By: Vargason, CGV Research Fellow

Introduction

As we enter the Web3 world, let’s start by asking ourselves a question: Do we need a crypto wallet to trade and keep our crypto assets? The answer is yes. Crypto wallets are essential for users in terms of market transactions and asset custody. With the development of DeFi, GameFi, and NFT, the use of crypto wallets has become a must-have skill. As a digital asset circulation carrier and an essential medium for reaching users, the crypto wallet is no longer an independent product but the gateway to the Web3 ecosystem.

In recent years, the number of tokens lost on centralized exchanges has increased. The CeFi platform, while generating significant revenues, is unable to protect users’ assets, making users prefer to protect their assets through crypto wallets. If you want to explore the Web3 world, the first thing you need to do is to understand and use crypto wallets. In this article, CGV introduces you the crypto wallet, its ecological development, and the role it plays in the Web3 world.

1. What is the crypto wallet?

1.1 The development path of the crypto wallet

Initially, crypto wallets were only used for depositing crypto assets and occasional transfers. Crypto wallets were more of an option for users with numerous assets, and most of users preferred to deposit their assets on non-custodial centralized exchanges.

Due to the frequent security incidents on centralized platforms and the threat to users’ crypto assets, users prefer to protect their assets through crypto wallets. With the development of DeFi and NFT, users have begun to use crypto wallets to interact with on-chain protocols. In addition to allowing users to interact with various protocols, crypto wallets have introduced exchange functions, greatly facilitating users’ participation in Web3.

1.2 Private keys are the “Achilles’ heel” of crypto wallets

Common crypto wallets are divided into three categories, namely software wallets, hardware wallets, and paper wallets, which can also be classified as hot or cold wallets depending on their working mechanism. A crypto wallet is mainly composed of a wallet account, a public key account, and a blockchain network, among which the most important are public keys, private keys, and mnemonics.

Crypto wallets do not deposit digital assets, they are just a tool that provide what’s needed to interact with the blockchain. These wallets can generate indispensable information to support transactions that send and receive cryptocurrencies via the blockchain. Such information contains one or more pairs of public and private keys, and the address essentially represents a specific “location” on the blockchain used to receive the cryptocurrency. Therefore, you can disclose the public key address to others to receive funds. However, you cannot reveal to anyone your private key, which allows you to access the cryptocurrency in your wallet, regardless of which wallet you use. The private key is the “Achilles’ heel” of a crypto wallet and is the most important part of your crypto wallet that you need to protect.

2. Why is wallet the gateway to the Web3 world?

2.1 The crypto wallet has a promising future

How to understand the relationship between crypto wallets and Web3? First of all, we should realize that the layout of crypto wallets is the starting point for building a value network, a vital traffic entry for infrastructure in the blockchain era. It is also the first step to participating in digital asset transactions and related asset activities.

Paypal reported a 40% increase in new crypto wallet users in revenue in Q4 2021 and predicted that crypto services would make more progress and double in 2022. This year’s frequent market manias have confirmed this. Recently, Robinhood officially announced the launch of a crypto wallet at the Bitcoin Conference 2022 in Miami, and Opera launched an Internet browser and a crypto wallet with built-in Web3 integration. Besides, Phantom won $109 million in equity, and WalletConnect completed the A round of $ 11 million, etc. As an important entry for Web3 projects, the market expectations of crypto wallets are very impressive.

Wallet is the traffic entrance of DeFi and an indispensable part of the crypto ecosystem. Wallets such as Metamesk and Bitkeep are crypto wallets that stand out in the wave of DFI. For example, Solana attracted users with its public chain design but lacked an easy-to-use wallet software. After Solana released the Phantom wallet, it attracted investment from industry investors including A16Z and Coinbase, and gained a large market share.

