Hardware wallets and MPC wallets have gained popularity, and the wallet sector is entering a period of dividends

Author: Runsheng, ChainCatcher

Since CoinDesk exposed Alameda Research's balance sheet in early November, the collapse of FTX and its ensuing crisis have plunged the crypto world into its darkest period ever. Over the past month, both institutional investors and individual retail traders have been passing around feelings of panic, with one of their primary concerns being the safety of their funds.

On one hand, the demand for hardware wallets has surged, even leading to shortages. According to Decrypt, hardware wallet manufacturers Ledger and Trezor have seen significant increases in sales. A Trezor analyst stated that Trezor sales experienced exponential growth after November 7. Ledger's Chief Experience Officer noted that November 13 was the largest sales day in Ledger's history. Additionally, OneKey core contributor Wang Yishi told ChainCatcher that OneKey's recent sales have increased nearly tenfold.

On the other hand, the concept of MPC wallets has garnered significant capital interest. In August of this year, the MPC wallet Safeheron announced it had completed a $7 million financing round. In November, the MPC wallet Fordefi completed an $18 million seed round, led by Lightspeed Venture Partners.

【Note: MPC (Multi-Party Computation) is a cryptographic collaborative computing framework that can be broadly understood as multiple parties having private inputs to complete a computational task together, while ensuring that their private inputs remain confidential. MPC wallets achieve decentralized control by performing multi-party computations on private keys, thereby mitigating risks or enhancing disaster recovery, effectively avoiding security issues such as single points of failure.】

The positive financing and sales data reflect the market's panic while also raising a new question: Has the crypto wallet sector entered a true period of dividends after the FTX collapse?

"There is indeed a wave of dividends in the crypto wallet sector recently," said Zhixian, founder of UniPass, to ChainCatcher. The FTX collapse has awakened centralized exchange users' awareness of self-custody of assets, and there has been widespread inquiry within the community about recommended wallets. However, Zhixian believes that this dividend period will not last long. On one hand, users have short memories and tend to forget pain once it heals; on the other hand, the new users in the wallet sector are mainly existing users from within the community, not new entrants, which limits their numbers.

"The institutions and high-net-worth clients have been more severely affected by the FTX incident," said Cobo VP Yu Feimo to ChainCatcher. The withdrawal volume from centralized exchanges (CEX) is much larger than expected, B-end users have become more conservative, and on-chain DEX liquidity has decreased rather than increased, with funds retracting back to traditional fiat banks represented by the US dollar. Yu Feimo stated that the FTX incident has caused cryptocurrencies to lose their greatest appeal to traditional asset management, and institutions are exiting more resolutely than retail investors.

Moreover, the data on wallet financing is not optimistic. According to Wang Yishi, the FTX collapse has not led institutions to pay attention to self-custody wallets, and the investment environment for self-custody wallets has not improved as many hoped, but rather has become more challenging. Wang Yishi explained that the FTX collapse severely impacted the confidence of VCs and their underlying LPs in the entire crypto industry, stating, "To some extent, the FTX incident has set the capital environment of the entire industry back three years."

ChainCatcher has noticed that security incidents such as wallet thefts and CeFi collapses are frequent. Although, in theory, security incidents serve as the best education for users, user forgetfulness seems to be the norm. This indicates that there are still many urgent cognitive biases that need to be addressed between security incidents and user education.

Zhixian reminded that a common misconception is that users mistakenly equate centralized crypto institutions (CeFi) with traditional financial institutions, extending their sense of security regarding traditional funds to CeFi, without recognizing the risks stemming from a lack of regulation and compliance. In fact, internal regulation within CeFi is very opaque, making it difficult for both outsiders and ordinary internal employees to understand the internal fund management.

"CeFi based on coin standards does not belong to blockchain at all," Yu Feimo believes this is the biggest misconception among C-end users. The FTX incident has led some to think that cryptocurrencies are unreliable, but in reality, it is just CeFi that is unreliable. However, Yu Feimo has observed a positive trend: now everyone realizes that CeFi carries the highest risks.

