For experienced crypto investors, there are several sectors that seemed promising but didn’t live up to the expectation: crypto wallets, privacy, and DAO.
Of these sectors, though with high expectations, there haven’t been any successful projects until today. Especially in the crypto wallet sector, so many failed projects cost tons of investors’ money in the last two crypto cycles. Nevertheless, plenty of people still hold solid faith in it.
As an experienced crypto investor, I will try to break away from the traditional frameworks, and rethink the status quo, dilemma and future prospect of this sector.
For common blockchain users, there are two kinds of most frequently used mobile apps: exchange apps and wallet apps. The majority of users’ crypto assets are saved or displayed in these apps.
Right now, among the top 20 cryptocurrencies, one of them, BNB, falls into the exchange asset category and none of them is in the wallet category. Expanding the scope to the top 100, five of them are exchange assets while wallet assets remain 0.
For an industry that frequently faces regulatory risks, centralized crypto exchanges are the prioritized targets for regulations. Every time when the news or the insider information, either true or fake, occurs, investors would rush to withdraw their crypto assets from CEXs to their crypto wallets. In crypto-native views, depositing assets to the crypto wallets is equivalent to saving assets on the blockchain. And storing these assets on the blockchain, with which they themselves have the only accessible private key, is much more reliable than storing assets in CEXs. Thus, for a user, a crypto wallet is indispensable, fulfilling needs including generating new addresses, backups, transferring assets, displaying balances, etc.
For example, when China issued the ban on ICOs on September 4, 2017, Imtoken became the most popular crypto wallet all over the world, with many users withdrawing their assets from CEXs (Huobi, Okex, BTC.China, etc.) to Imtoken wallets to avoid the loss they may suffer if the exchanges were to be shut down. Attributed to the impact of the ban, Imtoken was able to rapidly grow its user base, laying a great foundation for its leading position in the industry in the following two years. With its then popularity, Imtoken soon closed its A-series funding led by IDG.
There seemed to be a consensus regarding the crypto wallet’s prevalent use and perceived significant role for the crypto industry. With such a strong consensus and the low market cap, it seemed terribly undervalued and thus good timing to invest in this sector.
Unfortunately, however, the market doesn’t respond the way we expected - wallet projects remain low of their market cap.
Let’s take a look at some funding info:
Before 2018, the funding of wallet projects was often led by VCs. After that, it was mainly provided by top centralized exchanges for investment or acquisition purposes.
The reason behind this is simple: with a fast-growing user base and capital influx in the crypto market, exchanges are becoming the absolute dominant players.
They are equipped with enough motivation to maintain or even strengthen their monopoly and abundant capital for investments.
At the same time, with the crypto space’s rapid development in the last few years, trading in the secondary market is no longer the only use case for the industry. With the invention of DEX, Defi, NFT, GameFi and SocialFi, users are no longer bound to do trading in central exchanges. They can opt to withdraw money to the blockchain and engage in different kinds of fun and profitable dApps or Defi products. Crypto wallets are the best tools and entry points for such growing demands.
Centralized exchanges will suffer from huge outflow of both users and assets if they don’t make any changes.
With such a strong motivation and their deep bankrolls, investment or acquisition is the most economic and efficient way for exchanges to cut into this sector. And wallet startups are the most suitable targets for their investment.
For wallet providers, who struggle to make profits, it’s hard to turn down the offer for them to cash out.
Why is it so difficult for wallet businesses to make profits while they are so important in this industry?
I think the main reason is, while the business is called a “wallet”, they are in fact not closely related to the user’s on-chain assets.
The revenue sources for exchanges are very straightforward: trading fees, listing fees, staking, market making, investments, financing, mining, etc. It’s quite easy for exchanges to gain profits, in ways we can or cannot imagine.
Centralized exchanges absorb and keep real users and assets. Users will utilize or invest their assets in the exchanges when presented with a chance to make money. When users are to make withdrawals, exchanges can delay or even refuse the withdrawals by means of delayed verification or account blockage. In essence, exchanges have authorities over their users’ assets.
