All blockchains start with a beginning/genesis/very first block. Once that has taken place, each subsequent block comprises transactions that advance the state forward. How the blockchain records those state transitions (blocks) varies among the different protocols. This choice has profound ramifications for the entire protocol moving forward but also for the wallets that will support it. Let’s look at a couple of approaches before we dig into what exactly a crypto “wallet” is.

UTXOs vs. Accounts

UTXO

The UTXO (Unspent Transaction Output) model is the foundational method of maintaining blockchain records and is utilized by cryptocurrencies such as Bitcoin, Zcash, and even new projects like Fuel. UTXO refers to the remaining amount of crypto unspent after executing a transaction. In the context of UTXO-modeled blockchain, individuals do not directly transact specific amounts of digital currency but instead transact in the denomination of UTXOs.

For a blockchain utilizing the UTXO model (like Bitcoin), there aren’t actually accounts or wallets at the protocol layer. Instead, bitcoin(s) simply exist as a list of unspent transaction outputs or UTXOs. Each UTXO has a quantity and a requirement for spending it. Transactions are generated by consuming current UTXOs and producing new UTXOs in their stead.

In the example below, Alice owns 1.2 BTC. She only needs to spend 0.2 BTC for her purchase. Therefore, because of the way the Bitcoin blockchain works, she will send all 1.2 BTC. 0.2 BTC will then go towards her purchase, and 1.0 BTC will be returned to her. It is very similar to only having a $20 bill and buying something for $5. You must hand over your $20 and get $15 returned to you.

The UTXO (Unspent Transaction Output) model is similar to cash change in that it represents unspent funds but differs in that cash change has fixed denominations, while UTXOs can have fractional values. Additionally, cash change transactions are not recorded, while the record of UTXOs is permanently recorded on the blockchain ledger. The balance of an address can be determined at any point in time by tracing its recorded UTXOs.

The UTXO model has both advantages and disadvantages for Bitcoin-based wallets. On the one hand, it promotes privacy-preserving behavior as it is difficult to link digital assets to a specific wallet due to the creation of new addresses with each UTXO. On the other hand, it poses challenges in terms of user interface and experience as users are accustomed to the concept of accounts, whereas the UTXO model operates without the concept of an account, requiring users to rely on their wallet provider to manage a range of addresses and sum up the corresponding UTXO balances.

Accounts

The Account-Balance model is an alternative method of maintaining blockchain records, primarily employed by smart contract platforms such as Ethereum and Binance Chain (BNB). It emerged as a solution to the challenges faced by Ethereum developers in adapting the privacy-focused, disconnected logic of the UTXO model to the accounts of decentralized applications (dApps).

Unlike the UTXO model, which resembles cash-based accounting, the Account-Balance model resembles bank-based accounting. On smart contract platforms, each wallet address has a single balance, which is increased or decreased with the receipt or transfer of funds respectively.

The Account-Balance model, as used in Ethereum, functions as follows:

Jan has 10 ETH and wishes to transfer 5 ETH to Steve. The system first deducts 5 ETH from Jan’s account, resulting in Jan now having 5 ETH.
The system then increases Steve’s account by 5 ETH. Since the system is aware that Steve already has 5 ETH, Steve’s final balance is 10 ETH.

While the Account-Balance model allows wallets to derive account balances in a much more straightforward and efficient manner compared to the UTXO model, it should be noted that it is more susceptible to double-spending attacks as compared to the UTXO model.

The method of record-keeping employed by a blockchain is crucial as it directly affects how a crypto wallet derives digital asset holdings. If a wallet cannot conform to the blockchain's mode of record-keeping, it is not functional. For instance, if a Bitcoin-based wallet provider is unable to handle the complexity of the UTXO model and track all the new addresses associated with UTXOs, it will result in a perceived loss of funds for the wallet user.

Wallets and Custody Solutions

Interacting with digital assets within the crypto economy (and the broader blockchain industry) has grown in scope considerably over the past several years. For users to buy, hold, and sell digital assets, digital wallets and custody solutions were required as a form of evolving technology. Today, there are countless options on the market to fill the need for digital wallets on behalf of blockchain users that fill in different categories and types depending on their design.

There are two key classifications that fill this technology need: non-custodial and custodial. Non-custodial or self-custodial wallets mean that digital assets (e.g., cryptocurrencies) are held directly by the user. This represents the majority of popular on-chain wallet solutions like MetaMask, Trust Wallet, and more. On the other hand, custodial solutions mean that a third party, typically an exchange, takes custody of the assets on behalf of the user. This is similar to a traditional bank where the user has access to the funds when they are needed, but the funds are ultimately held and utilized by the bank itself.

Self-custody represents one of the core philosophies behind the creation and utilization of cryptocurrencies, starting with Bitcoin. When users control their own funds outright, they cannot be easily confiscated, misused, or frozen by any external parties like governments or institutions. This is the primary directive of decentralized, stateless currencies.

When cryptocurrencies are handed over to an entity like a centralized exchange (CEX) such as FTX, control over those funds is forgone, and the user no longer has possession of the crypto. This is where substantial risk has been introduced into the crypto economy over the past year with the collapse of CEXs and loss of customer funds.

Wallet

A digital “wallet” represents a blanket term that refers to anything in which crypto can be stored. Wallets, specifically, hold a user’s private keys that enable the user to access the funds on the blockchain. This grants the ability to buy crypto, use crypto (i.e., yield farming, staking, etc.), and any other functionalities available via on-chain applications. This can come in the form of a hot wallet (internet-connected) or a cold wallet (offline and secured).

