Digital wallets are software structures that resemble physical wallets and enable the storage, use, and classification of payment instruments. Digital wallets began as payment methods and evolved into various types of stubs such as digital passes, tickets, and boarding cards. Crypto wallets, on the other hand, seek to reimagine the digital wallet environment as something more than a secure repository for payment and crypto assets.
With over 100 crypto wallets and counting, this sector of the cryptosphere is becoming increasingly congested, further complicating an already complex blockchain and digital asset landscape. As I continue to explore this sector and attempt to make sense of the complexities of emerging blockchains, layer-one protocols, decentralized finance (DeFi), and nonfungible token (NFT) initiatives, I believe crypto wallets will become the next battleground as the layer-one protocol conflicts wind down. The fundamental challenges of transaction scalability, security, and speed of processing consolidate and morph as layer-one superiority goals for processing efficiency and security. Crypto wallets will not only reflect the war for wallet share, but also the battle for mind share.
Related: When DeFi meets NFTs
Today, the majority of crypto wallets feature software frameworks that, on a very basic level, perform the following services:
Maintain both public and private keys; Interact with a variety of layer-one blockchains;
Transfer and receive digital assets and cryptocurrency; balance monitoring.
Cryptocurrency wallets should serve a greater purpose than improved key management.
To my mind, we should widen the definition of a cryptocurrency wallet to include it as a means of participation in the crypto economy. It may offer the wallet owner a foundation for engaging in a regulated network that places a premium on digital identification and requires third-party authentication, such as Know Your Customer.
Related: Authorities are attempting to bridge the divide between hosted and unhosted wallets.
Simultaneously, it can be a component of emerging networks that protect individuals’ anonymity and place a premium on maintaining their secrecy and privacy. This choice framework will enable the regulatory and compliance conversation to shift away from individuals and toward networks and activities, similar to the choice frameworks provided by our present wallets on an analog level.
A wallet would be modeled as an extension of our current identification frameworks (such as a government-issued ID) to an evolving digital identity that symbolizes our (credit) history, reputation, and incentive-driven past. It would not only promote transparency and ethical behavior, but would also safeguard individuals’ privacy. The concept of identification is critical because digital identity (which is now associated with every wallet and network) is the underlying technology that enables the trade, trust, and ownership of digital assets.
Concerns about data privacy are growing, and blockchain technology is the solution.
The capacity of a wallet to govern participation and the framework for users to specify wallet features enable a flexible design and encourage involvement. Historically, these wallets have been used to store a variety of asset classes, including NFTs, DeFi assets, cryptocurrencies, and crypto assets. Additionally, they comprise existing payment instruments, stored value accounts, and other types of digital stubs, enabling participation and inclusion via a registration process for existing financial services platforms as well as present and future blockchain and cryptoeconomic-driven networks. Registration may entail the exchange of crypto primitives, such as a public key, or the provision of the wallet associated with traditional centralized systems.
In the Web 3.0 era
The question we should be addressing is how to create a crypto wallet capable of connecting to a future decentralized internet (Web 3.0) and the full cryptosphere, as well as replacing and reforming our current relationships with services and organizations.
The new design of these wallets should enable participation in (crypto)economic activities — whether Web 3.0 or otherwise — such as file storage, NFT custody, and simply storing data or instruments that enable a wallet to act as an account receptacle for all our earnings and engagements in the cryptosphere and with established institutions.
Related: The relationship between NFTs, DeFi, and Web 3.0
Whereas the World Wide Web Consortium’s (W3C) website payment standards and web payments work to develop technology standards. Although limited to Ethereum (layer-one protocol), MetaMask provides an impressive glimpse into what could be a clean approach to integrate a browser and wallet, dubbed a browlet. Since early 2016, MetaMask has been doing so and has now defined institutional access with MetaMask Institutional (MMI). At the moment, wallet technology is focused on layer-one or platform-specific wallets and key management, which is important for Web 3.0’s resilience and long-term growth. However, with a model like MetaMask’s, wallet provisioning can be a new revenue stream.
Institutional context and considerations — An institutional wallet?
The exponential growth of digital assets and related ecosystems, such as decentralized finance, native crypto assets, and non-fungible tokens, has not only resulted in massive innovation in technology and finance products, but has also attracted the attention of numerous innovators, technologists, investors, and, more recently, institutional investors.
