The competition for Web3 wallets intensifies. How to find new opportunities in a saturated market?

Written by: MICHAELLWY, Deep Tide TechFlow

Introduction

Web3 wallets serve as the primary gateway to on-chain services, enabling users to interact with dapps and store their digital assets. With over 350 wallets showcased on the WalletConnect website, it is clear that this sector has become one of the most saturated areas in the crypto space. The reason for this saturation is obvious: wallets represent the initial touchpoint for everything on-chain, and it is well-known that with distribution comes significant power.

In this article, I will not delve into technical details or categorize wallets into EOA, AA, MPC, and ERC-4337, etc. While these technical classifications are important, they typically only represent distinctions within specific layers of wallets. Instead, my focus is on presenting three frameworks to understand the business and strategic positioning of Web3 wallets. These frameworks will provide builders and investors with a clearer understanding of the wallet ecosystem, addressing questions such as: how do existing projects capture additional value in this saturated market? What strategies can newcomers adopt to carve out their territory among established giants? Which areas in the wallet market still have organic opportunities? These are the considerations that will guide our discussion.

Part One: "Universal Wallets" vs. "Specialized Wallets"

In this analysis, I plotted major wallets along two different axes: functional features and blockchain ecosystem coverage. While this classification is not a strictly quantitative or scientific categorization, it draws from my firsthand experience with these products. Rather than focusing on the exact position of wallets on the grid, it is more useful to observe the general quadrants they occupy. For example, wallets aimed at the Move chain and Bitcoin Ordinals ecosystem are positioned lower on the chart due to their specific ecosystem focus. On the other hand, wallets specialized for specific use cases such as trading, staking, and social interactions tend to be on the right side, indicating their specialization.

This framework divides the landscape into four distinct categories:

Top Left: This is a highly competitive area where wallets strive to be all-encompassing. They attempt to provide all major features, utilities, and chains. Typical participants in this quadrant include CEX-affiliated apps like Trust (Binance), Coinbase Wallet, OKX, Bitget Wallet, etc.

Top Right: While these wallets maintain broad chain ecosystem coverage, they do not pursue every available feature. Instead, they focus on meeting the use cases of the most active user groups. For example, Zerion and Zapper offer integrated DeFi portfolio tracking features. Rainbow leans more towards NFTs, featuring functionalities like internal minting.

Bottom Left: Here, wallets show a clear inclination towards specific ecosystems. Although they may support multiple chains, their loyalty tends to lean towards specific chains, such as Phantom leaning towards Solana, or Core Wallet leaning towards Avalanche and its subnets, while also supporting other EVMs. Their goal is to gain an early foothold on emerging chains and build a loyal user base from the start.

Bottom Right: These wallets focus on specific features with clearer objectives, such as staking and swapping. They selectively support chains, directing resources towards the most active/liquid chains, potentially offering promising investment returns.

Part Two: Wallet Stack

In the second framework, I drew on the ideas of Messari's Kel. He divides the wallet stack into four components: 1) Key Management, 2) Blockchain Connectivity, 3) User Interface, and 4) Application Logic. Based on this foundation, I explored the strategic implications of different stacks. In Kel's analysis, these four dimensions are described as different elements that, when combined, determine the wallet's accessibility, specialization, and business focus.

In my version, the wallet stack resembles a layered cake, with the most critical dimension at the bottom being security and key management. With a solid design at the lower layer, wallets can focus on improving the top layer's user retention through more decorative UI adjustments. The features within each layer have specific impacts on product strategy regarding onboarding, conversion, monetization, and retention.

1. Security and Key Management: Self-custody is the most critical feature of Web3. This dimension focuses on how wallets manage private keys and ensure security. Features here include multi-party computation (MPC), hardware wallet support, multi-signature capabilities, and social logins enabled by account abstraction technology. Elements surrounding key management shape the wallet's onboarding journey and its ability to successfully convert new users.

2. Chain Support: Wallets can differentiate themselves through the chains they support. Some focus on the Ethereum ecosystem (L2 and EVM), while others serve Bitcoin-related protocols (BRC-20 and Ordinals), Cosmos chains, or single chains like Solana and TON. In practice, a wallet's chain compatibility defines its potential market coverage.

3. Utility: This dimension emphasizes the core functionalities that set wallets apart. Examples include facilitating basic asset transfers, supporting dApps, native staking, and NFT management. The range of a wallet's utility establishes its revenue streams. Most wallets now offer basic services like swaps and fiat conversions. Therefore, the ability to stand out depends on improvements in the next layer.

4. User Interface / User Experience: As the initial interface, UI/UX coordinates how users interact with the wallet. This layer includes gasless swaps, transaction alerts, multi-chain balance display logic, and integrating Web3 domains into decentralized identities (DIDs). This dimension shapes the primary user activities within the application.

