding financing, Argent has completed a total of $56 million in three rounds of financing. In 2018, it completed a $4 million seed round of financing with participation from Index Ventures. In 2020, it completed a $12 million Series A financing round with Paradigm as the lead investor. In April 2022, it completed a $40 million Series B financing round with Fabric Ventures and Metaplanet as the lead investors.

Starting from the most important security of the encrypted wallet, Argent cancels the concept of private keys and mnemonic words, and uses social recovery and other functions to ensure user ownership of the wallet, thereby reducing the usage threshold. However, compared with other wallets, Argent wallet users cannot easily switch between most commonly used EVM networks, which to some extent will limit its usage scenarios and make it difficult to establish user stickiness. At present, the user group of Argent wallet is relatively small, mainly due to the stability of the ZK network and the lack of support for storage and trading of multiple cryptocurrencies.

2.Unipass

UniPass is an encrypted wallet that allows users to access their accounts without the need to remember mnemonic phrases. Its Email-based social recovery solution enables users to easily regain access in case of loss or threat. UniPass aims to provide a user-friendly experience familiar to Web2 users, while also facilitating seamless integration into the Web3 world. Its features include:

Compatible with ERC-4337: Users can activate the ERC-4337 compatible mode by adding the 4337 module transaction in the MainModule. After activation, transactions initiated by users will be submitted to the Bundler for verification through the standard ERC-4337 validation method. Users can also sign UniPass tx and submit it to Relayer for on-chain processing.

Email Recovery: Users can set multiple internet email addresses as guardians of their accounts. By submitting the email to the on-chain smart contract, users can retrieve their wallet private keys. When users have more than two guardian email addresses (including the primary email), they can use any two of them to submit an account recovery email and immediately recover their account. When users only have one guardian email, they usually need to wait for a 48-hour lockout period to recover their account.

No Gas Experience: UniPass provides a default relay node that accepts Gas payments in the form of native tokens and mainstream stablecoins.

3.ZenGo

ZenGo is the first keyless cryptocurrency wallet app with advanced security and biometric technology. Unlike other virtual currency wallets, ZenGo eliminates the 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 uses various security tools, including biometric encryption, three-factor authentication, and multi-party computation encryption, to operate as a non-custodial wallet without private keys. This keyless security system ensures that there are no single points of failure, and even if one of the multi-party computation encrypted shares encounters a problem, the user's encrypted assets remain secure.

From the financing situation, in February 23, ZenGo completed a $10 million A round expansion financing through the issuance of convertible bonds, and plans to conduct a B round financing later this year. After the A round expansion financing, ZenGo's valuation is $100 million, which is the same as the completion of the A round financing two years ago. In April 2021, ZenGo completed a $20 million A round financing, with investors including Insight Partners, Austin Rief Ventures, and Samsung Next.

However, for some traders, not having a private key is a major source of controversy, and not all of ZenGO's features are available globally, with third-party payment provider functions being specific to certain regions.

4.OKX Web3 Wallet

OKX Web3 Wallet's technological innovation progress in 2023 is evident. In April, the MPC non-private key wallet was launched, and in August, the AA smart contract wallet was launched. Jason Lau, the Chief Innovation Officer of OKX, stated that OKX's goal is to provide users with the most convenient, secure, and powerful Web3 platform, and the OKX MPC non-private key wallet and AA smart contract wallet will play an important role in achieving this goal.

OKX MPC wallet has significant advantages in terms of security, with the following specific benefits:

Resisting hacker attacks: OKX MPC wallet shatters 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, thus protecting the user's fund security.

Decentralized asset storage: Because OKX only holds a fragment of the user's assets and the exchange itself does not have the authority to use the user's assets without permission, it is a truly non-custodial wallet.

Good security of private key: Although OKX exchange holds a portion of private key fragments, even if OKX encounters unexpected situations, users can still assemble the complete private key by using fragment 2 on their mobile phone and fragment 3 on iCloud, and retrieve assets in their wallet without the exchange's consent or assistance.

Convenient transfer: When using the wallet in daily life, users can easily transfer funds using Fragment 1 from the exchange and Fragment 2 on their mobile phone.

Easily retrieve your mnemonic phrase: Use the OKX MPC wallet to retrieve your wallet and assets even if your phone is lost or damaged. You can use fragment 1 stored by OKX and fragments 3 backed up in iCloud or Google Drive to retrieve your mnemonic phrase at any time.

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 steps required for token exchange or trading to just one click. It has the following advantages:

Gas Fees Convenience: Users do not need to use the native tokens of the public chain to pay, but can use stablecoins USDC/USDT to pay. Additionally, when interacting with DApps on Discover browser and web, AA wallet can also achieve third-party payment of Gas Fees.

Step Simplification: The AA smart contract wallet combines multiple stages of on-chain DEX, DeFi exchange, and staking processes into one step, allowing users to complete token exchange and staking to earn interest with just one click.

A 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 if the private key is lost, users can still 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. The user's private key is divided 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.

5.HyperPay

HyperPay is the world's first multi-ecosystem digital asset wallet that integrates custody management wallet, decentralized self-managed wallet, HyperMate hardware wallet, and co-managed wallet. It provides users with one-stop services such as asset custody, financial management, value-added, and consumer payments. So far, HyperPay wallet supports 57 public chains for custody management wallet, 34 public chains for self-managed wallet, and 17 public chains for HyperMate hardware wallet. HyperPay wallet has over one million users, with asset management scale exceeding 1 billion US dollars and over 310 million transfers.

HyperPay mainly ensures the security of users' assets from four dimensions, including: the security of the wallet itself, the security during user use, the security of the server, and the security of technical developers. HyperPay's wallet hosting service provider, HyperBC, has obtained a Lithuanian cryptocurrency custody license, and funds hosted in the HyperPay wallet on the HyperBC platform will be regulated by financial institutions.

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