With options like software wallets, hardware wallets, paper wallets, custodial wallets, and self-custody wallets, navigating the world of crypto storage can be dizzying for beginners. However, crypto wallets are crucial to keeping your digital assets secure and accessing the world of Web3. While the number of users has grown over the past decade, there are still major obstacles to be overcome before Web3 becomes a part of our everyday lives.
So what can we do to change this? First, let’s look in-depth at what a cryptocurrency wallet is and the barriers to widespread Web3 adoption.
What is a crypto wallet?
Rather than storing your cryptocurrency, a crypto wallet holds your keys. Your funds are stored on the blockchain, and your keys allow you to access and use your crypto assets.
It works similarly to Apple Pay or Google Pay on your phone. Your money isn’t stored in your phone, but your phone allows you to access and spend it.
Your wallet holds two keys, a private key, and a public key. These are each a string of letters and numbers generated by cryptography — where cryptocurrency gets its name from!
Private key
Your private key allows you to send or spend your crypto. Never share your private key, as anyone who has it can access your funds. It’s like a password for your account.
Public key
You can share your public key with anyone who wants to pay you or send you crypto. It’s like a bank account number.
If you lose access to your keys, you may lose access to your funds completely.
Key takeaway: A crypto wallet stores the keys to your cryptocurrency and protects your assets.
Why do we need them?
Cryptocurrency was developed as a way to safely send money to another person without needing a bank or third party to handle the transfer. Every transaction needs to be securely encrypted to protect your assets. A crypto wallet is used to carry out these transactions safely.
Since then, the use of crypto wallets has evolved and expanded. As well as payments, your crypto wallet can be used to access Web3 (the new decentralized internet), the metaverse, Decentralized Finance (DeFi), and more.
Types of crypto wallets
Crypto wallets come in many different forms. They can be a piece of hardware, software, or even paper! Each has its own advantages and drawbacks depending on what you want to use it for.
Hot wallet
A hot wallet is a software wallet. They’re the most user-friendly option, and your keys are stored online. You can usually use a username and password to access them. Many newcomers to crypto start off with a software wallet. However, they are the most vulnerable to hacks as your keys are stored online. Some popular options include TrustWallet and Metamask.
Cold wallet
A cold or hardware wallet is a physical device that stores your keys offline. To use it, you can connect it to your phone or computer briefly. This reduces the risk of being hacked significantly. They are a little more complex but much more secure. Two popular hardware wallet manufacturers are Ledger and Trezor.
Key takeaway: A hot wallet stores your keys online, and 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 challenging and unappealing. On top of that, if you lose access to your wallet, your funds will be gone forever. Altogether, it’s enough to turn many off the whole concept.
That’s why some crypto users opt for a custodial hot wallet. With a custodial crypto wallet, a third party, like an exchange, holds your keys for you. They will often take care of most technical aspects, and you will just need login details. They’re a good starting point for people just getting started with cryptocurrency and can usually be set up as part of opening an account on a crypto exchange. Importantly, if you lose access to your account, you may be able to regain access through the provider.
However, as another party holds your keys, you don’t have full control over your assets. Some exchanges have temporarily or permanently halted withdrawals, causing users to lose access to their funds. Hence the popular crypto maxim, “Not your keys, not your coins.”
Many users prefer a self-custody or non-custodial wallet where they have complete control over their keys are assets. A self-custody, cold wallet offers users the most security and control and are a good choice for anyone holding a large amount of cryptocurrency.
Key takeaway: A hot custodial wallet is the most convenient solution, while a cold self-custody wallet is the most secure.
Crypto wallets and Web3
As well as payments, crypto wallets can also be used in Web3. Web3 refers to the new decentralized internet. Web2 — what we use today — is mainly made up of platforms run by centralized organizations such as Facebook, Google, or Twitter. These companies often own large swathes of data about each user. Web3 attempts to change this by handing control over data back to the users and providing decentralized alternatives.
