The Next Stop for Web3 Wallets: Why we are caring about the non-mnemonic wallets
By Zoe Zhou
“No key, no tokens”
The premise of owning digital assets is to fully and truly control your private key.
According to the data from statista.com, the number of crypto wallet users has reached 85M (yoy~6.3%) until November 2022. Though during the bear market, crypto wallets, as the entrance of Web3.0, have been currently on the eve of explosive growth. Its user experience and security directly affect when cryptocurrency will be in large-scale adoption.
Although self-hosted crypto wallets are safe, mnemonic words and private keys are much more complicated than traditional Web2.0 entrance — “username-passwords”. According to a report by Chainalysis in 2021, about 20% of the bitcoin lost is due to their owner did not remember private keys. Countless hacker attacks and security incidents such as FTX bankruptcy have continuously attracted the attention of the industry.
On Ethereum, there are two basic account types:
- Externally Owned Account (EOA): Each unique private key of an EOA should be derived through 12 unique mnemonic words. At present, mainstream dApp wallets are EOA wallets, such as Metamask, Phantom (Solana), BSC Wallet (BSC), Keplr (Cosmos), which are not programmable.
- Contract Account (CA, a smart contract deployed on the chain through the EOA account): It is a piece of programmable EVM code deployed on the chain through an EOA account, which can only be invoked by the EOA account.
In conclusion, each account is determined by a unique private key. The mechanism defect that always exists is that the forgetting, loss and leakage of private keys will cause irreversible digital asset losses.
Currently two types of crypto wallets are making significant progress as no mnemonic word solutions: smart contract wallets (including multi-signature wallets) and multi-party computation (MPC) wallets.
Brief Introduction of Smart Contract Wallet and Account Abstraction
Smart contract wallets can be understood as a smart contract for managing assets on chains with specific EOA accounts. The contract accounts support further programming. For example, Multi-signature wallets are smart contract wallets which require the signature from M-of-N keys to approve a transaction.
Recently, smart contract wallets have become a hot topic again due to the significant progress of proposal EIP-4337, Account Abstraction in Ethereum without requiring consensus-layer protocol changes. Account abstraction is able to decouple the relationship between the signers and the accounts, combining the advantages of programmability from CA and ability to proactively initiate transactions from EOA. Thus, users can customize the logic inside without improving from the consensus layer or the underlying layer.
In fact, the discussion of account abstraction has not stopped since the launch of Ethereum. Due to the immaturity of most solutions and the complexity of the modification on consensus protocol layer, many proposals about Account Abstraction were shelved in the past.
The key of EIP-4337 proposal is that the signature verification, gas payment, and replay protection are moved out of the core protocol and into the EVM, handed over to the entry point smart contract for execution. Smart wallets containing arbitrary verification logic instead of EOAs as their primary account without any consensus-layer changes. Bundlers (validators, MEV searchers, or the application itself) pick up transactions from the UserOperations pool, relay them to the blockchain and pay the fee.
However, EIP-4337 for now has such compatibility issues and node verification processes, which still need time to verify and improve. Due to the accumulation of functional modules and new mechanisms, new contract risks have been introduced and gas fees have been increased. It is worthwhile to note that Account abstraction has just launched on Ethereum mainnet in Feb, 2023. The Ethereum Foundation launched a 4-week $300,000 Account Abstraction #Grants to improve and strengthen the infrastructure surrounding Account Abstraction on Ethereum. We are expected to see more diversified applications development of the account abstraction wallets.
Brief Introduction of MPC wallet
The paper “Two-Party ECDSA from Hash Proof Systems and Efficient Instantiations” in 2019 caught the application of MPC (multi-party computation) technology into the public attention. Informally speaking, the most basic properties that a MPC protocol aims to ensure are:
- Input privacy: No information about the private data held by the parties can be inferred from the messages sent.
- Correctness: Any proper subset of parties willing to share information or deviate from the instructions should not be able to force honest parties to output an incorrect result.
MPC wallets use a threshold signature scheme (TSS) to create shares of one private key. They are designed to increase security by requiring multiple parties to jointly create private key fragments and then validate a transaction. The most important thing is that the private key will not appear from any process during accounts creating, using, saving, backing up and restoring.
