A cryptocurrency wallet (crypto wallet) is also known as a crypto wallet or a digital wallet. In the Web3 universe, a wallet not only serves the literal function of maintaining assets, but it is also a required tool to engage in the Web3 world. Academically, a wallet stores private keys, which may be thought of as an account's login and password.

Types of crypto wallets

The fundamentals

The core bedrock of the wallet idea is private keys, public keys, and their associated mechanisms. The link between random numbers, public and private keys, addresses, mnemonic phrases, and KeyStore is shown in the figure below. It is briefly explained below.

Source: Substack

A random number is a number chosen at random inside a computer with 64 to the 16th power options, a number roughly equal to the total number of atoms in the universe.

Private key: a private key is formed by processing a random integer, and a public key is founded on it and is asymmetrically encoded (elliptic algorithm).

Private keys and mnemonics: a modified mnemonic phrase to aid in key memory.
Private Key and KeyStore: KeyStore is a JSON-based file format for storing private keys. KeyStore is used to store private keys in a simple manner while maintaining security.

Public key and address: A public key is generated unilaterally from a private key. After hashing and coding format conversion, a widely encountered address beginning with "0x" is created.

In comparison to a real wallet and account, the public key is the wallet's address, which may be thought of as a bank account. The private key is defined as "debit card number + CVV," and the mnemonic phrase serves the same purpose. As a result, the connection may be stated as "KeyStore + password = private key = debit card number + CVV."

The above is an overview of public and private keys using Ethereum as an example. Despite the fact that the format and standard of non-Evm-compatible L1 chains vary, the fundamental mechanics and procedure remain the same.

Different Types of Wallets

The most important aspect of a wallet is to distinguish between public and private keys. There are several classifications for wallets, however, the most widely recognized categorization is as follows:

Criterion 1: It may be classified as decentralized or centralized, depending on whether the user has access to the private key. Users of decentralized wallets, such as MetaMask, TokenPocket, imToken, and others, keep their own private keys, whereas centralized wallets, also known as escrow wallets, keep the private key in the custody of a third-party centralized organization, such as Binance, Huobi, and other trading platforms.

Criterion 2: The wallet's private key may be classified as cold or hot depending on whether it is linked to the Internet. In a wide sense, cold wallets include "paper wallets" using mnemonics, offline mobile phones, hardware wallets, and so forth. Hot wallets, however, are wallets that connect to the Internet while signing for transactions, such as APP wallets or browser plug-in wallets.

The current landscape

High-Level Overview

The overall number of crypto users is estimated to be approximately 300 million. According to statistica.com, total wallet users worldwide are roughly 85 million as of November 2022, a rise of approximately 6.3% from 80M at the end of 2021, and a decline in growth rate compared to the previous year. With the next cycle expected to begin when the current round of the bear market ends, now is the dark before the morning.

According to research conducted by future market insight, the total revenue of the worldwide crypto wallet market in 2022 is around $1.398 billion, and it is predicted to approach $3.371 billion in the following decade, with a compound annual growth rate of 9.2%, indicating a strong growth tendency. The winners will continue to be winners, with a 35% market share.

In terms of geographical distribution, North America was an early participant and continues to dominate, with a revenue market share of more than 30.0% last year. In North America, there are numerous important companies, including Coinbase Global, Inc., BitGo, and BitPay, among others. PayPal Holdings, Inc. stated in June 2022 that all qualifying PayPal account holders in the United States might send and receive cryptocurrencies on PayPal, which has sped up the expansion of wallet users to some degree. Asia Pacific, notably Mainland China and Hong Kong, is the second fastest expanding regional market. The Asia Pacific area will be critical to blockchain innovation. The area has a huge population with great financial awareness and technological interests, which drives regional innovation in crypto wallets.

Business Model

Current crypto wallet business models are changing in tandem with the sector. Initially, most wallets (hot wallets) acted primarily as a private key storage and management tool, i.e., to store money. Until several on-chain applications were released in 2020, the primary business strategy was collecting transaction fees, which is a pretty weak income source.

As demand for Defi and cross-chain increased, crypto wallets continued to introduce different on-chain services like built-in cross-chain, staking, flash pay, and so on. Some have developed financial items like mining, asset management, and information subscriptions. In an effort to provide exchange services using the wallet as the gateway, several firms implemented exchanges as a built-in feature in the form of H5.

Following an examination of the majority of wallets now available on the market, ranging from typical hot wallets to custodial wallets to hardware wallets.

Market leaders

According to publicly accessible data, the top wallets are largely large corporations, either as internal products or as equity investments. One type is direct development by large corporations, such as MetaMask, Coinbase Wallet, and Facebook wallet, and the other type is investment received from large corporations, such as Trust Wallet with Binance's invested capital, C98, and so on.

metamask market leader

Source: The generalist

Overall, Meatmask, a massive entry wallet, has the largest income (at $200M), followed by Coinan wallets, with the Coin98 wallet, which concentrates on aggregated transactions and DEFI and has a market value of $2.1B. Among the fastest-growing wallets, imToken and TokenPocket are the most well-known, with imToken being the most popular among the Chinese community.