2.2 The path to digital asset management platforms for crypto wallets

With the increase in crypto applications and the expansion of the crypto market scale, crypto wallets will gradually become a management platform that includes a variety of digital assets, from the single function of depositing and protecting assets, to generate more service products, such as wallet wealth management products, manageable ID documents, one-stop aggregated asset management platforms for daily payment, memorial card, etc. In this way, users can further experience the advantages of decentralized wallets, which will become important product forms and presentation methods in Web3.

CGV deems that the more elements derived from crypto wallets, the more favorable it is to promote the progress of Web3. It may be a container for assets on our chain, and a collection of identities when we act in the Web3 world. A large number of daily behaviours will be related to the blockchain wallet, and users can even browse Web3 directly using crypto wallets. Crypto wallets are crucial to driving the industry. As the number of users grows, so does the demand for wallets. Crypto wallets are evolving into daily digital wallets, investment/deposits centers, digital identities, Web3 social, chain Bridges, etc.

2.3 Crypto wallets provide a safe haven for the Web 3 world

As wallets become more widely used, there are more incidents of malicious clusters targeting Web3-enabled wallets such as Metamask. Confiant, a security agency, has uncovered a cluster of malicious activities involving a distributed wallet that allows hackers to steal private seeds and access users’ funds through backflushed fake wallets.

Crypto wallet, which provides high performance, high security, and low threshold asset management services and extended platform for global users and developers, will be the next focus. There is no clear answer as to which crypto wallet should be used. If you trade frequently, a web wallet allows you to quickly access your funds and conduct transactions with ease. Let’s take a look at several wallets that are frequently used by users in the current market:

3. Ecological analysis of crypto wallets

To make it easier for you to understand crypto wallets, CGV analyses the current wallet market by the way it works, and divides crypto wallets into “hot wallets” and “cold wallets”.

Hot wallets refer to wallets that are connected to the Internet in any way. On the contrary, cold wallets are completely disconnected from the Internet. They use physical media to store keys offline, which can effectively resist online attacks by hackers. Therefore, cold wallets are more secure in “depositing” tokens.

3.1 Hot wallet ecology

1）BitKeep

BitKeep is a decentralized multi-chain digital asset wallet. The wallet team has a unique understanding of the crypto industry and wallets. They have integrated Wallet, Swap, NFTMarket, DeFi, and DApps to build the gateway to the Web3 ecosystem. Public data shows that BitKeep wallet has become one of the more popular crypto wallets in Asia in terms of user base, revenue size, and valuation ranking.

CGV notes that the problem for new users entering the Web3 world is that the learning threshold is too high, especially when it comes to mainnet selection for wallets, asset trading, and other issues. To lower the threshold for users, BitKeep has introduced several distinctive features:

• Buy any asset with any digital asset. BitKeep realizes quick exchange on DEXs such as Uniswap, Sushiswap, PancakeSwap, etc., and one-click cross-chain exchange for any asset of Ethereum, BSC, HECO, Polygon, Avax, Fantom, OEC, TRX, Solana.
• Save gas fees. Users do not have to deposit the corresponding mainnet tokens in advance as gas fees when transferring or trading via the BitKeep wallet, and can directly use the existing tokens to exchange, which saves the extra costs incurred by two exchanges, and simplifies the steps of exchanging mainnet tokens.
• Buy NFTs easily. BitKeep NFT Market is an aggregated NFT market with cross-platform search capabilities, as well as support for receiving and transferring tokens and bulk transfers of tokens, allowing users to purchase NFTs using any token on the same chain.

CGV notices that capital institutions also favor BitKeep. On May 18, 2022, BitKeep raised $15 million in financing, with a valuation of $100 million. KuCoin Ventures, A&T Capital, Matrixport, Bixin Capital, Peak Capital, YM Capital, and other first-tier institutions have participated in the investment.

2）MetaMesk

MetaMask is an easy-to-use crypto wallet supporting iOS/Android and major browsers. It is the wallet most widely supported by various browser in the crypto economy and has become the standard for all decentralized applications (Dapps). For users, MetaMask is an “electronic bank account” that can manage crypto assets, and users can use it for online and offline consumption, transfers, mortgage loans and other operations. It is also a “passport” to the decentralized network under the Web3 concept, through which users can connect to most platforms in the blockchain field.

