Opinion by: Zhen Yu Yong, CEO of Web3Auth.
Ethereum founder Vitalik Buterin did not hesitate in a recent exchange on X when he criticized the dismissive attitude of MicroStrategy CEO Michael Saylor towards the self-custody philosophy of cryptocurrencies. Buterin said that Saylor's arguments are tantamount to endorsing the usurpation of regulations, undermining the mission of cryptocurrencies.
Saylor argues that transferring Bitcoin (BTC) to institutionally managed entities provides a layer of security and legality that self-custody may not have. He believes that reputable financial institutions like BlackRock and Fidelity are less likely to be seized or interfered with by governments due to their critical role in the economic system. Self-custody advocates have been outraged and continue to argue that relying on third-party custodians will centralize risks, weaken the security of the network, and limit the development of advanced crypto features.
There is an emerging middle ground between Saylor's and Buterin's seemingly opposing views. A new development for "degens" and institutional investors is coming: multi-chain self-custody wallets.
The problem with self-custody
While self-custody (holding your own keys) provides absolute control over user assets, it often comes with a significant challenge - managing personal keys can be overwhelming for many users, especially those new to Web3. Saylor has a point about that.
However, remarkable advancements have been made to improve the overall user experience with non-custodial wallets, where users can create wallets simply by using their social accounts, including Farcaster, and even with Passkeys. This approach eliminates the complexity of managing individual keys and seed phrases often associated with self-custody solutions.
Buterin is also right that self-custody has a future. However, these advancements only apply to individual chains. Users still have to use multiple custodial and non-custodial wallets to transact across chains.
Users have different wallets across different chains for various purposes. Eliminating this complexity will create more innovation and engage users beyond just holding a bit of cryptocurrency.
More chains, more wallets, more errors. The more wallets, the more problems.
In the first half of 2024, over 70 new Layer-1 chains have been created, far exceeding the 50 new chains in 2023. Combine that with the countless decentralized applications built on different chains, and users struggle to navigate and manage their assets. Disparate blockchains create a fragmentation problem across the entire Web3.
On average, a user has from three to 10 wallets, depending on their experience with cryptocurrencies. This complexity increases the risk of human errors, such as sending funds to the wrong address, wrong chain, or simply forgetting their private keys. An estimated 20% of lost Bit is due to user errors.
New chains will further complicate the burden and complexity for users. The problem: Fragmentation means a poor user experience.
The fragmentation of ecosystems affects liquidity and interoperability. Users may have assets scattered across different wallets and blockchains, making their effective use difficult. For example, assets on one chain cannot be used as collateral in a lending protocol on another chain.
Imagine when you're at a shopping mall, you have to ask them what currency they accept every time you enter a new store. That's the reality in Web3 right now. Fragmentation hinders the seamless transfer of assets and affects the overall user experience.
Solving these issues is necessary to create a more viable and cohesive Web3 ecosystem.
What is the solution?
Wallet abstraction and chain abstraction are steps towards realizing that vision. Advancements like ERC-4337 and EIP-7702 allow Externally Owned Accounts (EOAs) to function as smart accounts and delegate 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, allowing Wallet C to use their funds without additional transactions. This solves the wallet fragmentation problem, allowing users to manage different accounts with a unified account.
Chain abstraction
Chain abstraction is the next crucial step to realize true interoperability in Web3. Users should be able to seamlessly interact with any chain, regardless of where their assets are held. Even with smart accounts, users cannot directly use funds from Chain X to perform on-chain Y transactions. This results in a poor user experience, requiring users to convert funds from Chain X to Chain Y before they can be used on-chain Y.
The above scenario is often referred to as liquidity fragmentation. Chain abstraction helps achieve liquidity abstraction and improve the current gas abstraction state. This streamlined crypto approach will work similar to Apple Pay, where users can easily choose a credit card for payments.
Similarly, users will interact with blockchains through a unified interface that allows them to view all their assets and balances across chains and spend crypto as if it were a single unified account.
We cannot fix the past.
Returning to Saylor's argument, both institutions holding Bit as an asset and "degens" can have a single unified account that is still self-custodied. The user interface and UX design for that private key can and should be designed to serve all types of crypto asset holders.
Saylor then commented: "I support self-custody for those who are ready and capable." However, self-custody across chains will, over time, make people ready and capable. If we continue with self-custody, and a large part of this crypto movement will use self-custody mechanisms, we have to do it right.
Fragmentation in Web3 ecosystems is a reality that we cannot reverse. It's an evolutionary story. As the industry evolves, it's no longer about how we attract users to a specific platform or chain, but how we make the Web3 ecosystem more user-friendly, functional and interoperable by unifying crypto and trusting self-custody systems.
Zhen Yu Yong is the CEO of Web3Auth. Web3Auth has built wallets for Binance.US, Trustpilot, and many Fortune 500 companies. Previously, Zhen worked at the Eth Foundation and Visa.
