In recent years, substantial investments and technological innovations have made waves in the cryptocurrency space, yet crypto custody solutions remain entrenched in outdated practices. Despite efforts by companies such as Web3Auth, which offers “Wallets as a Service” through multi-party computation, and smart wallet providers like Argent, the state of crypto custody feels as if it has not evolved significantly since 2021. The anticipated breakthroughs in adoption and usability have largely fallen short.
The Convenience Dilemma
Traditional finance (TradFi), with all its imperfections, provides unparalleled convenience and security, particularly in developed nations. Losing a password? A quick reset via email is standard practice. Unauthorized transactions? Dispute them easily and lock your card using a mobile app.
In stark contrast, the crypto world offers few of these conveniences. Apart from centralized, and now defunct, platforms like Celsius, crypto users face complex and unforgiving systems for managing private keys and securing transactions. The complexity of engaging with crypto often outweighs its perceived benefits, leading to low adoption rates outside niche areas like gambling. In everyday financial activities—such as saving, lending, or borrowing—crypto has yet to make significant inroads.
Underutilized Potential
Take Gnosis Safe, now known simply as Safe. This platform excels at managing funds and transactions, offering features like multi-signer approval and separating private key requirements. Despite holding over $100 billion in assets, the full potential of Safes remains largely untapped.
While over 5,000 Safes are created monthly on the Ethereum mainnet, they are predominantly used for cold storage rather than active DeFi (Decentralized Finance) interactions. Although Safes are designed to facilitate DeFi engagement, many users still opt to use their Externally Owned Accounts (EOAs) for transactions—practices that are considered risky and outdated.
The Data Speaks
The numbers reveal a significant disparity: a staggering 99.4% to 99.9% of token transfer volume on Ethereum occurs through EOAs rather than Safes. This statistic highlights a critical shortfall in the integration of utility and security within current crypto custody solutions.
When examining the use of raw ETH (Ethereum’s native asset), there is a slight shift. While a notable amount of raw ETH is managed through Safes—showing an increase in recent months—EOAs still dominate. As of May 2024, Safes are handling nearly $2 billion in raw ETH monthly, surpassing the volume managed by the EOAs that created them.
The Path Forward
Significant strides have been made in user protection since 2021, particularly with wallet projects like Rabby, Rainbow, Coinbase Wallet, and Metamask. These platforms focus on transaction simulations, approval management, and alerts for potentially malicious contracts. However, they still rely on the traditional model of users managing private keys directly.
The industry is exploring alternatives, such as transforming accounts into smart contracts (EIP-3074, EIP-7702) and abstracting transaction management (EIP-4337). These efforts aim to simplify and enhance user experience but face challenges in reaching a consensus.
The shift towards Layer 2 solutions and improved mobile integration suggests that the industry is moving in the right direction. The goal remains to develop practical, user-friendly solutions that can drive organic growth and enhance the overall crypto experience, paving the way for a decentralized financial ecosystem.
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