Examining the three pillars of a crypto wallet and its widening usage spectrum.
A practical method in quantifying a wallet’s elasticity.
Introduction
The premise of a wallet has significantly changed over the past decade since the first generated genesis block on bitcoin. Even the word itself has evolved from being addressed as a “bitcoin wallet” to a more umbrella understanding of a “crypto wallet” or just “wallet” itself.
As a tangent, a more accurate term for a wallet, as penned by Andreas Antonopolous, should be “keychain” instead. In the sense that your misinterpreted “wallet” essentially is only a private key, or a set of private keys. Everything else that you own is on the ledger.
Where once wallets were just siloed in holding ownership of a set of private and public keys (public address base58 formats weren’t even introduced during the first year of bitcoin), wallets now have spawned a litany of functionality such as the ability to buy crypto, swap tokens, hold NFTs, interact with DeFi dApps for staking, and much more.
Obviously wallets on exchanges have all these functionalities provided as well but for the purpose of this piece, we won’t categorize wallets on exchanges as true wallets. And in fact, they really aren’t. But for those who still hold a majority of assets on exchanges, it well reflects the type of crypto user you are amongst a widening spectrum of users. This can be mapped out to get a gauge and ultimately form a benchmark on what wallet is most appropriate to a certain type of user.
The entirety of this piece will attempt to outline some broad methodologies to use in forming certain benchmarks of crypto wallets and its targeted users by certain characteristics. This is by no means exhaustive or exclusive, but rather a working exercise on examining certain unrealized characteristics to one of the more altruistic and overlooked, but important areas of the bitcoin/crypto space. There are tons of mathematical models that attempt to formulate tokenomics of different networks and measure network activity, but there aren’t any models to form some type of benchmark in the crypto wallet segment.
Perhaps this could be a starting point.
Categorizing crypto users by wallet usage behavior
Let’s look at one extreme end of a proposed wallet usage spectrum. We’ll coin this the “Highly Private” wallet users. They tend to treat their wallet usage in a very anonymous manner. Their tendencies include:
- Doesn’t reuse addresses
- Limits on-chain transactions via layer 2 solutions
- Uses mixing services to obfuscate deterministic trails
- Prefers to leave private keys offline on cold storage solutions
If it doesn’t come obvious enough, the above behaviors tend to be from bitcoiners as they have always upheld the ethos of privacy and anonymity more so than any other decentralized networks. These are the more liberatarian users who could be considered “in it for the tech” and side closely with the cypherpunk movements.
Let’s move to the opposite end of the wallet usage spectrum and we’ll coin this end “Highly Open” wallet users. They tend to treat their wallets as their VIP ticket to the luxe event. Their tendencies include:
- Freely gives out address for potential airdrops and NFT mint events
- Hands over wallet history to potential employers as a way to gauge trading performance
- Publicizes blockchain domain names, such as ENS, over social media channels
- Feels comfortable with leaving private keys online on hot wallets or centralized exchanges
- Signs transactions and proofs needed for token or NFT-gated Discord communities
This spectrum tends to categorize DeFi users and NFT flippers as these sectors demand constant engagement. These sectors are also highly classified as the more money driven arena where clout and “degen scores” tend to win favorably within a community. These are the more greed-driven users who could be considered “in it for the lambos” and have a constant tendency to ask “wen moon?”. News of online hacks and phishing attacks on centralized third parties do not really faze them.
With the characteristics described above, we can map out a simple wallet usage spectrum based on a user’s diversification in types of wallets. With the far most left side indicating Highly Private users and the far most right side indicating Highly Open users. A color scheme of blue and red representing cold and hot, respectively, for visualization purposes. More explanation on the W(e) number values is in the later part of this piece.
If there’s ever any indicator of the type of crypto user one could possibly be, it starts by examining their own emphasis on what a wallet should encapsulate for them. And the growing divide between both spectrums has greatly diverged over the years, further pitting both sides farther away and away from agreement. The low/high time preference on both sides is a measure of transfer speed pertaining to transactions.
In once was a common understanding of the umbrella term “crypto” has now been shunned away by bitcoiners to the point where “crypto” and “bitcoin” are two entirely separate industries. Bitcoiners don’t even acknowledge the hot buzzwords such as Web3 or blockchain. Bitcoin-only wallets are the preferred choice rather than the general crypto wallet, which supports multi-currencies.
A wallet, the infrastructure for any crypto user and the fundamental user foundation, has certain categories that can more accurately describe the user rather than categorizing from the top down. Trying to ascertain the behavior of a user based on network usage, activity usage, or transaction usage can actually skew or rather miss certain traits that may seem like outliers.
Wallets, which are one of the least sexiest parts of the whole industry, are one of the most, if not the most, important part of the whole industry. User activity, network effects, DAO communities, and etc. are all concentric around the wallet.
The 3-axis categorization (Pillars) of a crypto wallet
All wallets can essentially be subjectively measured in terms of various characteristics and categories. For exercise sake, we’ll attempt to group a select choice of wallets based on certain characteristics and group them accordingly. We can start with the most obvious characteristic of security. Again, this will be a very subjective exercise and not meant to come up with accurate degrees of certainty, but more of a baseline in terms of wallet categorical quadrants we can think of. As Andreas Antonopolous once said:
“different groups of people will have different risk models with different tolerance for technical complexity. If what you’re trying to do with security is more technically complex than your level of skill, you introduce a very serious risk that you lose your crypto. There is no gold standard of security that applies for everyone.”
