What is a blockchain wallet

The blockchain wallet (hereinafter referred to as the wallet) is the user’s entrance to the blockchain and the user’s passport in the Web3 world.

Wallets usually include the following functions:

Create a blockchain account

Since the process of creating a blockchain account is complicated, the existence of the wallet can help users simplify these processes. Generally, during the process of creating an account, the wallet will guide the user to back up the private key or mnemonic phrase, and then conduct secondary verification to ensure that the user’s backed up private key or mnemonic phrase is accurate.

Manage blockchain assets

The existence of the wallet greatly facilitates users’ management of their own assets, which mainly includes transfers, collections, viewing asset details, transaction details, etc. The function is similar to that of a bank APP. You can see what assets you currently own, how much they are, and perform operations such as transferring your assets.

Explore the blockchain ecosystem

At present, some public chain designs will encourage users in the ecosystem to actively participate in the construction of the public chain ecosystem. The main forms include node voting, referendums, staking, etc., which can all be participated through wallets.

And some large-scale DApp applications exist in the form of third-party independent APPs. When experiencing DApps in the form of these APPs, a wallet is also required as a medium for login and transaction authorization.

trade

Some wallets will also support cryptocurrency exchange, exchange transactions, OTC transactions and other crypto asset trading services. Among them, OTC (Over The Counter) transactions are outside the exchange, guaranteed by a third party, and the customer’s point-to-point transaction method is the current legal currency and The main method of one-to-one buying and selling of crypto assets.

other

Since wallets naturally have financial attributes, some wallets will integrate a variety of financial tools and functions including mining pools, financial management, mining, project investment, etc., to meet the needs of users for asset appreciation.

Compare “Alipay”

For users who are coming into contact with the blockchain for the first time, we can first compare the blockchain wallet to “Alipay” from a non-strictly defined perspective.

The same points as “Alipay”:

• You can manage assets, perform payment transfers, view assets, etc.
• You can manage your identity and authorize login to access third-party apps or websites.

Differences from “Alipay”:

• “Alipay” is a centralized product controlled by Ant Group, while the blockchain wallet is native to the decentralized blockchain and is almost impossible to control by humans.
• Creating an “Alipay” account requires ID card and mobile phone information. If lost, it can be retrieved. Block wallet chain wallet accounts are anonymous and almost impossible to retrieve if lost.
• The assets managed by “Alipay” are recorded in legal currency. There are in-depth laws to protect the “ownership” of users. The assets managed by the blockchain wallet truly belong to the users.

Wallet developments and challenges

At the beginning of the birth of Bitcoin, the wallet was very rudimentary and even required several days of synchronization to download the entire Bitcoin ledger before it could be run. At that time, only a few geeks could use the wallet by operating on a computer. The picture below shows 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 e-wallet for smartphones. This was a historic step for the wallet to become available to ordinary users, but mainly Features: Only Bitcoin can be stored.

In November 2013, nearly five years after the birth of the Bitcoin genesis block, the Ethereum white paper came out, announcing that the blockchain has entered the 2.0 era. Smart contracts began to be used in the blockchain. At this time, in addition to transferring and receiving payments, the wallet In addition, on-chain contract operations can also be performed.

In 2018, the term DeFi was first proposed on Telegram. With the launch of Compound, Uniswap, DAI and other protocols, the Ethereum ecosystem began to flourish. After the development of Yield Farming and Aggregator in the summer of 2020, After the outbreak, trading activities increased significantly, DeFi liquidity mining became popular, the number of blockchain wallet users exceeded 50 million, and blockchain wallets entered a period of rapid expansion.

From 2021 to the present, with the narrative of cross-chain and Layer 2, blockchain wallets have become a popular choice for people to store assets and trade. At the same time, supporting cross-chain assets has also become one of the key considerations for users to choose a wallet.

In 2022, at the Devcon 6 conference held in Bogotá, Tomasz Tunguz mentioned some statistics of Web3: the cumulative DAU of each mainstream public chain is about 2.5 million, while the DAU of the traditional Internet is 5 billion, and the former is barely enough to reach 0.05 of the latter. %. From the supply side, there are about 16,000 developers developing in Web3. The total number of developers in the world has reached 27 million, and Web3 developers account for less than 0.06%. As a result, Web3 is still far from mass adoption.

As the entrance to Web3, the first challenge for large-scale adoption of wallets is to solve the problem of “private key storage”.

In the blockchain world, private keys control everything, and there is a consensus in the industry that “Not Your Keys, Not Your Coins”.

Decentralized wallets use mnemonic words and a hierarchical deterministic (HD) structure to derive private keys and self-custody, which seems to mean that decentralized wallets should be the best practice for managing crypto assets. According to a report released by Finbold, there are 295 million cryptocurrency wallet users on global exchanges, and there are only 81 million decentralized wallet users, accounting for 21.5%.