Challenges to crypto web3 wallets

The overall development of the wallet sector has been on a fast track throughout the current market cycle (which began in 2020 and continues to the present), thanks to a number of innovations that have added momentum. Some examples of these innovations include DeFi Summer in 2020 and the blossoming of L1 chains in 2021. On the other hand, user-friendliness, security, privacy, and regulation have consistently been the obstacles along the road.

User-friendliness

Wallets are a more complex financial solution than centralized banking systems. Wallets entail every step of interaction to be done by users themselves, which stipulates some basic understanding of blockchain. Users do not need to understand the entire logic as long as exchanges or centralized WM platforms provide convenient services; however, users do need to understand the blockchain in order to use wallets. As soon as any difficulty is experienced by users on authentication or interaction, there will be no customer care team from the wallet team. This makes it difficult for new users who do not have a specific degree of technical background to join the Web3 world.

The majority of wallet brands have poor user interaction, and there is much opportunity for improvement. For example, more user-friendly interactive anti-phishing (security) notifications might be introduced on both the plug-in side and mobile side of the wallet. More practical settings and user-friendly NFT-Token integration tools may be introduced, and Dapp environment customizations that are relevant to a wider range of use cases can be built. In addition to providing an interactive experience, the functions, login, and user interface of the wallet are unique in comparison to those of Web2 apps. As a result of the disadvantages described above, a significant number of users, both new and current, ultimately decide to go back to using conventional centralized wallets. Centralized wallets may be susceptible to human manipulations, but they are easy to use, and the interface is attractive to users. If decentralized wallets want to attract more users, they will need to improve their user-friendliness.

Privacy and governmental oversight

Discussions on privacy and compliance are unavoidable in Web 3, and the issues of data privacy and compliance continue to worry wallets. Recently, the unlawful gathering of MetaMask users' private information has finally pushed the privacy problem to the forefront of discussion. According to the most recent version of Alchemy's privacy disclaimer, which was published in October, IP addresses, user settings, MAC addresses, browser or device id, location information, and information about internet service providers are all examples of data that may be automatically collected or obtained by a third party. On November 23, ConsenSys, the company that owns both MetaMask and Infura, updated its privacy policy to state that the user's corresponding IP address and ETH address will be collected when the user opens a transaction using Infura as the default RPC in MetaMask. This lit the fuse for more aggressive talks on the invasion of privacy.

Another debate on decentralization has been sparked as a result of the topic at hand. After all, one of the most attractive aspects of the Web3 narrative is the fact that users are able to take complete control of their own data, which shakes up the status quo in which the majority of platforms are in possession of user data. MetaMask, which is now the most popular wallet option, went against the trend of the majority of Web3 users. Nevertheless, decentralization of data always results in a lack of regulation, which makes it impossible for any third parties or governmental organizations to intervene in situations when conflicts or theft of assets are experienced.

Wallets are essentially the Web3 ecosystem's largest traffic portal; however, with the current unsteady business model, wallets are faced with insurmountable problems with compliance that wallet service providers, which can provide the exchange of digital assets, should comply with the regulations and the nation's laws in which the services are offered. Wallets are primarily the Web3 ecosystem's largest traffic portal.

Concerning Safety

Wallets often have such a high degree of security that there is no need for a third party to be involved, and wallet users have full control over their assets while they are stored in the wallet. When compared to users of centralized wallets, users of decentralized wallets do not need to be concerned about the misuse or abuse of authentication on assets by financial institutions like banks or exchanges. In addition, decentralized wallets have less of reliance on centralized institutions, which means they are less likely to be vulnerable to assaults that target a single point of failure. However, the majority of wallet users today are responsible for maintaining both their private keys and their assets on their own, and this makes the wallet more susceptible to dangers like social engineering assaults and viruses.

The most significant threats to consumers' data security continue to come from anti-social engineering attacks and the safekeeping of private keys. Hackers might find fantastic prospects for their work when there is a lack of understanding and awareness about security, as well as negligent operational behaviors. Wallet developers have a number of challenges, one of which is the security of the wallet's underlying infrastructure. In addition to the code for the open-source wallet, developers are required to do in-depth audits on the safety of the codes for each major update, as well as the storage and administration of private keys.

Outlook for crypto wallets

As a traffic portal for Web3, wallets have become an essential piece of equipment for new users looking to enter the cryptocurrency world. This is because wallets are one of the most critical blockchain infrastructures. The Dapp ecosystem of wallets has experienced significant growth during the current market cycle (2020-present). The recent proliferation of firms in the wallet industry competes with one another in a variety of different ways, such as by offering EOA wallets, smart contract wallets, and MPC multi-sig wallets, amongst other variants. If one were to take a look into the future, one would see that the significance of wallets as portals will most likely outweigh all trading platforms and become the traffic hub for Web3. Additionally, rapid growth may be first spotted in identity portals, payment portals, non-self-custodial wallets, and multi-chain wallets. Wallets are digital storage devices that store digital assets.

