Multichain self-custody is the future

Opinion by: Zhen Yu Yong, a seasoned Web3 traveler and CEO of Web3Auth.

As a long-time resident of the ever-evolving Web3 frontier, I’ve seen my fair share of crypto wild west townships. The recent dustup between Vitalik Buterin and Michael Saylor over self-custody versus institutional custody has been as exciting as a high noon showdown, but with fewer tumbleweeds (or perhaps more).

Saylor’s stance on centralizing crypto for added security might make sense in the world of traditional finance, but in Web3, it’s like asking a cowboy to give up his trusty six-shooter and carry a suitcase instead. While managing private keys can be a challenge, advancements like social account wallets and Passkeys are making self-custody as easy as clicking a virtual holster buckle.

But Vitalik’s right too; self-custody is the future. However, it’s not just about each chain – it’s about the Wild West itself. With new layer 1s popping up faster than tumbleweeds in a windstorm, we need to corral these fragmented ecosystems and make them more user-friendly.

That’s where multichain self-custody wallets come in, like a trusty sidekick in a spaghetti Western. With wallet abstraction and chain abstraction, we can unify the crypto frontier and make it as easy to interact with different chains as it is to order a steak in a saloon.

So here’s to the future of Web3, may it be as wild and unpredictable as a stampede, but with the smooth UX design of a well-oiled six-shooter. And remember, if you can’t handle the crypto, stay out of the kitchen (or saloon).

Opinion by: Zhen Yu Yong, CEO of Web3Auth.

Vitalik Buterin, the founder of Ethereum, didn’t mince words in his recent critique of MicroStrategy executive chairman Michael Saylor during an exchange. He suggested that Saylor’s dismissive stance toward the self-custody ethos of cryptocurrencies could be likened to promoting regulatory control, which would undermine the very essence of cryptocurrency, according to Buterin.

Saylor posits that transferring Bitcoin (BTC) ownership to regulated institutions enhances its security and credibility compared to self-custody. He contends that entities like BlackRock and Fidelity, due to their pivotal positions within the economic system, are less susceptible to government confiscation or interference. However, proponents of self-custody remain critical, stating that relying on third-party custodians concentrates risk, undermines network security, and hinders the evolution of sophisticated cryptographic technologies.

There’s a middle ground emerging between Saylor and Buterin’s seemingly bipolar views. A new development for degens and institutional investors is coming: multichain self-custody wallets.

The trouble with self-custody

While self-custody (holding your keys) offers absolute control over a user’s assets, it is often associated with a significant challenge — managing private keys can be overwhelming for many users, especially those new to Web3. Saylor is right about that.

Significant advancements have been made to enhance the user experience in non-custodial wallets. Now, users can effortlessly create their wallets by utilizing social accounts like Farcaster, or even Passkeys. This method eliminates the intricacies of handling private keys and seed phrases that are typically linked with self-custodial options.

Furthermore, Buterin accurately points out that self-custody will continue to be relevant in the future. However, these advancements are limited to individual blockchains. As a result, users may need to utilize both custodial and non-custodial wallets concurrently to carry out transactions across different chains.

Users often manage multiple digital wallets across various blockchain networks, each serving distinct functions. Simplifying this multi-wallet structure could spur more inventions and attract users who are interested in exploring blockchain technology beyond just owning a small amount of cryptocurrency as a curiosity.

More chains, more wallets, more room for errors. Mo’ wallets, mo’ problems.

As an analyst, I’ve observed an impressive growth trend: Over seventy fresh Layer 1 networks sprang up in the first half of 2024, eclipsing the fifty newcomers we saw in 2023. Add to that the countless decentralized applications developed across various chains, and it’s no wonder users are finding it challenging to navigate and manage their digital assets. This fragmentation among blockchains presents a significant issue within the Web3 landscape.

On average, a user may possess anywhere from three to ten digital wallets, depending on their familiarity with cryptocurrency. This multiplicity can increase the likelihood of human mistakes, such as transferring funds to incorrect addresses, different blockchains, or misplacing private keys. Approximately 20% of all Bitcoin that has ever been mined is believed to have been lost due to user errors.

