Digital wallets are software constructs that mimic physical wallets and provide the functionality to store, use and categorize payment instruments. The journey of the digital wallet started with payments and transformed into other forms of stubs like digital passports, tickets, and boarding passes. However, crypto wallets are trying to redefine the digital wallet landscape as something more than the secure storage of payment and crypto instruments.
With more than 100 and growing crypto wallets, this sector is becoming overcrowded in the cryptosphere, adding to the complexity of an already fragmented blockchain and digital asset space. As I study this area and try to understand the complexities of new blockchains, layer-one protocols, decentralized finance (DeFi) and non-fungible token (NFT) projects emerging with exponential growth, I think crypto wallets will be the next Battlefront being at war will eventually cool off from Layer-One protocols. The core issues of scalability, security, and speed of transaction processing and the layer 2 protocol consolidate and change as the superiority of layer one aims at processing efficiency and security. Crypto wallets will not only provide a way to win wallet shares, but will also represent the battle for mind share.
Related: This time it’s different: When DeFi meets NFTs
Nowadays most crypto wallets offer software constructs which for the most part provide the following services on a very simple level:
- Store public and private keys;
- Interact with different Layer One blockchains;
- Send and receive crypto assets and cryptocurrencies;
- Monitor the balance.
Crypto wallets should be more than just better key management
In my opinion, we need to broaden the definition of a crypto wallet and see it as a way to participate in the crypto economy. It can provide the wallet owner with a choice to join a regulated network that emphasizes digital identity and requires validation by third parties, such as Know Your Customer.
Related: Authorities are trying to close the gap in non-hosted wallets
At the same time, it can also be part of emerging networks that preserve anonymity and emphasize the confidentiality and privacy of the participants. This selection framework will enable the discussion of regulation and compliance and will shift to the network and activities as opposed to individuals, just like the selection frameworks that our current wallets offer on an analogue level.
A wallet would be modeled as an extension of our identity constructs within the current identity frameworks issued by authoritative agents (such as a government-issued ID) to an evolving digital identity that encompasses our (credit) history, reputation and incentives represents history. Not only would it promote transparency and good behavior, it would also protect privacy. The concept of identity is important as digital identity (which is tied to every wallet and network today) is a fundamental technology to ensure the trade, trust and ownership of digital assets.
Related: Privacy concerns are growing and blockchain is the answer
A wallet’s ability to control participation and the selection frame that allows users to select wallet attributes allows for flexible design and encourages participation. These wallets are traditionally containers of all types of asset classes such as NFTs, DeFi assets, cryptocurrencies and crypto assets. In addition, they also contain existing payment instruments, value accounts, and other forms of digital stubs that enable participation and inclusion through a registration process for existing financial services platforms and both current and future blockchain and crypto-driven networks. Registration could either involve sharing crypto primitives, such as a public key, or providing the wallet identified for traditional centralized platforms.
In the Web 3.0 era
The question we should ask ourselves is how can we design a crypto wallet that can be a conduit to a new decentralized Internet (Web 3.0) and the entire cryptosphere, replacing and reforming our relationship with current services and institutions.
The new design of these wallets should enable the engagement in (crypto) economic activities – whether Web 3.0 or otherwise – for example the storage of files, the safekeeping of NFT and the simple storage of data or instruments that a wallet as an account for everyone let our earnings serve, and commitments in the cryptosphere and existing institutions.
Related: How NFTs, DeFi and Web 3.0 are intertwined
While website payment standards and web payments at the World Wide Web Consortium (W3C) aim to define technology standards. MetaMask, while limited to Ethereum (Layer-One Protocol), provides an impressive glimpse into a neat way to provide browser and wallet integration known as a Browlet. MetaMask has been doing this since the beginning of 2016 and is now defining institutional access with MetaMask Institutional (MMI). Currently, wallet technology design focuses on layer-one or platform-specific wallets and the key management necessary for the durability and growth of Web 3.0. However, with a model like MetaMask’s, wallet provisioning can be a new business model.
Institutional Context and Considerations – An Institutional Wallet?
The exponential growth of digital assets and related ecosystems like decentralized finance, native crypto assets, and NFTs has not only led to massive innovation in technology and financial products, but has drawn the attention of many innovators, technologists, investors and more recently. institutional investors.
