The Future of Web3 Hinges on Who’s Holding The Currency
You’d think that this blog would just be stating the obvious, but it’s not what you think. This isn’t a discourse on what we all know to be true; if you hold all the money, you can make the rules. That’s capitalism. This works for corporations, for billionaires, and governments globally. That’s not the point. The point is that in order for Web3 to work and succeed, we, the individual, need to be the ones holding the money. And the only way to hold money on the blockchain is with a wallet. Nothing new here, right?
But, where exactly is that money when it’s “in” your wallet? Is it really your crypto?
The crypto wallet is your passport. Everybody knows that. It’s how Web3 access is authenticated, but isn’t without risk and can be non-user-friendly at times, especially if you’re new to crypto adoption. Plus, there’s the human element. Outside of market crashes and hackers, the greatest threat to a wallet is us. We can lose the wallet, someone else can lose the funds, apps can crash, crypto can go missing, or you could make a basic mistake and send the funds to the wrong place. Power lies in who’s holding the crypto and how they’re safeguarding it. But it appears that the same procedures used to protect your crypto, also make it easy to lose.
Is this the only option?
Hot, Cold Wallets, Custodial And Non
Depending on how many coins you’re holding, how often you trade, and your general view about the stability of cryptocurrency and exchanges, will determine if you’re better suited to one wallet type over another. Both types come with benefits and drawbacks.
A hot wallet is a software wallet, is the most common and popular wallet available for cryptocurrency and accessing Web3 dApps. You can download an app to your phone, and an extension for your browser. You can even download a separate extension that offers browser notifications upon deposit, for your crypto wallet. These wallets store the cryptocurrency online through a third-party service like Coinbase, MyEtherWallet, or Metamask. Hot wallets are more convenient because they allow users to easily access their funds from any device with an internet connection.
However, they can be vulnerable to cyberattacks since they are connected to the internet at all times. Additionally, some services may require users to trust third-party companies with their private keys which could lead to potential security concerns depending on how secure those companies are.
Then, of course, there’s also the possibility that an exchange or wallet provider can close and/or go bankrupt, leaving a hot wallet holder with no way to recover their funds, if they haven’t properly been backed up with proper recovery mechanisms.
Given the latest events in crypto and exchange platforms, it would seem that a cold wallet is the safest bet. And that wouldn't be a wrong assessment. This physical device stores cryptocurrency offline, with no permanent, hard connection to the internet. Whether it’s a hardware wallet, a paper wallet, or a brain wallet, the secure aspect of this wallet speaks for itself - they’re less vulnerable to hackers because they’re offline. You’re also always in possession of your crypto, on your own device, rather than relying on an app.
Cold wallets allow users to easily and securely transfer funds by connecting the device to their computer via USB or Bluetooth connection. Whether it’s a Ledger Nano S, Trezor, or KeepKey hardware wallet, or if the private key and public address of the crypto wallet is written on a piece of paper in your fiat wallet, it’s a tough hack for anyone.
However, a cold wallet can be inconvenient if you need quick access to your funds since there is no way to access them without physically connecting the device or entering the password into an online system. Additionally, if your device gets lost or stolen, or you forget your password/seed phrase, then all of your funds will be gone as well.
Then there’s the ultimate drawback against either form of wallet: a transactional mistake. If you send funds to the wrong place, it’s gone. Cryptocurrency transactions are irreversible. To get your funds back, you must contact the receiver and request to send them back. If you don't know to whom the address belongs to, you can't do anything else to retrieve the funds.
It's unfortunate that the very things that have been put into place to keep Web3 and cryptocurrencies safe, and ensure the blockchain remains immutable, are the same factors that can cause a crypto holder all of their assets.
Custodial or Non?
Finally, there’s the option that your wallet, whether cold or hot, can be custodial, or non-custodial.
If you opt for custodial, then the private keys are stored on a server elsewhere, much like how Coinbase operates. The wallet operators maintain control of the private keys on their servers and transact on behalf of the users when it comes to exchanges and transactions. This means you yourself are not responsible for the security and safekeeping of your private keys - you, the user, are relinquishing control of your funds and access to a third party. That takes human error on your part off the table, but offers limitations in how you can use it.
If you’re just looking to buy and sell cryptocurrency, then by all means, custodial is the way. But if you’re planning to dive into DeFi, then you can’t rely on a hosted wallet.
Conversely, self-custody wallet providers have no access to your funds. The private key is exclusively generated on your device and only you can manage your currency. So you’re in charge of every facet of your crypto stockpile. But that also means that the onus is on you to keep your passwords and seed phrases safe, as well as not losing the device (hot or cold) that the crypto is on.
Imagine if you lost your cell phone with your Metamask on it, and the only place you had your seed phrase stored on was on that exact same phone? The only other option would be to use Metamask’s vault decryptor to restore the account, but it needs to be on the same device that originally hosted the account.
Ultimately, the wallet you choose will be based on a number of factors, but maybe we shouldn't be looking at wallets anymore. It might be time to go back to the drawing board.
The Need For New Web 3 Connectors
Originally, the crypto wallet made sense as a passport/gate to accessing Web3. But, is it still necessary?
You can endlessly debate over which type of wallet is better, because when it comes down to it, there is no “right” answer when deciding between a cold vs hot crypto wallet. Each person needs to weigh the pros and cons carefully before making their decision based on their own individual needs and preferences. A cold wallet offers increased security while a hot one provides more convenience but carries more risk. The most important thing that the wallet needs to do is Web3 authentication.
But what if there were a way to offer access to Web3, with the same level and scope of security that a wallet authentication provides, without the drawbacks of a wallet in any configuration of connectivity? That would be the holy grail of blockchain tooling, wouldn’t it?
If there could be a Web3 visionary out there, who’s looking to build a connection between a device and the blockchain that is virtually impermeable, secure, and also really difficult to screw up, that would be a game-changer.
But, is that even possible? We’re willing to find out.