Will MPC wallets be better solutions?
Here we focus on evaluating those two WEB3.0 wallets from properties below:
- Security :
Smart contract wallets use single private keys for controlling and access to the funds. Since smart contracts can be customized, risks such as contract vulnerabilities and compatibility vary. Even splitting shares on multiple devices such as Multi-signature wallets cannot assure entirely safety. A sophisticated hacker can wander long enough to track and reconstruct the keys. If they are able to compromise one server, they can move laterally across the network and compromise other servers or devices.
MPC wallets split the private key into several parts and distribute them among multiple parties without disclosing the whole, as they make it more difficult for attackers to steal private keys. MPC wallets are considerably safer if there is no need for multi-chain transactions and high-frequency interactions with dApps, especially in some specific cross-chain scenarios. However, they can not avoid off-chain governance like signing authorization policies and approval quorums. It cannot be said which of the two has absolute security. We prefer to focus more on the improvement of user experience.
2. Ease of use:
Whether it have smooth and seamless experience like Web2.0 payment products. Both wallets are more user-friendly without mnemonic words than conventional wallet solutions such as “Hot” crypto wallets, such as MetaMask (browser-based).
3. Functionality:
Whether it meets actual needs of Web3 users, such as DeFi or NFT daily transactions, investments, digital identity, web3 social, etc.
Compared with traditional EOA wallets that have limited functionality, smart wallets have advanced features such as multi-sig transactions, daily transfer limits, emergency account freezing, and more secure account recovery.
Certain organizations like exchanges, custodians, and other large digital asset businesses probably prefer MPC wallets because this technology prevents trust in any single employee with a single key to assets. Some schemes like Lit Protocol can interact with off-chain data through HTTP requests, potentially making MPC useful for web properties.
4. Extensibility:
Whether new features and integrations building in the ecosystem are easier.
Smart Wallets, which are essentially smart contracts, enable an ecosystem of developers to extend wallet functionality by default, implementations and feature extensions can be audited by anyone. MPC protocols are not standardized, and the existing ecosystem consists mainly of customized MPC wallet products.
5. Cost:
Single actions from multisig smart wallets due to multiple signatures needing verified are usually more expensive in gas than those of MPCs now, though transaction batching can help save costs in the long run.
MPC wallets may have lower transaction and recovery costs. MPC wallets are represented on the blockchain as a single address with no additional gas fee, which can be important for B2C users who conduct hundreds of transactions per day.
6. Transparency:
Smart wallets have more transparent and auditable codebases. Since key generations and signatures are generated off-chain and many MPC protocols are not open source, the ecosystem has no easy way to independently audit and integrate them for analysis if something goes wrong. MPC wallets hinder transparency and require more strict operational audits.
In summary, we believe that the two are not contradictory, and the choice between the two will depend on the specific requirements. MPC provides security at the key generation and management level, while smart contracts bring extensibility and more applications for ecosystem development. They are essentially not in the same dimension to solve the management problem of private keys. We look forward to seeing more innovative products that apply both technologies. For example, MPC protocols probably can be used in conjunction with multi-signature wallets.
MPC wallet is an off-chain solution that can control both ordinary wallets based on external accounts and smart wallets. It does not involve changes in the consensus layer or contract layer of Ethereum. The cost for users is lower and it is more feasible in the short term. However, the multi-party off-chain accountability system cannot be avoided, and the competitiveness of wallet products improvement from either security or user experience aspects is not obvious. For example, certain multisignature (multisig) wallets can be exploited by Web3 apps that use the StarkEx protocol, according to a March 9 press release provided by Multi-Party Computation (MPC) wallet developer Safeheron.
Smart wallet is a product with many innovation opportunities, which can bring more new applications and use cases. However, account abstraction is a big project that requires other smart contracts, developers, and Ethereum architects to cooperate with upgrades. The current application scenarios of the account abstraction still need some time to be verified. It is worth noticing that L2s have greatly accelerated the adoption for lowering the cost and greater extensibility, for example Starkware has already made all Starknet accounts smart wallets natively, and zkSync 2.0 will also launch with AA.
Bottlenecks of those two types wallets
In all, MPC-based wallets employ a similar methodology: minimize the risk of key theft by eliminating the existence of a complete key held by any single party. However, MPC protocols and wallet solutions providers can vary substantially.
