As the web3 ecosystem continues to grow and mature, debates around self-custody have been intensifying. In a recent exchange on X, Ethereum founder Vitalik Buterin criticized MicroStrategy executive chairman Michael Saylor’s dismissive attitude towards crypto’s self-custody ethos. However, amidst these seemingly bipolar views, a new development is emerging: multichain self-custody wallets.
The Trouble with Self-Custody
While self-custody offers absolute control over a user’s assets, it often comes with a significant challenge – managing private keys can be overwhelming for many users, especially those new to web3. Saylor’s argument that relying on third-party custodians centralizes risk, weakens network security, and limits the development of advanced cryptographic features has some merit.
However, massive improvements have been made to improve user experience with non-custodial wallets. Users can now create wallets using their social accounts, including Farcaster or even Passkeys. This approach removes the complexity associated with managing private keys and seed phrases often seen in self-custodial solutions.
A Middle Ground: Multichain Self-Custody Wallets
Buterin’s assertion that self-custody has a future is correct. The advancements mentioned above only apply to each chain, leaving users to still use multiple custodial and non-custodial wallets to transact on different chains. This complexity will create further innovations and onboard users beyond simply holding crypto for the sake of it.
As more layer 1s emerge (over 70 new ones in the first half of 2024 alone), users struggle to navigate and manage their assets across siloed blockchains, leading to a fragmentation issue within web3. On average, a user has between three and ten wallets, depending on their experience with crypto.
The Risks of Fragmentation
This complexity heightens the risk of human error, such as sending funds to the wrong address or forgetting private keys. Around 20% of all Bitcoin lost is estimated to be due to user errors. New chains will only complicate this burden further.
Fragmentation affects liquidity and interoperability. Users might have assets spread across different wallets and blockchains, making it difficult to use them efficiently. For example, assets on one chain cannot be used as collateral in a lending protocol on another.
Addressing Fragmentation: Wallet Abstraction and Chain Abstraction
Wallet abstraction and chain abstraction are steps towards realizing a more usable and cohesive web3 ecosystem. Advancements like ERC-4337 and EIP-7702 enable Externally Owned Accounts (EOAs) to function as intelligent accounts, delegating wallet control.
Traditionally, users would need to manually transfer funds between wallets. With EIP-7702, Wallet A and B can delegate control to Wallet C, streamlining the process.
A Unified Interface for Web3
Chain abstraction will function similarly to Apple Pay, where users can easily select their credit card of choice for payments. In web3, users will interact with the blockchain through a unified interface that allows them to view all their assets and balances across different chains and spend crypto as if it were a single unified account.
Conclusion
The fragmentation in web3 ecosystems is a reality we cannot reverse. It’s an evolutionary tale. As the industry grows, it’s no longer about how we onboard users onto a particular platform or chain but how to make the web3 ecosystem more user-friendly, functional, and interoperable by unifying crypto and trusting in self-custodial systems.
Zhen Yu Yong is the CEO of Web3Auth, which has built wallets for Binance.US, Trustpilot, and numerous Fortune 500 companies. Previously, Zhen worked at the Eth Foundation and Visa.
Disclaimer
This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts, and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
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