What Is a Blockchain Wallet?

A blockchain wallet (hereinafter referred to as “wallet”) is the gateway for users to access the blockchain and acts as a passport for users in the Web3 world. Wallets typically include the following features:

Creating Blockchain Accounts

Since the process of creating a blockchain account can be quite complex, wallets help simplify this process for users. Generally, during account creation, wallets guide users through backing up their private keys or mnemonic phrases and then perform secondary verification to ensure the accuracy of the backup.

Managing Blockchain Assets

Wallets greatly facilitate the management of assets owned by users, including transferring funds, receiving payments, viewing asset details, and transaction history. Similar to a banking app, you can see what assets you currently hold, and their quantities, and perform operations like transfers.

Exploring the Blockchain Ecosystem

Some public blockchain designs incentivize users to actively participate in ecosystem development through activities such as node voting, referendums, and staking. These can all be accessed via the wallet. Additionally, some major DApp applications exist as independent third-party apps, which also require a wallet for login and transaction authorization.

Transactions

Some wallets support crypto-to-crypto exchanges, exchange trading, OTC trading, and other crypto asset trading services. OTC (Over-the-counter) trading is a peer-to-peer trading method, guaranteed by a third party, which is currently the main way to trade fiat currency and crypto assets one-to-one.

Additional Features

Given the inherent financial nature of wallets, some integrate various financial tools and functions, including mining pools, financial management, mining, and project investments, to meet users’ needs for asset appreciation.

Compared to “Alipay”

For users who are new to blockchain, we can initially compare a blockchain wallet to “Alipay” from a non-strict perspective.

Similarities with “Alipay”:

Both can manage assets, make payments and transfers, and view asset details.

Both can manage identities and authorize logins to access third-party apps or websites.

Differences from “Alipay”:

“Alipay” is a centralized product controlled by Ant Group, while a blockchain wallet is natively decentralized and almost impossible to be controlled by anyone.

Creating an “Alipay” account requires ID and phone information and can be recovered if lost. In contrast, a blockchain wallet account is anonymous and almost impossible to recover if lost.

The assets managed by “Alipay” are fiat currencies with legal protections for user ownership. In contrast, the assets managed by a blockchain wallet truly belong to the user.

Wallet Developments and Challenges

In the early days of Bitcoin’s inception, wallet interfaces were extremely rudimentary, often requiring several days to synchronize and download the entire Bitcoin ledger before functioning. At that time, only a few enthusiasts with technical skills could operate wallets on their computers. The following image depicts the world’s first Bitcoin wallet designed by Satoshi Nakamoto, the founder of Bitcoin:

With the development of Bitcoin, on June 29, 2011, Bitcoin payment processor BitPay launched the first Bitcoin electronic wallet for smartphones. This marked a historic step towards making wallets accessible to mainstream users. However, its main feature at the time was limited to storing Bitcoin.

In November 2013, nearly five years after the creation of Bitcoin’s genesis block, the Ethereum whitepaper was published, heralding the arrival of blockchain 2.0. This marked the beginning of the use of smart contracts on the blockchain. During this time, wallets evolved beyond simple transactions like transfers and receipts to also include on-chain contract operations.

In 2018, the term DeFi (Decentralized Finance) was first proposed on Telegram. With the launch of protocols like Compound, Uniswap, and DAI, the Ethereum ecosystem began to flourish. Following the summer of 2020’s explosion of liquidity mining (Yield Farming) and aggregators, transaction activities surged significantly. DeFi liquidity mining became popular, pushing the user base of blockchain wallets past 50 million. This marked a period of rapid expansion for blockchain wallets.

Since 2021, with the narrative around cross-chain and Layer 2 solutions, blockchain wallets have become a popular choice for people to store assets and conduct transactions. Supporting cross-chain asset capabilities has also become a significant consideration for users when selecting wallets.

In 2022, during Devcon 6 in Bogotá, Tomasz Tunguz shared some statistics about Web3: the combined daily active users (DAU) of major public chains totaled approximately 2.5 million, whereas traditional internet DAU reached 5 billion, making up a mere 0.05%. On the supply side, about 16,000 developers are actively involved in Web3 development, compared to a global total of 27 million developers, representing less than 0.06% of the total developer population. Therefore, Web3 still has a long way to go before achieving widespread adoption.

Wallets serve as the entry point to Web3, and the first significant challenge for mass adoption is addressing the issue of “private key management.” In the blockchain world, control over private keys is crucial, as industry consensus dictates, “Not Your Keys, Not Your Coins.”

Decentralized wallets use mnemonic phrases and hierarchical deterministic (HD) structures to derive private keys and self-custody assets, which appears to be the best practice for managing encrypted assets. According to a report by Finbold, global exchanges have a total of 295 million cryptocurrency wallet users, with decentralized wallet users comprising only 81 million, accounting for 21.5%.