Additionally, due to the computational resources needed, MPC wallets require specialized hardware and software, and higher bandwidth. Therefore, they may not be friendly especially for 2C users. Currently popular MPC wallets in the market are mainly customized products.
Most hardware wallets including two largest hardware wallet manufacturers, Trezor and Ledger, don’t support MPC wallets due to a lack of compatibility with seed phrase restoration processes, though MPC hardware wallet options like Cypherock are available and open-source on Github. Ledger called MPC wallets a relatively new application with untested security. It referred to an academic paper that described a security weakness in most implementations of the fixed-key advanced encryption standard (AES) that MPC wallets use.
Account abstraction wallets are currently not implemented at the protocol level. Because these wallets are smart contracts, some commonplace issues such as storage costs are concerned. Besides, the infrastructure to support ERC-4337 protocol is not ready either. The current implementation of ERC-4337 relies heavily on Flashbots. Flashbots are essential to the account abstraction because it bundles a set of UserOperation objects into a single “bundled transaction”, which is then included in an Ethereum block. We’re seeing Layer 2 solutions actively building entirely new platforms to implement protocol-wide changes to address the aforementioned issues.
Obviously, the significant advantage is that wallet developers can constantly update new features based on smart contracts. We are positive about the new narrative of abstract accounts for wallets. Such as the article “Auto Payments for Self-Custodial Wallets” published by Visa, which explores the use of account abstract wallet Argent to realize automatic payments on the StarNet network. Programmatic payments that allow users to automatically pay using self-hosted wallets without signing every transaction. Also, high-frequency trading behavior of games in web3.0 must have a strong concern with new user-friendly wallets.
Conclusion
Technology is only a sufficient condition for the realization of functions, while functions will lead to inevitable changes in the market structure.
It is not difficult to talk about technologies such as MPC protocols or account abstraction, but there is still a series of product iteration from technical mechanisms to markets. In addition to the security issues that everyone cares about, the improvement of user experience is a very important dimension for us to evaluate wallet products. After all, as tools for entering Web3.0, wallet products should not only serve users right now (who have already gotten used to private keys and mnemonic words), the main purpose should be “break the ecosystem”, which providing a much smoother user experience, enabling more Web2.0 people to use.
At present, EIP-4337 is the most feasible account abstraction solution. There are already many smart wallet projects exploring this path. We suggest more attention can be paid to the construction of account abstraction and smart wallet projects especially on Layer 2.
We believe that the MPC protocol is a more secure and reliable technology, but how to better implement it among practical MPC wallets scenarios is the key. We probably need more patience to see more diversified as well targeted solutions for persons and institutions.
Reference
https://medium.com/1kxnetwork/wallets-91c7c3457578
https://blog.jarrodwatts.com/what-is-account-abstraction-and-how-does-eip-4337-work
https://hackernoon.com/what-is-account-abstraction-and-why-is-everyone-talking-about-it
https://www.argent.xyz/blog/wtf-is-account-abstraction/
https://www.theblockbeats.info/en/news/32634
https://www.wikiwand.com/en/Secure_multi-party_computation#Definition_and_overview
https://www.bitcoininsider.org/article/196364/account-abstraction-will-evolve-wallets
https://cointelegraphcn.com/news/why-are-we-bullish-on-the-future-of-web3-wallets
https://mp.weixin.qq.com/s/TF2FCQDyyApzEVHQjxgZRg
https://foresightnews.pro/article/detail/21898
https://blog.makerdao.com/what-are-smart-contract-wallets-and-how-can-they-benefit-defi-users/
https://medium.com/huobi-research/加密寒冬下耀眼的明星-web3钱包赛道的现状-挑战与机遇-de779ee03ece
About Jsquare
Jsquare is a research and tech-driven investment firm focused on facilitating blockchain mass adoption, and empowering future Alpha in Web3. Currently it is self-funded with AUM over $150M. The portfolio includes CeFi (CoinList, 3iQ, Republic, FV Bank), GameFi/NFT (Efinity, Big Time, Thetan Arena, Apeiron), Infra/Tooling (Pocket, Render, Shardeum, Moonbeam, ChainSafe, GSN) , among others.
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