Crypto wallets don’t actually store funds. Instead, they store two keys:

A public key links to an address that lets you send and receive transactions. Think of it as your email address.
A private key proves that you own the tokens associated with your public address. Think of it as your email password. Since a private key is hard to remember (it’s a very long string of random numbers), wallets also give you a 12-24 word seed phrase. Private keys signify complete ownership of all digital assets. Therefore, protecting them is imperative.

Downloading a cryptocurrency wallet from a wallet provider to a computer or phone does not automatically mean that the owner is the only one who has a copy of the private keys. For example, with Coinbase, it is possible to install a wallet on a phone and to also have access to the same wallet through their website.

For crypto wallets, conventional wallets utilize a seed phrase and hierarchical structure to create and denote private keys, public keys, and the front-facing on-chain addresses to identify the wallet. Private keys are used to sign and execute transactions, while the public key is what external users are given to send crypto to the wallet.

wallet hierarchical deterministic structure

Key Generation

At the heart of this process is the generation of a private key. This key is derived from a randomly selected number taken from the secp256k1 elliptic curve—a crucial mathematical construct in cryptography. To create a public key, this private key is then multiplied by a predefined point on the elliptic curve. The Ethereum address, a crucial identifier within the network, is subsequently generated from the last 20 bytes of the hashed public key. To enhance usability and provide a human-readable backup, a "seed phrase" is often introduced. This seed phrase enables the deterministic derivation of both private and public keys, ensuring accessibility and security.

Signing Transactions

The cornerstone of any blockchain transaction is the signing process, wherein the user proves their ownership and intent to transfer assets. This operation involves various components, including:

Transaction Details: A transaction contains essential information such as a nonce (a sequential number that prevents double-spending), the amount to be transferred, the gas price (a fee for network processing), and the recipient's address.
Private Key: The private key comes into play as it is used to sign the transaction. Here, the Elliptic Curve Digital Signature Algorithm (ECDSA) takes center stage. ECDSA leverages elliptic curve cryptography, with secp256k1 as the chosen curve, to generate a digital signature. This signature comprises values denoted as (r, s, v).
Broadcasting: The resulting signature is then combined with the original transaction. Together, they are broadcast onto the Ethereum network, initiating the process of transferring assets from one address to another.

private key generation diagram wallet — Source

Verifying Transactions

Once a transaction reaches the Ethereum nodes, it undergoes a rigorous validation process within the node's mempool. Here's how the verification process unfolds:

Signature Extraction: Ethereum nodes extract the signature from the incoming transaction data.
Public Key Derivation: Utilizing the extracted signature and the hashed transaction data, the nodes derive the public key of the sender.
Address Confirmation: The final step involves confirming the authenticity of the transaction by matching the derived Ethereum address with the purported sender's address. This verification process ensures that the transaction has indeed been initiated by the rightful owner of the assets.

Seed Phrase

A seed phrase is a phrase of 12 to 24 words that corresponds directly to a private key. Seed phrases are employed since private keys are typically large strings of letters that appear unreadable to humans. Words are much easier to remember and transcribe as opposed to a string of random letters and numbers.

As shown below, each word in a seed phrase corresponds to a specific string of characters. Because there are 2048 potential words and 12 or 24 randomly generated words in a private key, it is nearly impossible to crack your wallet.

IMPORTANT! Record your seed phrase in the correct sequence and protect it at all costs! You must keep your seed phrase/private key protected. They are nearly impossible to hack or penetrate unless you get it stolen or give it to someone.

Do NOT share with anyone! If someone sees these words, they CAN steal all your crypto.

Do not try and save these words on anything digital. Do not screenshot these words. Do not store these words on your computer or mobile device. Your security is only as strong as your 12-word seed and passphrase. Check your work twice, and then confirm that you have acquired your 12 words.

All wallets have different characteristics depending on their underlying designs. Typically, there is some form of give and take with a number of identifiers, including the following:

Security
Privacy
Cost
User Experience
Recoverability
Extensibility

Security is generally considered to be one of, if not the most important attributes of any crypto wallet. Secure wallets have a higher degree of protection from external, sophisticated attacks and are harder to break. This means that user funds are less susceptible to hacks and attack vectors, keeping funds safe. In a similar manner, privacy helps to protect the identity of the user behind the wallet. This can be utilized for many different reasons, such as an organization wanting to remain anonymous or an individual wanting to keep their identity confidential when making sensitive transactions.

Cost is a big factor when considering adoption and ease of use (user experience). Some wallets may be expensive to obtain (typically hard wallets like Ledger) or transact with. This goes along with user experience, which refers to the permissions, controls, and accessibility of the wallet. As crypto wallets become more in demand from the mainstream adoption of blockchain technology, recoverability has grown into a far more significant quality. Recoverability refers to the ability to recover assets in the event of a compromise, loss of life, or some other factor.

Lastly, extensibility refers to the level of access and compatibility that the wallet allows. Different blockchains and ecosystems are compatible with different wallets. Some chains, like Fantom, even have their own native DeFi wallets that users can open to interact with that specific ecosystem. Many universal wallets like MetaMask are accepted nearly everywhere and even support many different networks.

1. Paper Wallet

Paper wallets are basic wallet options that generate a key and security phrase, which can then be written down and hidden for later access or recovery. Using a metal plate or temperature-resistant item is advisable, as it's fireproof/waterproof, etc. This is the best option for investors or users looking to keep crypto in “cold storage” (offline and not traded) for extended periods of time. Those wishing to trade crypto, engage in DeFi activities or utilize applications would be unsuitable to utilize a paper wallet.

