Like traditional identity documents (IDs), wallets have always been our gateway to the crypto world. This article is about the Web3 cryptocurrency wallet and its differences from Web2 e-wallets like ApplePay or PayPal we used to know. In essence, the Web3 wallet also serves the purpose of storage and transactions like e-wallets in Web2. However, it improves the operating model, allowing users more freedom and security.

Web3 wallet landscape

The whole e-payments market is expected to reach 4.8 billion by 2025. Payment/wallet businesses have enjoyed revenue growth, especially since more and more applications are continually integrating with online payment.

The number of investments poured into the Web3 wallet applications is approximately $3.3 billion. Recently, the leading web3 wallet company ConsenSys - Metamask raised $450M, bringing the company's valuation to $7 billion. As more new ecosystems are launched, the number of wallet addresses increases significantly because no one wants to miss this "dreamland". At the same time, the expansion of ecosystems leading to the primary development trend of Web3 wallet projects today is to deploy multi-chain wallets (Figure 1).

Figure 1. Web3 wallet landscape

Operating model

• The blockchain wallet can be interpreted as an interface for users to interact with the blockchain. Its primary function is to store assets or perform transactions.
• Blockchain wallets are divided into two types: custodial and non-custodial. We can also classify this according to the connection of the wallet: cold wallet (offline) and hot wallet (online).
• Each wallet will include a public key & a private key: When a user creates a new “account”, an encryption algorithm will generate a private key; From the private key, generate a public key; From the public key, and generate a wallet address.

Note that this path only goes in one direction; there is no reverse (ie, no one can know the private key even if they know the wallet address).

• The private key works like a unique key to open your safe because every transaction on an account requires the signature of the private key.

Figure 2. how does a Bitcoin wallet work (Source: Blocktrade)

• The only difference between custodial and non-custodial wallets is who manages the private key. Like its name, non-custodial wallets require the user to keep and manage the private key themselves, while in custodial wallets, the private key will be stored by a third party.

Key storage

Commonly used methods to store secret keys:

• Store on hardware: this storage method is considered the safest, but they are also less convenient than the above storage methods.
• Local key storage: The key is stored on the device and can be accessed from software that points to a specific location in a database. Although convenient and fast, this method is not secure and vulnerable to attacks.
• Store with password (password-protected key): This method is similar to the above, but there will be an extra layer of security in the middle - only when the user enters the correct password then be able to access the private key. However, hackers can still steal passwords through spyware that tracks keystrokes or through brute force (a trial-error process on the computer to find the result).
• Password-driven key: The password will be used as a control directly from the public-secret key pair. However, hackers can still attack this method by using random passwords to find these public-private key pairs (i.e. from the password "iloveyou" will find a corresponding key pair). Therefore, hackers can easily trace the private-public key pair of a user's wallet address if he/she sets a weak password.

Model shifting

The model of e-wallets in Web2 involved three parties: User, Bank, and Service provider. Users need the participation of 3rd parties such as banks to store and confirm transactions and service providers to perform payments and connect between banks and senders/receivers.

A custody crypto wallet is a service provided by a centralized exchange like Binance and Coinbase. The service is to support you in keeping your wallet signature, meaning that they can keep and manage your private keys on your behalf. In other words, you won't have full control of your funds nor the ability to sign transactions, which is similar to the e-wallet at Web2.

In contrast, with the non-custodial wallet model, users do not need to worry about intermediaries like banks because they have complete control over their wallets and assets. Because of cutting intermediaries, users do not need to go through the complicated authentication process steps or share personal information (Figure 3).