As a Form of Identification in Order to Access Web3

The current version of the internet, known as Web2, is centralized and is driven by blockchain technology. Web3 is a decentralized alternative to Web2. Not only does Web3 ensure that users have fair access to the internet, but users will also have control over their own data and will be able to create their own websites and applications; transactions can be initiated at will by cryptographic applications without the administrator rights of a centralized company, thereby bypassing the centralized power of Web2. Web3 is a more decentralized alternative to Web2, which allows users to access the internet. Web3 also ensures that users have fair access to the internet. The distributed structure of Web3 enables it to provide users with a wide range of benefits and limitless opportunities. The worldwide market for Web 3.0 blockchain technology is projected to reach $33.53 billion by the year 2030, representing a compound growth rate of 44.9% between the years 2022 and 2030, as stated in the GrandView research.

As opposed to Web2, Web3 does not need users to log in using a wide range of different credentials. Additionally, decentralized wallets are compatible with all application ecosystems inside Web3, which bestows on the wallet the most dominating role as a traffic gateway within Web3. In July 2022, at the celebration of MetaMask's sixth anniversary, the company announced that the overall number of MetaMask users had surpassed 80 million, with more than 30 million using the platform on a monthly basis. Other wallets that provided user acquisition statistics, such as Trust and TokenPocket, have attracted users numbering over 10 million. This makes them, without a doubt, the most prominent traffic entrance in the cryptocurrency market since they cover practically all users of popular cryptocurrencies. It is anticipated that Wallet will accomplish the functions of off-chain KYC, on-chain user profile, and on-chain credit assessment with the vast user base and that it will finally realize on-chain rules and compliance.

Not only will future cryptocurrency wallets serve as identification portals for accessing any digital assets or virtual assets in the Metaverse (land, real estate, game props, and a great number of other NFTs), but they will also enhance the ability to engage in projects that are suitable for on-chain indemnifications. [Cryptocurrency] wallets will serve as ID portals for accessing any digital assets or virtual assets in the Metaverse.

As a Gateway for Financial Transactions

Retail bitcoin payments are still in the very early stage at the moment owing to the imperfect global legal framework as well as poor knowledge of cryptocurrency among merchants and other factors. On the other hand, as bitcoin slowly gains popularity and the legal environment steadily improves, the number of project creators and users who make payments with cryptocurrencies skyrockets. Wallets, in their capacity as Web3 portals, have the ability to integrate all crypto payment initiatives, so giving rise to a new generation of the Web3 payment ecosystem. Through the use of the wallet, one is able to carry out all important physical and online activities, including shopping, ordering meals, taking a taxi, traveling, and making other types of P2P payments.

Non-self-custodial wallets

MPC wallets and smart contract wallets are the two primary categories of wallets that fall under the category of non-self-custodial wallets. MPC wallets are custodial wallets that lack mnemonics. MPC (Multi-Party Computation) wallets are an improved kind of multi-sig wallets that provide the additional layer of authentication provided by the performance of multi-party computation off-chain on private keys. Rather than being built on EOA, smart contract wallets use the underlying technology of smart contracts. When compared to conventional wallets, which require users to store their private keys, non-self-custodial wallets do not include traditional private key production and storage. As a result, the entry barrier for Web2 users to access the Web3 space is significantly lowered.

Source: 1kxnetwork

Logging into Web3 may be a less-than-ideal experience for first-time users, and getting started may even be challenging in certain cases. Before a user can securely log in, traditional EOA wallets call for a number of steps that are both difficult and time-consuming. These steps include wallet development, private key maintenance, and the storage of mnemonics. The new generation of non-self-custodial wallets without mnemonics is making it easier for Web2 users to access their accounts by streamlining the login procedure and minimizing the level of complexity involved. Non-self-custodial wallets have the potential to become the next growth point in the not-too-distant future by facilitating the transition of Web2 users into Web3 users.

Multiple Chains Wallets

It is still unable to fulfill the present demand for multi-chain and cross-chain despite the fact that the current competitive environment of multi-chain has been shaped, and each L1 chain has built its own wallet for the purpose of ecological growth. In addition, the management of private keys on a multi-chain will be problematic if there is chaos; however, only one identity is required to create a multi-chain wallet in the absence of other tools that manage private keys, means that only one identity is required to manage assets on multiple chains. Users that make use of the wallet ecosystem may simultaneously cross chains and redeem assets on various chains. This functionality was made possible by the wallet ecosystem.

As was just indicated, multi-chain wallets have already covered the majority of mobile and desktop wallets, in addition to hardware wallets. Plug-in wallets are presently seeing slower growth than other types of wallets, particularly EVM-compatible multi-chain wallets, Polkadot's Polkadot.js cross-chain wallet, and Cosmos' multi-chain wallet. The desire for interoperability between many chains and numerous smart contracts is predicted to expand in the future, which will likely result in an increase in the level of competition among multi-chain wallets.

Disclaimer:
This article is intended for and only to be used for reference purposes only. No such information provided constitutes advice or a recommendation that any investment or trading strategy is suitable for any specific name.

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