2. Hot Wallet

Hot wallets are the most popular and widely utilized wallet form in the crypto economy. Hot wallets allow users and investors to actively use their crypto assets in trading, swapping, staking, and any other DeFi-related mechanics. Hot wallets include popular options like MetaMask. These wallets have the capability to stretch across ecosystems (Ethereum, Avalanche, Polygon, etc.) and access numerous decentralized applications.

The vibrant access that hot wallets enjoy also comes with extensive attack vectors. While cold wallets store keys completely offline, hot wallets can be stored directly on a PC or a cellphone. This means any security breaches to the device can result in the loss of keys (potentially funds).

Popular hot wallets in specific sectors include:

Ecosystem-specific wallets - Phantom and Glow on Solana, Braavos and Argent X on StarkNet, Electrum for Bitcoin, etc.
Mobile - Rainbow wallet, Brave, Metamask, and Trust
DeFi - Zerion, DeBank, and Zapper
NFT - Castle and Genesis
Teams or institutions - Squads, Gnosis, and Fireblocks

Software or “Hot wallets” are wallets connected to the internet and kept in a downloaded software/app on your computer, phone, or tablet. This method of storing your crypto adds a bit of convenience but at the risk of potential hacking and malware. It is usually recommended you only store a small amount of the BTC you intend on using in a “hot wallet” and the rest in a “cold wallet.” This is similar to how one does not walk around with their entire life savings but rather lets a bank hold onto the majority.

hot wallet browser extension comparisons — Source: Binance

Hot wallet attack vectors

Computer hacks
- Copy + paste bug
- Screen tracking
- Keyboard tracking
Malware from plug-ins
- Phishing (email and Twitter)
- Give-away scams (typically Twitter)
Fake URL/website
Social engineering
- Exploiting customer help to obtain personal information or bypass security
- SIM swapping
Fake re-sellers or tampered devices
- ONLY buy DIRECT from the retailer. No Amazon, eBay, Facebook, etc.

3. Hardware/Cold Wallets

Hardware wallets are a type of “cold storage” that keeps your crypto secure, offline, and away from potential hackers. This is the most recommended option for storing cryptocurrencies.

At their core, hardware wallets are simply devices designed to securely generate private keys, addresses, and sign transactions. Most hardware wallets come with their own app that serves as both an interface for firmware updates and a wallet interface for signing transactions. However, these apps generally have limited functionalities for users compared to more generalized wallets.

A more secure approach involves utilizing web extensions like MetaMask in conjunction with the hardware wallet. The seed phrase is generated and stored offline in the hardware device instead of directly in the MetaMask extension, allowing for transactions to be signed via requests from the extension. This eliminates the risk of funds being compromised in the event of a computer compromise, as the seed phrase remains protected.

Fortunately, there are several great options for BTC. The Ledger (Ledger Live tutorial), TREZOR, ColdCard, and KeepKey are currently the four most popular, while BillFodl and CryptoSteel add another dimension of security for storing your seed phrase/private key.

hardware wallet comparison table — Source: Binance Research

Hardware Wallet Best Practices

The suggestions below are a bit advanced. A huge percentage of “lost crypto” is due to the owner simply being phished or key mismanagement (losing your seed phrase). In both scenarios, THE OWNER is the issue. Not some thief with a wrench. Be honest with yourself about your own operational security, how reliable you are as a steward of the keys, and the lengths you’re willing to go to protect YOUR money.

Many will be too lazy or say, “Well, it’s just X amount of dollars. It’s not that much and worth all this hassle.” However, you should protect your crypto now like it’s worth 20x its current value because that has happened time and time again. That $10,000 turns into $200,000+ and is secured by a binder in a closet next to old receipts.

Once your crypto stack becomes large enough that you would be upset if it all disappeared, you’ve waited too long! It’s now time to take measures to protect your stack.

Keep duplicates- there’s a saying in some industries, “One is none. Two is too few. Three is key.” For incredibly important things, like a seed phrase/private key, always have duplicates to remove any single points of failure.
Diversify
- Now that you have multiple copies of a seed phrase, you need different locations to store them. Storing them all under your bed accomplishes nothing. Try to have two very different and distinct locations. A safety deposit box at a bank is a decent 2nd location.
- Buy hardware wallets from different companies in case one goes bankrupt, gets exploited, or acts maliciously
- Seed phrase storage - Do not label your seed phrase “Joe’s Crypto Password.” Be discreet. Do not make it obvious to anyone should they get access to it.
Durable - Your storage locations need to be resistant to fires, floods, kids, pets, natural disasters, etc. Don’t just write it on a piece of paper and keep it in a drawer. People have lost tens of millions of dollars due to simple floods and pets.
Secret - This is a matter of personal preference (and well, really, all of this is) but keeping a low profile is better than not. Social media, your friends, people on Tinder, etc. do not need to know “when you got into Bitcoin” or “how much crypto you have.” It puts a target on your back, and you will be surprised how many people come reaching out after the next BTC all-time high.
Back-up plan - If you die, fall down a well, get divorced, etc. Private key custody is hard. Succession/inheritance plans are another wrinkle. Look into plans that fit your needs. Some services specialize in exactly this.

4. Multi-Signature Wallet

Multi-signature (AKA multi-sig) is a type of security model and digital signature scheme that requires users to provide multiple keys to authorize access to or transact with secure digital assets. Such a transaction must be signed by a threshold of participants in order to be valid, similar to how some legal or financial documents require a co-signer or multiple authorizations across different mediums. The wallet owner can decide how many signatures are required for a transaction to be valid.