Related: Institutions appear optimistic about crypto despite record bitcoin outflows
While blockchain, as a distributed ledger infrastructure and transaction processing system, aims at efficiency for dematerialized assets (assets in a ledger entry), the emergence of crypto and digital assets is changing the landscape and the participants and is essentially changing the market infrastructure. Thus, digital (and crypto) assets become unique and differentiated, not only because of the inherent properties of the assets, but also because of the resulting changes in the market infrastructure for digital (crypto) assets. Digital (crypto) assets are usually owner assets, and the entitlement to these assets is usually regulated by a public-private key infrastructure. Digital assets are bearer assets, which has trading and security implications and is a consideration for institutional asset managers looking to allocate capital to a digital asset fund.
The notion of a wallet in an institutional context has a few more nuances and considerations, which include (but are not limited to):
- Know your customer / know your transaction needs.
- Asset allocation and token provisioning.
- Interaction with crypto custody services and service providers.
- Collateral management and lending.
- Liquidity management and treasury considerations.
In contrast to traditional finance with a unique institutional market infrastructure, specialized asset classes, dematerialized assets, licensed gating criteria and much more – the core constructs of digital assets such as DeFi tokens, tradable NFTs, layer one protocol cryptocurrencies and so on – not significant for institutional investors. The dematerialized assets, central securities depositories (CSDs), secured lending and trading models for traditional finance are not the same across DeFi and other emerging asset classes. The issuance and emergence of institutional custody solutions, digital asset trading desks, etc., employ the systemic traditional financial apparatus and risk models to tame a rapidly growing technology and crypto-managed ecosystem.
The issues from an institutional perspective are scope, risk and focus on traditional organizational controls and governance. For example, the institutional situation in the custody of digital assets is similar to the traditional service of a custodian, namely the physical possession of financial assets on behalf of a customer. However, despite the conceptual similarity, the practice of digital asset custody requires significant technology design considerations. It is also necessary to take into account business and transactional considerations such as liquidity, treasury and collateral management, and to foster a deeper understanding of an evolving regulatory and compliance framework for digital assets that can represent different asset classes.
The application of the traditional financing lens not only leads to a cost component, but also puts institutional investors at a disadvantage. This speaks in favor of using wallets in an institutional context to address the nuances discussed earlier.
Perhaps the impact of DeFi on traditional business models, liquidity (capital adequacy) and treasury and related services offered to fund managers and administrators, shaping institutional wallet requirements from “institutional custody” of core assets to “point of provision” and Withdrawal “Advance and Allocation.” This changes the perspective and focus of institutional custody and expands the institutional wallet as a channel for providing allocation instructions for the use of cryptocapital, instructions for participation in automated market makers (AMMs) and liquidity pools and an interface to the “Custody” for long-only assets.
Related: The Rise of DEX Robots: AMMs Are Pushing For An Industrial Revolution In Retail
And again, here is the most important question we should ask ourselves: How can a crypto wallet be designed that can be a channel to the Web 3.0 and the entire cryptosphere and replace and reform our relationship with current services and institutions? The promise of crypto assets only comes to life through their usage, diffusion and speed, but if we create a market structure that just mimics or replicates an existing system, what have we solved?
I think crypto wallets will be the next battle front when the Layer-One protocol wars finally cool off. As the core issues of scalability, security, and speed of transaction processing and the layer 2 protocol consolidate and change, the superiority of layer one aims at processing efficiency and security. Crypto wallets will not only provide a way to win wallet shares, but will also represent the battle for mind share.
This article does not provide investment advice or recommendations. Every step of investing and trading involves risk, and readers should do their own research when making a decision.
The views, thoughts, and opinions expressed herein are those of the author alone and do not necessarily reflect the views and opinions of Cointelegraph.
Nitin Gaur is the founder and director of IBM Digital Asset Labs, where he develops industry standards and use cases and works to bring blockchain to business. Previously, he was Chief Technology Officer of IBM World Wire and IBM Mobile Payments and Enterprise Mobile Solutions, and founded IBM Blockchain Labs, where he led efforts to establish blockchain practice for the company. Gaur is also a well-respected IBM engineer and master IBM inventor with a rich patent portfolio. He also works as a research and portfolio manager for Portal Asset Management, a multi-manager fund specializing in digital assets and DeFi investment strategies.