Unlike exchanges, crypto wallets don’t keep users’ assets. They only serve as a way to display the assets, but not storing them - all assets still stay “on-chain”. Wallets are more of only a tool for asset visualization or transfers. They have no means to prevent users from switching to other wallet providers or to intervene in users’ asset transfers.
Users have relatively low barriers and maximum freedom over their assets in wallets, so they are not strongly tied to any wallet providers.
As for now, lots of wallet providers are working to solve this dilemma, taking actions including providing financing products, security solutions, and news services, serving ads or even starting hardware wallet business. But none of these efforts are truly profitable, or creating sustainable business advantages.
Many users prefer wallets over exchanges for two reasons: security and full control. It might be a mistake from the very beginning if wallet providers try to make profits from users’ assets the same way as exchanges do.
We tried to classify crypto users based on their trading preferences: traders, holders, and dApp users.
Traders trade frequently and value liquidity. They’d prefer to deposit assets in exchanges and be prepared to trade anytime.
Holders seldomly trade. They care most about security. Once they purchase an asset, holders will withdraw the assets into decentralized wallets or hardware wallets, not considering selling for a while. They also tend to purchase in large volumes.
DApp users, on the other hand, would like to embrace new applications and concepts, for example, Web3, Metaverse, DeFi, GameFi, NFT, or DAO fundraising and crowdfunding. They are active users of wallets.
These three types of users are not fixed; they can be interchangeable and may co-exist in one individual.
Judging from the direction of blockchain industry evolution, I believe with the improvement of blockchain performance, there will be an even richer dApp ecosystem, attracting more users to become dApp users. Although a considerable amount of users will probably still stay as traders for the foreseeable future, the growth trajectory of dApp users is self-explanatory.
As the entrance for users into the crypto world, wallet providers should explore how to serve the growing community of dApp users. Instead of user assets, they should focus on user behaviors, and explore how to serve use cases like web3 and metaverse.
There are quite a lot of unmet needs of the dApp users. To name a few, how to protect users from phishing dApps? How to detect suspicious authorization? How to avoid being misled by zero-width characters? How to visualize on-chain data? And all kinds of alerts, for example, for whale activities. There are still quite a few we haven’t listed out yet. Wallet providers don’t have to provide all these functionalities; just striving to satisfy a focused few can help develop a closer bond with users and their assets.
In the long run, blockchain technology will eventually be prevalently adopted. Future dApps, regardless of which chain they are on, form the decentralized Web3 world for users to explore. At that stage, all chains are so secure and user-friendly enough that users won’t need to know which chain the dApps run on, nor will they care. They just need a convenient and integrated entrance into the world. The wallets could be the entrance.
Seeing from the future perspective, it might be inaccurate or even misleading to call the entrance a “wallet”.
Once I was in discussion with a friend in the wallet business, he argued that a wallet should be simple and straightford, only serving the single purpose of storing users’ assets. He maintained that a wallet startup should aim to become the “Alipay/Paypal” in the crypto industry.
It might be many people’s stereotype that crypto wallets should be equivalent to “Alipay/Paypal”. However, it’s very unlikely that the wallets will ever become such a thing - they serve different kinds of assets with different usages.
Users do need a wallet for crypto assets, but they need more than that. The current wallet is only a tool for on-chain asset display or transfers. While the wallet may be useful, it doesn’t mean it is valuable.
The current business model of wallets, either as a backup wallet of exchange assets, or as a tool to display assets, won’t bring attractive valuation to the business. Only when the “wallet” becomes the entrance into Web3, the business can have the potential to achieve as high a valuation as exchanges.
I can’t yet think up a clear path of how wallets can become such an entrance. It might be:
This remains an open question. If we continue to follow and research the development of the wallet industry, we may be able to identify good investment opportunities.
Original link：
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Translation：@Alex
Proofreading: @YaruiP
Layout：@Coucou
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