The emergence of Web3, the decentralised iteration of the internet, has brought forth a plethora of new concepts and technologies, often leaving newcomers feeling overwhelmed. Among these, the realm of digital wallets stands out as a crucial element in this evolving landscape.
Digital wallet usage is booming, with the number of unique users projected to reach 4.4 billion by 2025, up from 2.6 billion in 2020. This growth is mirrored in the transaction volume, which is expected to exceed $10 trillion in 2025, compared to $5.5 trillion in 2020. This growth is driven by the increasing convenience, security, and accessibility digital wallets offer consumers and businesses.
To effectively navigate this space, it's essential to grasp the fundamental distinctions between the wallet types. Let's dive deep into the topic by looking at the evolution of the Web3 digital wallet.
What are "Decentralised Wallets"?
A decentralised wallet, also known as a non-custodial wallet, is a type of cryptocurrency wallet that gives users complete control over their private keys. This means that users are responsible for their security and do not need to trust a third party to keep their funds safe. Decentralised wallets are typically stored on the user's device, such as a computer or smartphone.
A major precursor to the push for decentralisation was the inception of the first cryptocurrency, Bitcoin. The 2008 financial crisis exposed the vulnerabilities inherent in traditional financial systems, characterised by centralisation, opacity, and susceptibility to political influence. This led to the creation of Bitcoin, which marked not just a response to this crisis but rather the culmination of long-held concerns from the digital asset's creator about the inadequacies of conventional financial structures.
The Evolution of Decentralised Wallets
The history of cryptocurrency wallets is intertwined with the development of cryptocurrencies. The first blockchain wallet, Bitcoin-Qt, was developed alongside the Bitcoin protocol by Satoshi Nakamoto in 2009. Bitcoin-Qt was the first software wallet to allow users to store and manage their cryptocurrency. However, software wallets were often difficult to use and offered few features.
In the early 2010s, web-based wallets were introduced. These wallets were easier to use than software wallets and could be accessed from any device with an internet connection. However, web-based wallets were also less secure than software wallets, making them more vulnerable to hacking attacks.
In response to the security concerns surrounding web-based wallets, hardware wallets emerged in the mid-2010s, providing users with a significantly more secure storage solution. These physical devices store users' private keys offline, effectively isolating them from potential online threats.
As the ecosystem grew, so did the demand for more sophisticated and user-friendly wallets.
Hot and Cold Wallets
The term "hot wallet" encompasses software wallets and web-based wallets due to their constant connection to the internet. In contrast, hardware wallets, also known as "cold wallets," are physical devices that store users' private keys offline, offering enhanced security.
The analogy of a traditional wallet and a vault or piggy bank aptly illustrates the distinction between hot and cold wallets. Hot wallets, frequently used for daily transactions and storing small amounts of cryptocurrency, resemble the wallet you carry, readily accessible but potentially vulnerable to theft or loss. On the other hand, cold wallets are akin to a secure vault or piggy bank kept at home, offering superior protection for more extensive cryptocurrency holdings and long-term storage.
Ownership or Security, A Choice We Must Make?
In the early stages of decentralised wallet adoption, non-custodial wallets, designed to provide users complete control over their private keys, were often intricate and challenging to utilise. This complexity hindered accessibility, leading to the emergence of custodial wallets managed by third parties, which gained widespread popularity due to their user-friendliness. However, this shift towards custodial wallets came at some expense of decentralisation, the core tenet of blockchain technology, as users relinquished control of their accounts to centralised entities.
The pursuit of enhanced usability and accessibility in cryptocurrency can compromise the fundamental principles of decentralisation and user ownership. While custodial wallets offer a simplified user experience, they introduce potential risks associated with centralised control and a single point of failure. For instance, during the collapse of LUNA in May 2022 and FTX in November 2022, many users lost access to their custodial wallets and could not withdraw their cryptocurrencies on those platforms. This highlighted the need to balance user-friendliness and the preservation of decentralised principles.
Ownership and Security, No Longer a Trade-Off
In response to these challenges, developers have introduced account abstraction, a concept that simplifies user experience while enhancing security. Portkey is the first account abstraction (AA) wallet on the aelf blockchain to incorporate a decentralised identity (DID) solution.
This innovative approach introduces a social recovery mechanism that empowers users to safeguard their Web3 accounts by leveraging Web2 social accounts, like an email address or a QR code, as the guardians of their Web3 wallets. This integration not only simplifies the account recovery process but also bridges the gap between Web2 and Web3 users, making the transition more seamless and approachable.
Most significantly, it eliminates the need for users to memorise complex seed phrases. Portkey effectively resolves the longstanding dilemma of balancing security and usability, paving the way for a more user-friendly and secure Web3 experience.
You can read more about the role of Portkey Verifiers and how they help realise the social recovery mechanism here.
What The Future Holds
Web3 decentralised wallets are rapidly evolving, transcending their initial role as mere cryptocurrency storage solutions. These versatile tools are poised to empower users, enabling them to seamlessly interact with decentralised applications (dApps), manage digital assets, and access a broad spectrum of financial services. This remarkable transformation brings with it immense promise, igniting excitement about the potential of Web3 to revolutionise how we interact with the digital world.
As these versatile tools continue to evolve, we can anticipate a future where Web3 becomes truly accessible to the masses, transforming the financial landscape and shaping a more decentralised and inclusive digital ecosystem.
*Disclaimer: The information provided on this blog does not constitute investment advice, financial advice, trading advice, or any other form of professional advice. Aelf makes no guarantees or warranties about the accuracy, completeness, or timeliness of the information on this blog. You should not make any investment decisions based solely on the information provided on this blog. You should always consult with a qualified financial or legal advisor before making any investment decisions.
About aelf
aelf, the pioneer Layer 1 blockchain, features modular systems, parallel processing, cloud-native architecture, and multi-sidechain technology for unlimited scalability. Founded in 2017 with its global hub based in Singapore, aelf is the first in the industry to lead Asia in evolving blockchain with state-of-the-art AI integration, transforming blockchain into a smarter and self-evolving ecosystem.
aelf facilitates the building, integrating, and deploying of smart contracts and decentralised apps (dApps) on its Layer 1 blockchain with its native C# software development kit (SDK) and SDKs in other languages, including Java, JS, Python, and Go. aelf’s ecosystem also houses a range of dApps to support a flourishing blockchain network. aelf is committed to fostering innovation within its ecosystem and remains dedicated to driving the development of Web3, blockchain and the adoption of AI technology.
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