Multi-signature schemes have numerous benefits, including dividing up responsibility for possession of a digital asset among multiple people, heightened security by eliminating a single point of failure, and a solution for wallet recovery in the case of someone losing their private key. The primary benefit is that security is shared among numerous individuals. Even if your computer and hardware wallet are stolen, you are still safe because other actors are needed to move funds if properly set up. Your crypto will remain secure even if your seed phrase is hacked, akin to a safe deposit box that requires multiple keys. In the same line, it is imperative that every person with multi-sig duties comprehends the significance of private keys/seed phrases and can be relied upon with this responsibility.

One of the most basic forms of multisig storage is the 1-of-2 setup. This involves binding two private keys to a single wallet, allowing anyone holding either key to approve transactions. This is ideal for a small business where either of the two founders can transfer funds and trust is established through contractual and personal relations. It can also be a useful personal backup solution, as users can recover funds even if they lose one private key.

Another commonly used multisig setup is the 2-of-3 signatures wallet. This requires two out of three registered signers to complete a transaction. It is useful for escrow transactions and is also implemented by cryptocurrency custodians as an additional security measure. In this setup, the company may hold two of the keys, with one securely stored offline and the other held online to make the signing process easier. The third key is delegated to a trusted blockchain security company, which may be required if the crypto custodian loses one of its keys.

For a more robust multisig setup, the 3-of-5 signatures wallet requires three out of five signatures to validate transactions. This is useful for a corporate structure where several decision-makers must approve transfers. As long as over 50% of the parties consent to the decision, they can approve fund transfers. Delegating signatures to entities in diverse geographical locations could improve security.

multi sig best practices — Source: Revelo

Multi-signature wallets can also be classified as hosted or unhosted. A hosted multisig wallet is one created with a third-party platform such as Coinbase Custody or BitGo. These entities secure cryptocurrencies using institutional-grade solutions while giving clients access to multi-signature functionality. Clients register approved signatories and define signature thresholds for fund transfers. An unhosted multisig wallet (also known as a self-hosted wallet or simply a wallet) is one where the individual or organization holds the private keys instead of using a trusted third party. The setup process for unhosted wallets is usually more complex as users require security-optimized infrastructure and best practices. However, the user enjoys greater convenience and eliminates the counterparty risk associated with third parties.

While multisig wallets offer superior security features, they also come with certain trade-offs. For instance, they may not be the ideal choice for scenarios that require quick transactions due to the need for multiple signatories. The number of signatories and geographical boundaries can also limit their usage, making them less convenient for emergency situations or routine payments. Moreover, using multisig wallets requires a certain level of technical knowledge, which may be beyond the reach of average investors.

The setup process for multisig wallets may involve consulting a third-party wallet provider, installing specific software, or purchasing dedicated equipment like multiple hardware wallets and safe boxes. This process may be too complex for the average crypto investor and is one of the key factors hindering the adoption of multi-signature wallets.

Another challenge associated with multisig wallets is fund recovery and custodianship. Compared to single-key storage, recovering funds stored in a multisig wallet takes longer and requires more coordination. Additionally, N-of-N setups may not provide backup or recovery solutions for rare situations where one of the signatories is unavailable.

Entities that choose to use a multisig wallet hosted by a third-party custodian may expose themselves to counterparty risk. If a security breach occurs at the third-party custodian, the consequences could be far-reaching.

Despite these challenges, multisig wallets are an attractive option for users who prioritize security over convenience. The level of security provided by multisig wallets makes them a popular choice for institutional investors and businesses that require a more sophisticated level of asset protection. For individuals looking to use multisig wallets, it is important to carefully consider the trade-offs and consult with a trusted third-party provider to ensure that the setup process is done correctly.

Multi-party Computation (MPC)

Multi-party computation is a solution for securing data among several participants in a private manner. It allows many parties, each with their own private data, to verify the final computation without revealing their own secret portion of the data. Each participant in an MPC possesses a piece of confidential information. Typically, one entity owns one part of a cryptographic key that can move funds or change code.

multi-sig vs MPC wallet — Difference between multi-sig and MPC. Source

MPCs shard a private key into many segments, with each individual possessing a portion of the private key. When signing a transaction, a subset of MPC nodes must independently sign the transaction and communicate it to the larger group. In order to sign transactions, each participant inputs their secret portion and a public input (the message to be signed) to generate a digital signature. Then, anyone with access to the public key should be able to validate and verify the signatures. Since the key shares are pooled and the signature is generated off-chain, an MPC wallet transaction cannot be distinguished from a typical private key wallet.

Even if a bridging protocol has a limited quantity of relayer nodes, the relayers can be chosen at random from the pool of candidates to create the multi-party computing (MPC) group. To authorize a cross-chain transaction, the protocol can require a minimum number of relayers to come together and sign the message before any action can be taken. The greater the threshold of an MPC group, the less likely it is that relayer groups will collude.

MPC also guarantees that if a number of parties inside the group decide to disclose information or depart from the protocol's instructions during execution, the MPC will not allow them to coerce the honest parties into outputting an inaccurate result or leaking confidential information.

MPC Strengths

No single failure point
Flexible/Configurable Signing Schemes
Detailed Controls Around Access and Signing
Easier Recovery

MPC Drawbacks

Off-chain Coordination and Accountability: Off-chain management of signing policies and approval quorums make MPC setups susceptible to centralized failures not applicable to regular cold storage.
Incompatible with the majority of conventional wallets, such as Ledger and Trezor, due to the absence of a seed phrase or complete private keys on a single device.
MPC algorithms are not standardized; therefore, institution-grade secure devices like the iPhone SEP and HSMs do not natively allow bespoke implementations. MPCs are mostly niche, custom-made products with closed-source libraries.