It is naturally unsafe to entrust private keys to a centralized exchange. The collapse of FTX in November 2022 is the latest in a long list of exchange security incidents. However, a large number of users are still willing to bear the custody risk in exchange for lower Cost and ease of use. Because for the vast majority of users, although they can independently manage their assets by mastering the private key without leaving the assets and data in the hands of others, the custody of the private key has become a big problem. I believe many people have the experience of writing mnemonics on paper.

According to OKLink statistics, in 2022, users’ digital asset losses due to private key leaks and private key losses will be the largest, up to US$930 million, accounting for about 40% of the total losses. In the blockchain world, once the private key is lost or stolen, it means a permanent loss of assets, which is unbearable for ordinary users.

In order to solve the “private key custody” problem, wallet manufacturers are exploring private keyless wallets and social recovery, and smart contract wallets are one of the mainstream solutions.

Smart contract wallet

Ethereum’s account types are divided into external accounts (Externally Owned Account, EOA) and contract accounts (Contract Account, CA).

A smart contract wallet is a contract account that behaves like a wallet, that is, a smart contract that allows users to manage assets and interact with DApps. Different from external account wallets, smart contract wallets do not have private keys, only addresses. Therefore, smart contract wallets cannot actively initiate transactions and can only execute transactions according to the written code after being triggered. And smart contracts need to be deployed on the chain, therefore, the creation of smart wallets requires initial costs.

The multi-signature wallet we often call is a type of smart contract wallet, which requires the signature of M-of-N keys to execute transactions.

Each entity in a multi-signature wallet holds its own private key. Executing transactions requires multiple entities to pass the verification of the wallet contract. The contract generally provides recovery options. Most entities can vote to change the authorized key set, which can effectively solve the problem of a few entities. The problem of private key being stolen or lost.

Multi-signature wallets are widely used by DeFi protocols and DAOs, but they are not a universal and popular technical path for wallets. After all, the average user is already used to Web2 payments and accounts, such as payments via biometrics and social recovery of accounts.

To achieve such powerful functions in the Web3 world, the concept of “account abstraction” needs to be introduced.

In computer science, “abstraction” means extracting relevant parts from a larger piece, splitting something into smaller parts.

In Ethereum, account abstraction refers to splitting transaction verification and transaction execution from a monolithic process into modular components that can be adjusted to the user’s individual needs.

The core goal of account abstraction is to enable smart contracts to serve as the initiating account for transactions, allowing users to customize the security model and operation model of their accounts, completely eliminating the need for external accounts. Because external accounts are so tightly coupled to key pairs that they are essentially the same thing, it is impossible to program them with custom code to authorize transactions and unlock the user experience.

Buterin mentioned in the article “Three Transformations of Ethereum”: Failure to allow everyone to migrate to smart contract wallets will lead to the failure of Ethereum.

Therefore, account abstraction is of great significance to Ethereum. Once implemented, new applications, gameplay, and imagination space may be born in Web3.

Account abstraction

Since Ethereum was launched in 2015, the discussion of account abstraction has not stopped. The latest ERC-4337 was proposed by V God et al.

Introduced UserOperation, which is a special transaction that expresses user intent and allows contract accounts to actively perform operations. These UserOperations are managed by a role called Bundler, which simulates executing UserOperations and adds valid operations to a special transaction pool. The EntryPoint contract then verifies and executes these UserOperations to fulfill the user’s intent.

The biggest advantage of ERC-4337 is that it does not require modifications at the consensus protocol level, because it does not require a hard fork.

The verification and transaction processes are separated into two smart contracts: EntryPoint contract and Wallet contract. The EntryPoint contract acts as a coordinator to interact with the Wallet contract. The Wallet contract handles user transaction verification based on custom logic. If the wallet contract successfully validates a transaction, the entry point contract executes the transaction and commits it to the next block.

This abstraction gives developers and users the freedom to code whatever they want into their custom wallet contracts as a requirement for transactions to be valid. For example, wallet contracts can use multi-signatures, social recovery features, and even quantum-resistant signature schemes.

ERC-6551 is a proposal from the Future Primitive team to connect non-fungible tokens (NFTs) to smart contract wallets in a new way, allowing for more control and flexibility over assets. The protocol, called “Token bound accounts,” allows each NFT to have its own wallet address.

ERC-6551 is not an account abstraction, nor is it a new token standard. But smart contract wallets can be combined to significantly enhance the functionality of NFTs, making them more practical than ever, such as enabling NFT composability, on-chain reputation, game character inventory, etc.

In principle, NFT holders create smart contract wallets by interacting with the Registry contract. The Registry contract is immutable, does not require permission, and has no owner. It deploys a unique, deterministically addressed smart contract wallet for each NFT. Its control is only owned by the NFT holder. When the ownership of the NFT is transferred, Control of the account is also transferred.