Entrusting private keys to centralized exchanges is inherently insecure, as evidenced by the recent collapse of FTX in November 2022, which is just one in a series of security incidents involving exchanges. However, many users are still willing to bear custodial risks for lower costs and ease of use. For the vast majority of users, independently managing their assets by controlling their private keys without relinquishing assets and data to others remains a significant challenge. Many users may relate to the experience of writing down their mnemonic phrases on paper.

According to OKLink’s data from 2022, losses due to private key leaks and losses amounted to a staggering $930 million, accounting for about 40% of total losses. In the blockchain world, losing or having a private key stolen means permanent loss of assets, which is a burden that ordinary users find difficult to bear.

To address the issue of “private key management,” wallet manufacturers are exploring solutions such as keyless wallets and social recovery mechanisms. Smart contract wallets are among the mainstream solutions being adopted.

Smart Contract Wallet

Ethereum distinguishes between two types of accounts: Externally Owned Accounts (EOA) and Contract Accounts (CA).

A smart contract wallet is a type of contract account that behaves similarly to a wallet, allowing users to manage assets and interact with DApps through a smart contract. Unlike externally owned account wallets, smart contract wallets do not have private keys; they only have addresses. As a result, smart contract wallets cannot initiate transactions autonomously; they execute transactions according to pre-written code when triggered. Additionally, smart contracts need to be deployed on-chain, which incurs an initial cost for creation.

One common example of a smart contract wallet is a multi-signature (multisig) wallet, which requires signatures from multiple keys (M-of-N) to execute transactions.

A multi-signature wallet involves each entity holding their respective private keys, and transactions require validation through the wallet’s contract by multiple entities. Typically, these contracts also offer recovery options, allowing a majority of entities to vote and modify the authorized key set, effectively addressing the issue of theft or loss of private keys for a minority of entities. While widely adopted by DeFi protocols and DAOs, multi-signature wallets are not the mainstream path to universal wallet usability. After all, regular users are accustomed to Web2 payment methods and accounts, such as biometric payments and social recovery accounts.

To achieve such robust functionality in the Web3 world, the concept of “account abstraction” needs to be introduced. In computer science, “abstraction” refers to extracting relevant parts from a larger segment and dividing something into smaller, modular components. In Ethereum, account abstraction involves separating transaction validation and execution from a monolithic process into modular components that can be adjusted based on users’ individual needs.

The core goal of account abstraction is to enable smart contracts to act as transaction-initiating accounts, allowing users to customize the security and operational models of their accounts without relying on external accounts. External accounts are inherently tied to key pairs, making them essentially the same thing, and cannot be programmatically customized with user-defined code to authorize transactions and unlock user experiences.

As Vitalik Buterin mentioned in “The Three Ethereum Flavors,” failing to migrate everyone to smart contract wallets could jeopardize Ethereum’s success. Therefore, account abstraction holds significant importance for Ethereum, potentially ushering in new applications, gameplay, and imaginative possibilities in the Web3 space once implemented.

Account Abstraction

Since Ethereum’s launch in 2015, discussions around account abstraction have persisted. The latest proposal, ERC-4337, introduced by figures like Vitalik Buterin, introduces UserOperations, which are special transactions representing user intent and allowing contract accounts to actively execute operations. These UserOperations are managed by a role called the Bundler, which simulates the execution of UserOperations and adds valid operations to a special transaction pool. Subsequently, an EntryPoint contract verifies and executes these UserOperations to fulfill user intents.

ERC-4337’s major advantage lies in not requiring modifications at the consensus protocol level, thus avoiding the need for a hard fork. The verification and transaction processes are separated into two smart contracts: the EntryPoint contract and the Wallet contract. The EntryPoint contract acts as a coordinator, interacting with the Wallet contract. The Wallet contract, based on customized logic, handles transaction validation for users. Upon successful validation by the Wallet contract, the EntryPoint contract executes the transaction and submits it to the next block.

This abstraction provides developers and users with freedom, enabling them to incorporate any desired functionality into custom wallet contracts as requirements for valid transactions. For instance, wallet contracts can utilize multi-signature schemes, social recovery features, and even quantum-resistant signature schemes.

ERC-6551, proposed by the Future Primitive team, introduces a novel approach to linking non-fungible tokens (NFTs) with smart contract wallets, enhancing control and flexibility over assets. Known as “Token bound accounts,” this protocol allows each NFT to possess its own wallet address.

ERC-6551 is not about account abstraction or a new token standard. Instead, it can significantly enhance NFT functionality when combined with smart contract wallets. For example, it enables NFT composability, on-chain reputation, and game character inventory management.