Threshold Signature Schemes (TSS)

Threshold Signature Schemes (TSS) involve a subset of trusted nodes participating in key generation (and signature) events. MPC requires that more than one entity/node/validator is necessary to control the wallet's contents. TSS is a subset of MPC. TSS enables multiple entities to collaboratively generate a key and signature rather than just one party. After the key is generated, no single entity ever has access to the full key and cannot sign without the cooperation of the others. TSS is comprised of two values: n/t, where n is the number of nodes required to generate a signature, and t is the total number of entities involved.

5. Smart Contract Wallets

Smart contract wallets are specific types of wallets that store assets in a smart contract (typically on the Ethereum blockchain). They allow for programmable features that enhance security and ease of use compared to regular Ethereum accounts (EOAs). These features include transfer limits, bundle transactions, and fee reductions. With smart contract wallets, the possibilities for innovation are vast, and the wallet provider can choose to implement various features to improve the user experience. Two popular implementations are Argent and Safe.

Argent

Argent is a smart contract mobile wallet designed to help users recover lost or forgotten private keys. According to a report by Chainalysis, 20% of bitcoins in circulation in 2021 were lost because the owners couldn't remember their private keys. This is a common problem, not just for bitcoin but across all blockchains. To address this issue, Argent has a feature called "social recovery."

With social recovery, users list a "Guardian" or a trusted public address upon creating an Argent account. Guardians are trusted third parties designated by the wallet owner to help maintain control of the wallet. If a user does not feel comfortable custodying their private keys 100% by themselves, they can elect a Guardian as a “backup.” This is akin to giving your mom or significant other a password in case you forget the password. With the use of Guardians, Argent provides an added layer of security and trust for the wallet owner's digital assets.

If a user loses their private key, they can request the Guardians to help recover their wallet by sending them a notification. The Guardians will then have the option to accept or reject the recovery request. If at least half of the Guardians approve, the wallet will be unlocked in the mobile app, and the user will receive a code to unlock it through their phone or email. It's important to note that social recovery in Argent requires a mobile phone number and email address, which may compromise decentralization and anonymity compared to other wallet captions.

In the beginning, Argent was the most popular smart contract wallet with more users than competitor Safe but then Ethereum gas fees became prohibitively expensive for Argent. This is due to the differences in how gas fees are paid in Argent compared to other smart contract wallets (like Safe). With the deployment of a Safe wallet, users pay their own costs. However, Argent operates a relayer service that listens for off-chain communications signed by users and then encapsulates them within a transaction to be placed on-chain. When L1 rates became expensive, Argent ceased paying for gas on behalf of their wallet users.

Safe

Safe (previously known as Gnosis Safe) is another widely-used smart contract wallet in the Ethereum blockchain, but rather than catering to retail and mobile users like Argent, it focuses on teams, corporations, DAOs, and multisig setups. It currently holds over $30 billion in assets and is considered to be the leading multi-sig on Ethereum.

Over time, the number of active Safes on the mainnet has increased significantly, and with the growth of Layer 2 solutions, this number continues to grow. The biggest disadvantage of smart contract wallets on Ethereum is the gas fees, as every transaction must originate from an EOA, leading to added costs for daily usage, especially on Layer 1. The lower transaction costs of an L2 make Safes a viable option for most users again.

Coinbase Smart Wallet

Coinbase unveiled its latest innovation in February 2024: the Smart Wallet. This product stands out as it adheres to the ERC-4337 standard for smart contract wallets, introducing a suite of features designed to enhance user experience and security in the cryptocurrency domain.

One of the hallmark features of the Smart Wallet is the integration of Passkeys. This modern authentication method is set to replace the traditional username and password system. It operates by generating a public key that is stored by an application or domain to identify users, while a private key is securely generated and stored on the user's device. This system is particularly compatible with biometric authentication methods, such as Apple’s FaceID, allowing users to authorize transactions swiftly and securely through biometric verification.

Another innovative feature of the Smart Wallet is its support for cross-chain transactions. Traditionally, updating smart contract wallets across different blockchain networks requires executing the same transaction on each network. However, the Smart Wallet simplifies this process by enabling a single transaction to be replicated across all networks where the user’s wallet is active. This functionality not only streamlines the management of multi-chain assets but also significantly enhances the user experience by reducing the complexity and time involved in managing cross-chain transactions.

Perhaps the most distinctive feature of the Smart Wallet is Magic Spend. This feature addresses a common challenge faced by smart wallet users: funding the wallet for on-chain transactions. With Magic Spend, users can directly utilize funds from their standard Coinbase account to cover on-chain transaction costs. This integration effectively bridges the gap between a user's Coinbase balance and their on-chain activities, allowing for a seamless transaction experience without the need to pre-fund or top-up their smart wallets.

The introduction of Magic Spend is particularly noteworthy for its potential to tap into Coinbase’s substantial user base. As of 2022, Coinbase reported having 9 million monthly active users. By enabling these users to effortlessly engage with on-chain transactions through their Coinbase accounts, Magic Spend opens up a vast new market of crypto-holding retail users to the on-chain ecosystem. This feature represents a significant step forward in making on-chain interactions more accessible and convenient for a broader audience, potentially driving increased adoption and engagement within the cryptocurrency space.