A new set of chains could make the tasks and intricacies harder for users to handle, leading to an unsatisfactory user experience. The challenge lies in the fragmentation.

The division of ecosystems impacts both the ease of accessing resources (liquidity) and the ability for various systems to work seamlessly together (interoperability). Users may find themselves holding assets in multiple digital wallets or blockchains, which can hinder their effective usage. For instance, an asset stored on one blockchain might not be acceptable as collateral within a lending platform on another.

When you’re exploring different stores at a shopping mall, it’s important to always check which currency they accept before making a purchase. This is similar to the current state of Web3, where fragmentation causes issues with smooth asset transfers and negatively impacts the overall user experience.

Addressing these issues is critical for creating a more usable and cohesive Web3 ecosystem.

What’s the solution?

Implementing Wallet abstraction and Chain abstraction are key methods for bringing the envisioned concept into reality. Innovations such as ERC-4337 and EIP-7702 empower Externally Owned Accounts (EOAs) to behave as intelligent accounts, allowing them to delegate wallet management.

Historically, individuals had to manually move funds from one digital wallet to another. However, thanks to EIP-7702, it’s now possible for Wallet A and B to grant control to Wallet C. This allows Wallet C to access and use the funds in both A and B without the need for extra transactions. In doing so, this solution tackles the issue of wallet fragmentation, giving users the power to manage multiple accounts using just one, consolidated account.

Chain abstraction

Transitioning to chain abstraction is crucial for achieving genuine interoperability within the Web3 ecosystem. Users ought to effortlessly engage with any blockchain network, irrespective of where their assets are stored. Currently, even with smart accounts, users cannot directly employ funds from Chain X to perform transactions on Chain Y. This situation leads to a suboptimal user experience, as users must initially transfer funds from Chain X to Chain Y before they can utilize them on Chain Y.

In simpler terms, the situation we’re discussing is known as “liquidity fragmentation.” The concept of “chain abstraction” aims to provide a unified view of all liquidity (money or assets), making it more accessible and enhancing the existing gas management system. This method will operate much like Apple Pay, allowing users to effortlessly choose their preferred payment method for transactions in the crypto world.

Similarly, users can engage with multiple blockchains using a consolidated platform that provides an overview of all their digital assets and balances from various chains, and enables seamless spending of cryptocurrencies as if they come from a single integrated account.

We can’t undo the past.

Regarding Saylor’s points, it is proposed that individuals or institutions holding Bitcoin as an asset, along with crypto enthusiasts known as “degen,” could all benefit from a unified account system that maintains self-custody. This account would be designed to cater to every kind of cryptocurrency owner, ensuring a user interface and experience (UX) that is tailored to each user’s needs.

Later on, Saylor expressed his viewpoint: “I endorse self-holding for those who are ready and capable.” However, as Multichain self-holding grows, it may eventually make everyone willing and able to do so. If we persist with self-holding and a significant portion of the crypto community adopts self-custodial methods, it’s crucial that we get it right.

In simpler terms, the division within the Web3 world is something that can’t be undone and it’s a story of evolution. As this field expands, it’s not just about getting users onto a specific platform or blockchain anymore. Instead, we need to focus on making the entire Web3 environment more accessible, efficient, and compatible for users by unifying cryptocurrencies, trusting in decentralized storage solutions, and fostering interoperability between different platforms.

Zhen Yu Yong is the CEO of Web3Auth. Web3Auth has built wallets for Binance.US, Trustpilot and numerous Fortune 500 companies. Previously, Zhen worked at the Eth Foundation and Visa.

This piece serves primarily as a source of general knowledge and isn’t meant to replace professional legal or financial counsel. The perspectives shared within this text belong solely to the author, and may not align with those held by CryptoMoon.

2024-11-19 11:15

The trouble with self-custody

What’s the solution?

Chain abstraction

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