Related: Despite historic Bitcoin outflows, institutions appear confident on crypto
While blockchain as a distributed ledger infrastructure and transaction processing system aims to maximize the efficiency of dematerialized assets (assets contained within a ledger entry), the emergence of crypto and digital assets alters the landscape and participants, essentially altering the market infrastructure. Thus, it distinguishes digital (and crypto) assets not only by their intrinsic qualities but also by the resulting changes in the market infrastructure for digital (and crypto) assets. In general, digital (crypto) assets are bearer assets, and their ownership is typically managed by a public-private key infrastructure. Because digital assets are bearer assets, they have trading and safekeeping issues, as well as consequences for institutional asset managers considering allocating capital to a digital asset fund.
In an institutional setting, the concept of a wallet has a few additional complexities and implications, which include (but are not limited to) the following:
- – Recognize Your Customer/Understand Your Transaction’s Requirements
– Allocation of assets and token deployments.
– Interaction with crypto-custody services and providers of crypto-custody services.
– Management of collateral and loans.
– Considerations for liquidity management and treasury.
Unlike traditional finance, which has a distinct institutional market infrastructure, specialized asset classes, dematerialized assets, and licensed gating criteria, the fundamental constructs of digital assets such as DeFi tokens, tradable NFTs, and layer-one protocol cryptocurrencies, among others, do not differ significantly for institutional investors. Traditional finance mechanisms like as dematerialized assets, centralized security depositories (CSDs), collateralized lending, and trading are not applicable to DeFi and other developing asset classes. The issue and rise of institutional-grade custody solutions, digital asset trading desks, and others employ the systemic risk concepts and equipment of traditional finance to regulate a rapidly rising technology and cryptoeconomic led ecosystem.
Scale, risk, and alignment with typical organizational controls and governance are the institutional concerns. For example, the institutional environment around digital asset custody is comparable to the traditional service given by a custodian bank, which is the physical custody of a client’s financial assets. Despite their conceptual similarity, digital asset custody demands careful consideration of technological design. Additionally, business and transactional factors like as liquidity, treasury, and collateral management must be addressed, as well as a greater grasp of an evolving regulatory and compliance environment for digital assets, which may represent a variety of asset classes.
Using a standard finance lens not only adds a cost component, but also disadvantages institutional investors. This argues for the use of wallets in an institutional setting to address the previously highlighted subtleties.
Perhaps the impact of DeFi on traditional business models, liquidity (capital adequacy), and treasury and related services provided to fund managers and administrators will drive the design of institutional wallet requirements away from “institutional custody” of core assets and toward “points of deployment, disbursement, and allocation.” This shifts the institutional wallet’s viewpoint and focus away from institutional custody and toward giving allocation instructions for crypto-capital deployment, participation instructions in automated market makers (AMMs) and liquidity pools, and an interface to long-only asset “custody.”
Related: The development of DEX robots: AMMs advocate for a trading industrial revolution
And, once again, here is the critical question: How can a crypto wallet be structured to act as a conduit to Web 3.0 and the whole cryptosphere, as well as to replace and reform our current relationships with services and institutions? The promise of crypto assets is realized through their use, circulation, and velocity; however, if we develop a market structure that merely mirrors or replicates an existing system, what have we accomplished?
Crypto wallets, I believe, will be the next battleground as the layer-one protocol wars wind down. As the fundamental challenges of transaction volume, security, and speed of processing consolidate and morph, layer-one superiority aspires for processing efficiency and security. Crypto wallets will not only reflect the war for wallet share, but also the battle for mind share.
This post makes no investment recommendations or advice. Each investing and trading decision entails risk, and readers should conduct their own research before proceeding.
The author’s views, thoughts, and opinions are entirely his or her own and do not necessarily reflect or represent those of Cointelegraph.
Nitin Gaur is the founder and director of IBM Digital Asset Labs, where he develops industry standards and use cases for blockchain technology and aims to make enterprise-scale blockchain a reality. He formerly worked as chief technology officer of IBM World Wire, IBM Mobile Payments, and IBM Enterprise Mobile Solutions, and he launched IBM Blockchain Labs, where he spearheaded the drive to establish the enterprise’s blockchain practice. Gaur is also a prominent IBM engineer and a master inventor with an extensive patent portfolio. Additionally, he is the research and portfolio manager for Portal Asset Management, a multi-manager fund specialized on digital assets and decentralized financial infrastructure investment methods.