MPC vs. Smart Contract Wallets

MPC and Smart Contract (SC) wallets serve different functions and offer unique benefits to their users. In the scenario where a whitelist of addresses is established and an attacker initiates a transfer to a non-whitelisted address, the operation of these two types of wallets differs. In the case of an SC wallet, the malicious transaction is signed and the policy is checked on-chain. If the address is not whitelisted, the transfer is blocked. Conversely, with an MPC wallet, the attacker's key is compromised and generates only a portion of the signature. The other nodes in the network, using off-chain policies, determine that the address is not whitelisted and refuse to sign their shares or complete a valid signature.

One advantage of MPC wallets is that they utilize Externally Owned Addresses (EOAs) and do not require the deployment of new addresses on a chain, unlike SC wallets. Additionally, MPC policies and signature schemes can remain private and not be disclosed on-chain. MPC wallets are also flexible in that they are not limited to a particular chain or Virtual Machine and do not rely on protocol upgrades.

MetaMask

MetaMask is a cryptocurrency wallet that supports the Ethereum blockchain, Layer 2 networks, and standalone EVM-compatible blockchains. It is a non-custodial solution that enables users to interact with decentralized applications and manage their crypto assets. Developed by Consensys, it is widely supported by the Ethereum developer community and has gained significant popularity, with over 30 million monthly active users as of Q1 2023.

One of the key advantages of MetaMask is its flexibility in supporting EVM blockchains. In recent years, there has been a proliferation of EVM-compatible blockchains; each offering improved efficiency and cost-effectiveness over the original Ethereum blockchain. MetaMask's technology allows for easy integration of these new networks, enabling users to switch between them and access decentralized applications on any network. This is particularly useful for investors who are always looking to explore new projects and ecosystems.

Another advantage of MetaMask is its ease of access and user-friendly interface. The wallet is available for all smart devices, and the interface is designed for basic transactions, making it accessible for even casual investors with minimal knowledge of the technology. Additionally, MetaMask can be used in conjunction with hardware wallets such as Trezor and Ledger, providing users with the option to store their crypto assets in a more secure manner for long-term holding.

One of their popular offerings is the MetaMask swaps, which was processing $3B-$5B of volume per month at its peak and generating close to $0.5B in revenue since its launch in late 2020. MetaMask charges a 0.875% swap fee on top of the 1-30bps DEX fees the user is already paying, which is considered a rather high fee by some.

MetaMask's integrated swap feature operates as a super aggregator, collecting liquidity from a host of sources, including other decentralized exchange (DEX) aggregators. Despite its competition with Coinbase in this domain, it also finds rivals in other super aggregators such as Matcha and DefiLlama.

Information from 0x indicates that, when looking at trading volume over the previous month, MetaMask trails behind Matcha ($627.8 million), DefiLlama ($350.5 million), and Coinbase ($111.4 million), with a total of $101.1 million in transactions. However, when it comes to user count (203,372) and total transactions (434,430) within the same timeframe, MetaMask outperforms all its competitors combined.

The average transaction size on MetaMask stands at a mere $233, which is less than a third of its nearest competitor, Coinbase. This might imply that MetaMask primarily serves smaller accounts, but it's probably more attributable to MetaMask’s swap fees of 0.875%. As a result, users may favor executing smaller swaps on MetaMask because of its ease of use, while turning to other super aggregators for larger swaps – as neither Coinbase nor any of the other aggregators impose a fee.

MetaMask's second app was the bridge product which supports 4 EVM L1s and has three levels of fee extraction taking place. However, the bridge volume saw a drop of ~80% due to market conditions and EVM rollups gaining share from the L1s. MetaMask recently launched liquid staking in-app, which allows users to stake their ETH for an LSD without going to the protocol and reduces the attack surface.

MetaMask's latest development is their product "Snaps," which is still in its pre-release phase. Snaps allow external developers to build apps on top of MetaMask's functionality, similar to the App Store or Microsoft's Windows. Snaps are JavaScript files that can be installed by users to increase the functionality of MetaMask. Some potential snaps already being showcased include StarkNet for contract accounts on L2, Web3Auth to turn MetaMask into an MPC wallet, ZK-Nullifier to create pseudonymous apps, smart accounts to access smart contract wallets directly from MetaMask, and more. Snaps is an exciting development from the MetaMask team as it allows them to scale their wallet and increase its functionality in a way that is not possible with a closed development loop.

However, MetaMask also has certain limitations that make it less suitable for certain investors. One limitation is its maximalism towards the Ethereum blockchain and EVM blockchains, which means it only supports these types of crypto assets and doesn't have plans to support other blockchain networks. This can be inconvenient for investors who hold assets across multiple chains and are looking for a single wallet solution. Additionally, the process of manually adding custom blockchains can be time-consuming and less convenient for some investors.

MetaMask has recently rolled out an anti-phishing function in 2023 that alerts users when they are about to engage with a potentially fraudulent website. Although this is a commendable initiative, in my view, it doesn't quite hit the mark, given that its effectiveness is inevitably constrained by the reliance on various services to keep an updated database of malicious sites.

There is an emerging suite of tools, namely Pocket Universe (with over 50,000 downloads), Fire (surpassing 40,000 downloads), and Blowfish (with more than 1,000 downloads), that are introducing an innovative security measure known as transaction simulation. These tools, available as browser extensions, operate in concert with your wallet extension to model a transaction on a network fork. This functionality assists users in assessing the safety of a transaction they're about to authorize. A practical demonstration of this process is available via the Fire extension.