Recently, several crypto VC practitioners have told ChainCatcher, "Actually, the money in a bank card is the most real." This kind of pessimistic sentiment also reflects the confusion of most Web3 users: how can they ensure their funds are 100% safe?

Zhixian told ChainCatcher that crypto funds cannot achieve absolute safety, only relative safety. This involves many dimensions and reflects a proposition that the crypto industry has yet to solve: how can users of different levels safeguard their assets? Zhixian suggests that the correct approach should be to reach a relatively safe scenario for asset amounts at different stages, so that users are not exposed to targeted attacks and other security situations at the corresponding stages.

A consensus in the industry is that decentralized asset custody is a feasible solution currently, aiming for nearly 100% safety. TokenPocket CBO Michael provided the following specific suggestions:

1. Don't put all your eggs in one basket; manage assets in two categories: large and small wallets.
2. Use cold wallets or multi-signature management for large assets (do not authorize anything externally), while small assets can use hot wallets.
3. During regular use, do not authorize unknown links casually, regularly check authorization status, and promptly cancel any suspicious authorizations or change to a new wallet address.
4. Whether using hot or cold wallets, keep your private keys secure; do not let others know and avoid exposure to the internet.

ChainCatcher has noticed that discussions around the development of MPC wallets, hardware wallets, and smart wallets are increasing. Since the birth of Bitcoin 13 years ago, wallets have evolved from single-chain single-asset to multi-chain multi-asset wallets. According to Michael, the number of users who have used crypto wallets globally should exceed 100 million. So, will the FTX incident bring changes to the wallet development landscape? What challenges does wallet development face?

Zhixian analyzed that the changes brought by FTX to wallet development are not significant. He stated that in previous phases such as the ICO era, DeFi era, and NFT boom, there have always been waves of wallet trends. The wallet industry primarily competes on ecological first-mover advantages and ecological adaptability, but the problem is that differentiation has not been achieved.

"The development of wallets faces both old and new challenges; the old challenge is security, while the new challenges are functionality, scalability, and support for new scenarios. How to transition between the previous generation of key wallets and the next generation of smart wallets?"

In Zhixian's view, the recent discussions around smart contract wallets highlight that the current infrastructure cannot keep up with new narratives and scenario demands. How to ensure that security, applicability, and functionality can support the next wave of "next billion users," i.e., scenarios for mass user entry, is a question all wallets should consider.

So, what will be the direction of crypto wallet development?

Michael analyzed that in the medium term, the user base of MPC is likely to experience explosive growth because MPC wallets can lower the user threshold and provide opportunities for private key recovery. If combined with popular Web2.5 products, it can allow a large number of Web2 users to enter Web3. However, in the long term, users will gradually understand the benefits of EOA wallets, which will become fully popularized in five years and surpass MPC wallets, while the user proportion of hardware wallets will remain relatively low.

"The ultimate goal is for all EOAs to become smart contract wallets." Zhixian predicts that one possible development direction for wallets is to effectively serve existing needs, improving security and applicability while also supporting new scenario demands for mass user entry, minimizing barriers, and addressing issues like mnemonic phrases and gas fees that hinder user entry.

Yu Feimo shared with ChainCatcher two directions she is optimistic about: for B-end, the MPC direction, and for C-end, keyless wallets, i.e., wallets without mnemonic phrases. In her view, there is now a new consensus in the wallet sector regarding how B-end and C-end wallets can be compliant, whether C-end wallet technology can withstand scrutiny, and how B-end wallets can combine with MPC to lower barriers.

She finally reminded that C-end clients often do not understand business models and operational methods, only focusing on seemingly glamorous institutions. In reality, the underlying issues of wallets should be emphasized again, namely asset security and private key management; wallets are merely a form of presentation.

According to CoinDesk, Binance's Chief Strategy Officer Patrick Hillman recently stated, "Centralized exchanges may cease to exist in 10 years as the cryptocurrency market is moving towards decentralized finance (DeFi)." Binance's statement is filled with a sense of crisis, while also indicating a positive trend for the wallet sector.