With the latest ERC-4337 proposal and ERC-6551 proposal becoming the industry benchmark, the industry will usher in rapid development in 2023, as shown below:

EIP-3074 is another proposal that has received widespread support from the Ethereum community and is officially included in the next Ethereum hard fork.

EIP-3074 was proposed by Ethereum researcher Sam Wilson, Go Ethereum developer Matt Garnett and others. Its core is to allow any EOA account to operate like a smart contract wallet without deploying additional contracts or manual migration.

EIP-3074 introduces two new Ethereum virtual machine instructions: AUTH and AUTHCALL, which enable EOA to connect a smart contract and transfer control of transactions to the smart contract.

• AUTH: used to verify a signature and set a context variable “authorized”. If the signature is valid and the signer’s address matches the given authorized address, then “authorized” is set to the authorized address. The AUTH instruction allows a smart contract to perform operations on behalf of an EOA, thereby enabling authorized delegation;
• AUTHCALL: Similar to the existing CALL instruction, used to perform an external call. The difference is that AUTHCALL will use the authorization address previously set through the AUTH directive as the caller address. This means that AUTHCALL will use the authorized EOA as the sender, not the contract itself.

EIP-3074 needs to be implemented through a hard fork of Ethereum. The main goal is to give EOA functions similar to smart contracts and delegate the control of EOA to smart contracts. But since the account itself is EOA, if the key is stolen or lost, it means a complete loss of control.

EIP-7702 was released by Vitalik on May 7 this year as an alternative to EIP-3074. EIP-7702 allows EOA to temporarily adopt the functions of smart contracts during the transaction process. EOA can convert EOA into a smart contract wallet during the execution of a single transaction and return to a normal state after the transaction is completed.

EIP-7702 introduces a new transaction type containing the “contract_code” parameter and signature, which temporarily converts the signed EOA account into a smart contract wallet during the transaction, thereby achieving the equivalent functionality of EIP-3074.

EIP-7702 does not introduce new opcodes, so no hard fork is required. The main goal is to make EIP-3074 more streamlined and more compatible with EIP-4337, because the “contract_code” parameter introduced can be the existing EIP-4337 wallet code, and with additional EIP (EIP-5003), the EOA account can also be permanently upgraded to a smart contract wallet.

In the end of account abstraction, all accounts on Ethereum use smart contract wallets to manage assets and transactions, and no longer rely on traditional EOA accounts.

The current cutting-edge research on account abstraction includes the following:

social recovery

Social recovery refers to a mechanism that uses social relationships to help users regain access to their accounts if they lose their keys, such as using email to reset the password of a smart contract wallet.

Users using the social recovery feature typically need to set up a guardian during or after the wallet creation process and reach a certain guardian verification threshold, such as 2 out of 3 guardians, to log in or restore the wallet. This process is often called multi-factor authentication.

Social recovery is currently a popular research direction in account abstraction. Wallets that have implemented social recovery include Argent Wallet, Loopring Wallet and UniPass.

intention to trade

Intents are a set of signed, declarative constraints that allow users to outsource transaction creation to a third party without giving up full control of the transaction. Simply put, if a transaction specifies “how” to perform an operation, then the intent defines “what is the expected result” of the operation.

Intent transactions use the wallet client as the intent layer, allowing users to express their intentions and complete the process from intent to UserOperation.

At present, there are only some experimental projects for intent trading. Whether it is the natural language input of intent, or dismantling the target, calculating the optimal path and executing operations, AI can play an advantage. It is expected to become one of the scenarios where blockchain combines AI.

Device Account

Device Account (DA) is a technology that uses hardware security modules on modern computing devices (such as PCs, mobile phones, tablets, etc.) on the user side to manage user keys and wallet accounts.

Device accounts rely on passwordless authentication technology Passkey/WebAuthn, which is more convenient and more secure than traditional authentication methods:

• Protected by the device they are saved on, using biometrics as an extra layer of security, no password required;
• It can be seamlessly synchronized between multiple devices such as mobile phones and computers through Airdrop/Bluetooth, eliminating single points of failure;
• You can log in securely across devices, scan the QR code on your phone and log in to the web page biometrically to improve user experience.

Summarize

As one of the necessary tools for crypto market participants, wallets occupy a very important position in the infrastructure field. In the future, the importance of the wallet entrance will surpass the trading platform and become a gathering place for Web3 traffic and one of the infrastructures of the Metaverse.

While supporting payment and transfer, all DApps are integrated into the wallet. Project developers and users can gather in large numbers to form a new generation Internet ecosystem based on blockchain technology. In this ecosystem, all online operations of users can be performed through the wallet, including social networking, short video browsing, shopping, ordering food, hailing a taxi, and traveling. The wallet will truly become “Alipay” in Web3.

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