In summary, MetaMask is a popular and versatile cryptocurrency wallet that supports EVM blockchains and enables easy access to decentralized applications. Its flexibility and user-friendly interface make it accessible for a wide range of investors. However, its maximalism towards the Ethereum blockchain and the process of manually adding custom blockchains can be limiting factors for some investors.

Keplr

Keplr is a web browser extension and hot wallet similar to MetaMask in Ethereum. It is the most popular wallet in the Cosmos ecosystem and allows users to do far more than just send and receive tokens. A new user can create a new wallet or import an already existing one. Users need to preserve and re-enter the seed phrase when creating a new account to ensure security. After creating an account, the user is welcomed by a wallet screen with a 0 balance. Note, however, that users will need to obtain ATOM tokens in order to explore the Cosmos Hub.

Keplr's dashboard offers routine features like governance capabilities/staking, liquidity pool statistics for Osmosis, NFT portfolios, and more. Keplr has also incorporated more novel, bleeding-edge type features such as account abstraction (users can pay for gas in any token). In addition, a number of retail features have been introduced, such as fiat onramp connections with Transak, MoonPay, and Kado, and the option to establish a wallet not just with a seed phrase or hardware wallet but also using Google (not advised for those serious about security). Keplr uses Web3Auth for the Google sign-in, which already offers MPC solutions and is also developing a MetaMask snap. In the future, there can be an MPC version in which the Google account is only a fraction of the signing key.

Keplr has a few more items on its roadmap, including EVM support, a more robust identity/reputation layer, and further account abstraction features such as spending limitations, social recovery, and more. As a side note to this, Cosmos chains have account abstraction built-in already. AA is a tool; what counts are the things that people create with it.

TrustWallet

Trust Wallet is a multi-chain cryptocurrency wallet that is designed to securely store crypto assets. Since its launch in November 2017, the wallet has reportedly been downloaded over 15 million times on both the Google Play and Apple stores. Trust Wallet has gained a significant reputation, in part due to its association with the Binance Exchange, which is currently the largest cryptocurrency exchange in terms of daily trading volume.

One of the key features of Trust Wallet is its multi-chain support, which enables it to be used across various different cryptocurrency networks that operate in different ways. As of July 2021, Trust Wallet was confirmed to support over 33 chains, ranging from payment solution blockchains to enterprise-level smart contract blockchains. This makes it an attractive option for investors who wish to diversify their portfolio and hold all their assets in a single wallet while still maintaining the option to use just a single chain.

In addition to multi-chain support, Trust Wallet also provides access to decentralized applications (dApps) via its in-built browser and the "WalletConnect" protocol. This allows users to connect to decentralized applications for their EVM blockchains and non-EVM chains like Cosmos, all from a single point of access. Furthermore, Trust Wallet is also available for personal computers and users can install the Trust Wallet extension on desktop browsers.

One of the key benefits of using Trust Wallet is the ability to manage assets from a single point, making it easier for investors to coordinate their portfolios and quickly check the status of their wallets. Additionally, Trust Wallet offers extra features such as staking programs, a decentralized application browser, and centralized exchange integrations, which can further enhance the user experience. The staking feature allows users to access staking programs of supported cryptocurrencies directly from their wallet without needing to navigate to another site.

However, there are also some limitations to using Trust Wallet. For example, at present, users of Trust Wallet and hardware wallets cannot use their hardware wallets in combination with their Trust Wallet as Trust Wallet does not currently have a hardware wallet support system. Additionally, Trust Wallet does not currently have the infrastructure for installation on custom networks, meaning that users will have to stick to using the networks installed by the developers or use Walletconnect (where available) to connect to applications on these networks.

In conclusion, Trust Wallet is a robust and secure multi-chain wallet that offers a wide range of features and support for various cryptocurrency networks. However, it is important to note that there are some limitations to using the wallet, such as the lack of hardware wallet support and the inability to install it on custom networks, which may be important factors to consider for some investors.

Rabby Wallet

Singapore-based DeBank is the organization that brought the Rabby Wallet to life. Founded by Tang Hongbo, DeBank has made a name for itself as a tracker of Decentralized Finance (DeFi) protocols, boasting coverage of over 800 protocols spanning 15 distinct chains. This remarkable feat was partly funded by their successful $25 million funding round, attracting notable investors such as Coinbase Ventures, Crypto.com, and Circle Ventures, among others.

One of the standout products born from DeBank's development endeavors is the Rabby Wallet. A non-custodial wallet with Ethereum compatibility, Rabby is not only a competitor to MetaMask but arguably an upgrade with more extensive features. Rabby Wallet supports Ethereum, along with various Ethereum Virtual Machine (EVM) compatible chains such as Polygon, Arbitrum, and Optimism, boasting integration with 141 chains and testnets and over 10,000 cryptocurrencies. Designed to enhance user experience, Rabby Wallet simplifies the DeFi interaction process by automatically selecting the appropriate chain for any given dApp, eliminating the need for manual chain switching. Security is a paramount feature of Rabby Wallet, offering transaction previews for estimated balance changes and conducting pre-transaction risk assessments to identify potential vulnerabilities. In January 2024, Rabby introduced a points system to incentivize user engagement through activities like referrals and utilizing specific wallet features. Although speculation about these points qualifying users for future token airdrops exists, official details regarding the full scope of the Rabby Wallet Points program remain forthcoming.