In principle, the holder of an NFT interacts with a Registry contract to create a smart contract wallet. The Registry contract is immutable, permissionless, and ownerless, deploying a unique deterministic-address smart contract wallet for each NFT. Control over this wallet is exclusively held by the NFT holder. When ownership of the NFT changes, control over the associated account also transfers accordingly.

With the latest ERC-4337 and ERC-6551 proposals becoming industry benchmarks, the year 2023 witnessed rapid growth in the sector, as shown below:

EIP-3074, another proposal widely supported by the Ethereum community, has been officially included in the next Ethereum hard fork. Proposed by Ethereum researcher Sam Wilson and Go Ethereum developer Matt Garnett, its core objective is to enable any Externally Owned Account (EOA) to operate like a smart contract wallet without the need for deploying additional contracts or manual migration.

EIP-3074 introduces two new Ethereum Virtual Machine (EVM) instructions: AUTH and AUTHCALL. These instructions allow an EOA to link with a smart contract, transferring transaction control to the smart contract seamlessly.

1. AUTH: Used to verify a signature and set a context variable “authorized”. If the signature is valid and matches the given authorized address, “authorized” is set to that address. The AUTH instruction allows a smart contract to act on behalf of an Externally Owned Account (EOA), enabling delegated authorization.
2. AUTHCALL: Similar to the existing CALL instruction, AUTHCALL is used to perform an external call. However, unlike CALL, AUTHCALL uses the authorized address set previously by the AUTH instruction as the caller address. This means AUTHCALL uses the authorized EOA as the sender, rather than the contract itself.

EIP-3074 requires a hard fork of Ethereum to implement, aiming to grant EOAs functionalities similar to smart contracts by delegating control of an EOA to a smart contract. However, since EOAs themselves are susceptible to key theft or loss, this could result in a complete loss of control.

EIP-7702, introduced by Vitalik on May 7th this year as an alternative to EIP-3074, allows EOAs to temporarily adopt smart contract functionalities during transactions. In a single transaction execution period, an EOA can be temporarily converted into a smart contract wallet using the “contract_code” parameter and signature in a new transaction type. This achieves functionality similar to EIP-3074 without introducing new opcodes or requiring a hard fork.

EIP-7702 aims to streamline EIP-3074 and make it more compatible with EIP-4337 by utilizing the “contract_code” parameter, which can contain the existing EIP-4337 wallet code. Additionally, through an additional EIP (EIP-5003), EOAs can permanently upgrade to smart contract wallets.

In the ultimate scenario of account abstraction, all accounts on Ethereum would manage assets and transactions using smart contract wallets, no longer relying on traditional EOAs.

Currently, forefront research on account abstraction includes the following:

Social Recovery

Social recovery involves using social relationships to help users regain access to their accounts in case of key loss, such as resetting the password of a smart contract wallet via email. Users typically set guardians during or after wallet creation, requiring a threshold of guardians (e.g., 2 out of 3) for login or recovery. This process is often referred to as multi-factor authentication. Social recovery is a popular research direction in account abstraction, with wallets like Argent Wallet, Loopring Wallet, and UniPass already implementing it.

Intent Transactions

Intent transactions consist of signed declarative constraints that allow users to delegate transaction creation to third parties while retaining complete control over the transaction. In essence, if a transaction specifies “how” to perform an operation, intent defines the “expected result” of that operation. Intent transactions treat the wallet client as an intent layer, enabling users to express their intentions and complete the process from intent to UserOperation. Currently, intent transactions exist primarily in experimental projects, leveraging AI for tasks such as natural language input, goal decomposition, optimal path calculation, and execution. This area holds promise as one of the scenarios where blockchain integrates with AI.

Device Accounts

Device accounts (DA) use hardware security modules on modern user devices (e.g., PCs, smartphones, tablets) to manage user keys and wallet accounts. Device accounts rely on passwordless authentication technologies like Passkey/WebAuthn, offering more convenience and enhanced security compared to traditional authentication methods:

1. Protected by their hosting devices, they use biometric technology as an additional security measure, eliminating the need for passwords;
2. They can seamlessly synchronize across multiple devices such as phones and computers through Airdrop/Bluetooth, solving single-point failures;
3. They can securely log in across devices by scanning with their phone and then biometrically logging into web pages, enhancing the user experience.

Summary

Wallets, as essential tools for participants in the cryptocurrency market, occupy a crucial position in the infrastructure domain. In the future, the importance of wallet gateways will surpass that of trading platforms, becoming hubs for Web3 traffic aggregation and foundational infrastructure for the metaverse.

By integrating all DApps alongside supporting payments and transfers, wallet providers enable developers and users to converge massively into a new generation of blockchain-based internet ecosystems. Within this ecosystem, all online activities for users can be conducted through wallets, including social interactions, browsing short videos, shopping, ordering food, hailing rides, and traveling. Wallets will truly become the “Alipay” of Web3.

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