In terms of security, it is different from the mode in which the keys are stored in the central server, which isolates the storage environment from the site environment. With respect to connectivity, the interface between Ethereum and various DeFi platforms is built. That is, it is possible to participate in construction without synchronizing complete nodes. MetaMask is undoubtedly the most likely to become the Google of the Web3 era with its initial business model, as well as its leading monthly active users and funding scale.

3）Gnosis

Gnosis Safe is a smart contract wallet running on Ethereum that requires the minimum required amount of keys of the total number of keys that is needed to sign the transaction (M-of-N). For example, if your business has 3 key stakeholders, you can set your wallet to require approval from all of them before sending a transaction request, which ensures that no one can steal the funds.

Over the past 4 years, the development of multi-signature wallet Gnosis Safe has become a critical infrastructure for Web3, protecting digital assets for DAOs, institutions, projects and individuals. Gnosis Safe users manage over $64 billion worth of assets on the Ethereum mainnet alone.

4）CoinbaseWallet

CoinbaseWallet is a beginner-friendly secure wallet with low transaction fees and ease of use. With CoinbaseWallet, you can use it not just as a tool to access cryptocurrencies, but as a foothold to explore decentralized networks. With CoinbaseWallet, you can manage ETH and all your ECR-20 currencies. As it supports BTC, BCH and LTC, you can use it to receive airdrops and cryptocurrencies, buy and store cryptocurrencies, and trade with anyone anywhere with no fees.

3.2 Hard wallet ecology

1）Ledger

Ledger is a hardware wallet with moderate ease of use and high security. Ledger, the maker of Bitcoin hardware wallets, is one of the technology leaders in digital currency security, providing consumers and businesses with trusted hardware.

Ledger is a smartcard-based Bitcoin hardware wallet that offers the highest level of protection with technology-leading availability and manipulation. Ledger hardware wallet is a multi-functional wallet, a hardware device that securely stores private keys. When viewing the wallet and sending transaction requests, the hardware wallet needs to be used with a software wallet. It also supports the secure storage of Bitcoin, Ethereum and platform tokens, Zcash, etc. Its projects have offered open source resources on Github.

2）Trezor

Trezor is a hardware wallet with moderate ease of use and high security. Trezor is a high-tech data encryption memory. This brand is recognized as the earliest and most discreet and secure crypto memory. It is a reliable brand that has been verified by global digital currency players, with excellent company records and rich software support. Trezor’s security model is based on the principle of zero trust, which assumes that any part of the security system can be successfully attacked.

Summary

There is no clear answer as to which crypto wallet should be used. CGV suggests that if you trade frequently, web wallet can allow you to quickly access funds and conduct transactions conveniently. If you hold a large number of cryptocurrencies for a long time and do not intend to sell them, then cold wallet is an ideal option. These wallets are not connected to the Internet and are more secure against online phishing attacks or scams. Therefore, before choosing the ideal wallet, you should first figure out the technology of the wallet. Practical protection tools should be considered when using cryptocurrency trading platforms.

CGV deems that with the continuous prosperity of the Web3 ecosystem, it will be a huge opportunity for crypto wallets to integrate this ecosystem and enrich our assets.

About Cryptogram Venture (CGV) : Cryptogram Venture (CGV) is a Japan-based research and investment institution engaged in crypto. With the business philosophy of “research-driven investment”, it has participated in early investments in FTX, Republic, CasperLabs, AlchemyPay, Graph, Bitkeep, Pocket, and Powerpool, as well as the Japanese government-regulated yen stablecoin JPYW, etc. Meanwhile, CGV FoF is the limited partner of Huobi venture, Rocktree capital, Kirin fund, etc. Currently, CGV has branches in Singapore, Canada, and China.