Distinct Features of Rabby Wallet

Three standout features elevate Rabby Wallet above its competitors:

Multi-Chain Functionality: Rabby Wallet seamlessly links to 44 chains and deftly automates chain-switching, a stark contrast to its competitors that require manual switching. This significantly streamlines the user experience and efficiency.
Transparency: Transparency is paramount for Rabby Wallet. Prior to any transaction confirmation, users are granted full visibility into the specific details of the transaction, a feature that sets it apart from most wallets. This provides a higher level of control and understanding of your transactions.
Risk Assessment: Rabby takes a proactive approach to security by performing a pre-transaction risk assessment. It actively scans each transaction and issues warnings for any potential failure or security risk. This includes notification if the address has previously been under attack or doesn't exist on the chain.

Rabby Wallet enhances the user experience with its advanced transaction simulation feature, which allows users to preview the outcomes of their intended transactions without the need for additional security extensions. This simulation runs a test version of the transaction, providing insights into what to expect upon execution, including potential extra events not disclosed by the smart contract developer. This built-in functionality ensures users are fully informed of the implications of their actions on the blockchain.

Moreover, Rabby Wallet takes proactive measures to safeguard its users against fraudulent activities. It identifies and alerts users about potential scam transactions, such as dusting attacks or transactions involving counterfeit assets. Additionally, Rabby Wallet incorporates a security alert system that warns users of various security concerns prior to finalizing a transaction. These alerts may be triggered by actions including, but not limited to, initiating a transaction to a new wallet, transferring assets to a suspected scam or non-whitelisted wallet. Users are required to address these security warnings before they can proceed, adding an extra layer of protection against potential threats and ensuring a safer transaction environment.

As of now, Rabby Wallet extends its support to 39 different blockchains, with the promise of future expansions. This wide array of support further underscores Rabby's commitment to a versatile and seamless user experience.

Rabby Wallet operates on a no-tracking policy. According to their privacy policy, they do not collect full IP addresses, keys, transactions, or personal data from your wallet, ensuring that your transactions remain private and secure from potential threats, including hackers and regulatory authorities.

Software Security and Privacy

Security is a cornerstone for Rabby Wallet. The team conducts regular security rule updates and audits. Its back-end services are minimal, reducing the risk of data compromise. Its open-source code has undergone auditing by an experienced security firm, showcasing Rabby's commitment to a secure and user-friendly experience. Although Rabby Wallet is free software released under the permissive MIT license, it relies on closed source dependencies (closed source API). This creates a bit of a conundrum regarding its open-source status.

While Rabby Wallet is growing in popularity as an alternative to MetaMask, it currently only exists as a Chrome extension, with approximately 80,000 downloads. At present, there are no versions available for Firefox or mobile, and the Windows and Mac desktop wallets are still in closed beta.

Audit Considerations

Rabby's codebase handling wallet security reportedly borrows heavily from MetaMask. However, this hasn't been verified by a third-party auditor. An early version of Rabby was audited by Slowmist, a firm recently entrusted to audit OKX exchange’s downloadable wallet software.

Unfortunately, this audit pertains to an outdated version of the codebase, and there have been significant updates since. This means that any of these updates could potentially introduce security risks.

A review of their Github reveals issues relating to outdated and insecure cryptography dependencies. The project should be utilizing Ethereum's extensive and audited JavaScript library which was released in January 2022. Not leveraging this upstream security improvement in a crypto wallet as vital as Rabby Wallet is a concerning oversight.

Rabby's security engine performs a preliminary screening of every transaction before it is signed, helping users to identify potential risks. However, this API is not open-sourced and lacks technical documentation, making it difficult to ascertain what information about your transaction is sent and how this data is stored or analyzed.

RPC and Logging: Transparency Required

Rabby seems to utilize its own RPC server hosted at matomo.debank.com, rather than using Alchemy/Infura. Data is directly sent to festats.debank.com and Sentry (o460488.ingest.sentry.io). While logging to Sentry is not inherently bad if done securely, it is yet another organization capable of tracking your IP address as being linked to crypto activities. However, Rabby/DeBank does not block Tor or VPN connections, enabling users to mask their IP addresses for enhanced privacy.

Additional Safety Measures and Crypto Security

Most of these below, as well as much, much more, can be found here.

Use 2FA (not SMS-based): 2-Factor Authentication (2FA) is used to ensure accounts are protected by more than a password but need an additional randomly generated code or device to grant access.
1. How to Set Up Google Authenticator
2. How to restore access to your accounts if you lose/destroy your device w/ Google Authenticator (2FA)
Whitelisting of addresses is often used by businesses to ensure funds can only be sent to previously approved addresses. This forces a hacker to gain access to both the wallet and the mechanism that manages this list.
Bookmark your favorite/most frequented sites
Use a password manager
Use burner wallets/addresses, especially when interacting with a new protocol for the first time
Geographical distribution of these keys and/or participants to protect against physical attacks
Cold storage
A crypto vault has a built-in, predetermined delay when you try to move funds. This is also known as a timelock. It prevents cryptocurrency from being moved until a certain amount of time has passed.
Yubi keys or other security hardware
What to do if you signed a scam transaction
Don’t link a device to your home address
1. Buy with cash if possible
Use separate email
Have “crypto computer”
1. Use a VPN
2. Use Brave or Firefox Browser
3. Be mindful when you give a website or extension permission to access things like your camera, location, plugins, etc., in the future.
4. Audit your Chrome Extensions: Remove extensions you don’t use, don’t need, don’t trust.
5. If you do use Chrome, follow these instructions:

Visit chrome://settings/content and ensure the following settings:

[x] Unsandboxed plugin access: Ask when a site wants to use a plugin to access your computer.
[x] Location: Ask before accessing
[x] Camera: Ask before accessing
[x] Microphone: Ask before accessing
[x] Flash: Block sites from running Flash
[x] Popups: Blocked

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