The three characteristics (3 pillars of a crypto wallet) we will use to build our categorical model are listed below:
- Security. Although there is no gold standard of security, we can use the characteristics as “hot” and “cold” as a bifurcated starting point. Then you could also use any instances of historical hacks or code bugs as a next set of reference for measurement.
- Agility. This refers to the speed of being able to use the wallet. Speed in terms of set-up, creating and completing transaction process, and simplicity in accessibility. Wallets have their own friction and pain points during the process of a simple transaction. The more friction there is, i.e. plug in, offline tx signing, etc., the slower the overall experience for the user, plus a potential higher susceptibility in making mistakes.
- Complexity. This could more or less be similar to Agility but there are nuances. A wallet may seem complex at face value for a novice, which would entail speed and agility to decrease. But for a more sophisticated user, that same wallet may not seem complex at all but would still have a low ranking when it comes to agility.
Security has been chosen to be placed on the y-axis, Agility being placed on the x-axis, and Complexity being placed on the z-axis. A fourth axis of functionality could be possible but for simplicity’s sake, it’s easier to visualize a 3-axis chart rather than a convoluted matrix chart. Perhaps a more advanced categorization model can be made for a later piece. For now, we are assuming wallet usage measurement in terms of HODL’ing and sending/receiving basic vanilla transactions. But feel free to make suggestions on how to incorporate a 4th axis of functionality into the framework.
The wallet brands chosen below are completely arbitrary in some instances, but for the most part each representing a certain category to some extent. Categorical fit and placement was also subjective but could be quantified as you will see later in the next section.
As you can see, the z-axis of complexity and x-axis of agility can more or less be linear in relation. Which makes sense: a wallet setup that is more complex should, on average, be less agile for the average user. So in a sense if we want to ignore the z-axis of complexity and replace it with functionality, we could, but this could be for a later analysis piece. Or just use the x-axis and y-axis only for simplicity. Again, this could be considered for a follow up piece.
Quantifying a wallet’s elasticity from the eyes of its user
Ultimately, a wallet can also just be simply measured using the x-axis of agility and the y-axis of security in a ratio as below. A ratio of above 1 would imply a wallet that has relatively high agility, whereas a wallet with a ratio below 1 would imply a wallet that has relatively high security and relatively low agility.
In the image in the first section, we were introduced to a W(e) value, which stands for a proposed quantitative value of a wallet’s elasticity degree. For this case, let the term “elasticity” refer to the wallet’s overall flexibility or tensility to one’s usage. An overarching statement but think of it as the wallet’s ability to respond in an efficient manner. A wallet’s multifunctional speed often sacrifices its raw private key security, and vice versa. We can attempt to quantitatively measure this in a simple 1:1 ratio.
1. The measurement of the x-axis, which corresponds to agility, would be either a subjective or objective measurement. Subjective in the sense where an average crypto user rates the time it would take to activate the device and complete a transaction initiation from a scale of 1 to 10. An Objective measurement could also be conducted through the actual timing of an average crypto user activating a particular crypto wallet and then completing a transaction initiation. The time measurements could be conducted with at least a dozen of crypto wallets with a sample size of “average” crypto users of 500 or so. A normal distribution with the standard deviation to be used in calibrating a score on a scale of 1 to 10.
2. The measurement of the y-axis variable, which corresponds to security, would be mainly a subjective measurement based on a ranking scale derived from a multitude of sample sizes. These sample sizes could be categorized in clusters of security experts, expert crypto users, and average crypto users.
Price elasticity, which is a common metric in economics, measures the degree of change in quantity demanded per degree of change in price. Wallet elasticity, in this sense, would measure the degree of change in agility based on the degree of change in actual raw security of the private key. A W(e) value of over 1 would indicate the wallet’s elasticity is highly agile and less than 1 indicating the wallet’s elasticity is highly secure.
The degree of wallet flexibility would be theoretically capped between the bounds of 0 and 10. With 0 indicating a user that is Highly Private with a cold wallet extreme wallet diversification and with 10 indicating a user that is Highly Open with a hot wallet extreme wallet diversification. These values can essentially be plotted along on the wallet diversification spectrum from above.
Conclusion
As wallets continue to evolve, quantitative measures can also evolve to better position wallets in areas of different needs for different users. By better understanding certain user needs and demands, a wallet can pivot along the spectrum of different characteristics to improve on. Agility, Security, Complexity, and Functionality are all strong foundational characteristics wallets need to be mindful of. A fifth axis can also be incorporated representing the characteristic of durability, or longevity. Wallets essentially are the bridge between the digital and the physical. And as this digital trend continues to uproot our lives, “there is no greater calling than safeguarding the lanes of two-way travel between the physical and digital world”. There will always be a physical initial touch and process when interacting with our digital assets.
Having certain quantitative measures as standard benchmarks when comparing across the market of crypto wallets, new and existing users can have a higher maturity when conducting their own due diligence on which wallet best suits their needs. Although there are already a few standout market leaders in the wallet space, both tails of the distribution hosts a hoard of solid emerging new wallet options that are slowly aiming to fulfill needs that haven’t been covered. This progression will also eventually give us a better picture of a more efficient equilibrium between agility and security that we can use as a gauge of our crypto activity.