Blockchain technology and cryptocurrency are the foundations of this new iteration of the internet. As such, you’ll need a crypto wallet to connect to Web3. Once connected, your crypto wallet functions like an identity in Web3. Any action you take is linked back to your wallet, and your wallet proves ownership of things like NFTs or other digital assets.
You’ll have to connect your wallet to play blockchain games, use dApps (decentralized applications) or use any DeFi services like lending platforms or decentralized exchanges. Every wallet action needs to be signed by your private key.
Although you can use a custodial wallet for some Web3 applications, you won’t be able to interact with the entire spectrum of Web3 — dApps, exchanges, the metaverse, games, DeFi, and more. Also, as your wallet functions as your Web3 identity, it’s crucial that you have full control over both your identity and assets. The best way to connect is by using a self-custody hot wallet.
As each wallet has advantages, some Web3 users opt for a combination — a self-custody cold wallet for the bulk of their assets and a self-custody hot wallet for easy trading and accessing Web3.
Key takeaway: A self-custody hot wallet is used to access Web3 and functions as your Web3 identity.
The issues with Web3 wallets today
While 1 in 5 Americans have owned cryptocurrency, we haven’t quite reached mainstream adoption of Web3. For many, crypto is simply a speculative asset rather than a vital component of the Web3 ecosystem.
For broader Web3 adoption, users need to be able to use crypto wallets easily and securely. However, there are still significant issues plaguing both crypto wallets and the broader crypto landscape that are proving to be hurdles to Web3 expansion.
Difficulty of use
Many users find it quite challenging to use cryptocurrency or interact with Web3. Even setting up a crypto wallet to connect to a Web3 application can be complex. With multiple platforms, wallets, and currencies, all involving their own techniques and intricacies, it’s a steep learning curve for newcomers.
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 letter wrong can result in your assets being sent to a non-existent address. In the best case scenario, the transaction will fail. However, your assets may be “burnt,” i.e., gone forever. That’s why many platforms now use QR codes for wallet addresses 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 users do when getting started is purchase a cryptocurrency, usually with fiat money, on an exchange. However, only some exchanges support 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 transfer it to your hardware wallet.
Also, if you want to convert your crypto back to fiat, you’ll need to use an off-ramp, such as an exchange that will sell you fiat for crypto. This can sometimes take days and involve heavy fees. Many exchanges don’t support this process at all. This means depending on the cryptocurrency you hold, you may have to transfer it across different platforms or trade it for other cryptocurrencies before you can sell it for fiat.
Technical knowledge
You’ll need to have a good grasp on how cryptocurrency works and the underlying tech to navigate the world of crypto safely. Even still, you may make a mistake or fall for a scam and lose all your crypto. This is a huge barrier to Web3 adoption as many users simply don’t want to learn the technical information required.
To use a crypto wallet, you need to understand seed phrases, signing transactions, and how to handle different assets. An error can result in major 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.
While every transaction is linked back to your wallet address (generated from your public key), you’ll need to use a blockchain explorer to trace 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, with a total of $20.6 billion in crypto crime reported last year, and the trend doesn’t appear to be slowing down. The complexity of cryptocurrency, along with a lack of understanding of how to safeguard assets and identify scams, contributes to this problem.
One reason for this is the vulnerability of hot wallets, which are necessary for interacting with Web3 protocols because they store keys online, making them an easy target for hacking. Inadequate security practices, phishing scams, fake airdrops, and flawed smart contracts can all compromise wallet security. In addition, many users store their login information or seed phrases on devices that can be easily accessed by malicious actors.
Despite taking precautions, wallet software vulnerabilities, as seen in the Solana hack last year, can still pose a risk. The prevalence of scams and security issues for crypto holders can create a sense of skepticism around the broader Web3 ecosystem, which 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 simply too complex and inconvenient for many users. So, how can we overcome these obstacles? How do we get to 1 billion Web3 users?
In our upcoming article, we will explore potential solutions to these issues and why we need to make Web3 more accessible, not make the average user more tech-savvy.
What do you see as the barriers to 1 billion Web3 users?