Now, let’s look at two examples: one from the top left quadrant, Trust Wallet, and another from the bottom right quadrant, Uniswap Wallet.

Trust Wallet epitomizes the "fat wallet." It boasts a feature set that nearly covers all four aspects of the stack. Notably, it has strong support for almost every chain ecosystem. In contrast, Uniswap Wallet adopts a "lean" approach. Its design and functionality are clearly targeted at the trading experience, making it a more specialized tool.

Here we have more examples to illustrate how different wallets uniquely position themselves within specific dimensions.

Omni Wallet, formerly known as Steakwallet, emphasizes native staking. It offers a simple UX for facilitating native staking of over 20 tokens. From the outset, Omni's mission has been clear: to highlight staking, liquid staking, and yield opportunities in DeFi vaults, thereby carving out a unique space.

Metamask operates its swap functionality as a meta-aggregator, sourcing liquidity from DEXs, DEX aggregators, and market makers. This strategy ensures users receive the best quotes. In return, users pay Metamask a 0.875% swap fee for the aggregation service.

Trust Wallet stands out for its extensive chain support. It supports chains from over 70 different ecosystems, including EVM, Move-based chains, Cosmos, and independent chains like Solana and TON.

OKX Wallet has been focused on improving user onboarding and conversion. They introduced MPC-based social login, allowing users to create wallets using their email. This feature bypasses the step of jotting down a 12-word mnemonic, which is a common barrier for newcomers.

Part Three: Monetization and Differentiation

Another useful framework for evaluating wallet products is to look at their monetization and differentiation of functionalities.

Monetization refers to the potential for internal wallet functionalities to generate revenue. For example, certain features like fiat swaps, token swaps, and bridging can easily generate revenue by introducing additional platform fees. Features related to staking and DeFi yields can allocate a portion of rewards as platform fees. Beyond asset management, functionalities related to dapps, such as dapp discovery/marketplace, also provide another revenue stream: platforms can charge advertising fees to enhance the visibility of certain dapps.

Differentiation emphasizes the competitive distinction of functionalities. It measures the apparent differences of a product or service from its competitors and its substitutability. Basic utility functions like token transfers, transaction history, and swaps are standard features found in most wallets. However, specialized functionalities like staking and gas fee subsidies provide a stronger moat—when users decide to stake assets with a specific wallet, they are more likely to use the same wallet for subsequent on-chain fund management. Social features are another example: social functionalities seen in Halo Wallet and Easy Wallet, such as community feeds and Web3 profiles, foster user connections. Once users establish social ties within the platform, they are bound to its network effects.

Based on the three frameworks outlined above, it is crucial for developers and investors in the wallet space to ask the following questions:

1. Where does the wallet stand in terms of ecosystem coverage and functional specificity? Which quadrant does it roughly occupy in the first framework? Does it focus on specific blockchains or use cases? Who are its significant competitors nearby on the map?

2. Which layer of the wallet stack does the project emphasize? Does it introduce meaningful differentiation and superior functionalities that expand the scope of each layer? What factors are prioritized in terms of user conversion, market coverage, revenue generation, and user retention?

3. Finally, how does the wallet's functionality stack up against profitability and differentiation? How strong is its moat?

Two Trends to Watch

Finally, I want to highlight two key trends that could significantly change the wallet space in the future.

1. Embedded Wallets

One development trend to watch is the rise of embedded wallets—many decentralized applications (dapps) are increasingly choosing to vertically integrate wallet functionalities. A recent example is the rise of Friend.Tech and its branches. Traditionally, they would require users to connect to the dapp via Metamask or WalletConnect. However, to eliminate the mnemonic requirement for new users, Friend.Tech integrated an embedded wallet utilizing Privy infrastructure.

This shifts the paradigm from "one wallet for all dapps" to "one wallet per dapp." Users may no longer manage assets through a single application but may have multiple addresses and balances for various dapps, challenging the theory of "fat wallets" and suggesting a more decentralized wallet ecosystem. If we consider Friend.Tech as a wallet, it would be plotted somewhere on the bottom right of the first framework: its use case is specific to managing Friend.Tech keys, with its chain focus solely on Base.

Thus, with the emergence of "Wallet as a Service" (WaaS) offerings from Privy, Coinbase WaaS, Web3Auth, Magic Link, Ramper, Unipass, Dynamic, Sequence, Particle, ZeroDev, and Biconomy, the value proposition of traditional wallets may diminish. Instead, dapps may encroach on the wallet application space, treating wallet functionalities as auxiliary features and capturing market share once dominated by standalone wallets.

2. The Role of Wallets in the MEV Supply Chain

While this article primarily explores the wallet space as a standalone sector, it is also essential to consider the role of wallets within the broader context of the MEV supply chain. Wallets serve as powerful gatekeepers in this ecosystem, compiling user intent into on-chain actions. They determine how transactions are routed—whether through public mempools or MEV-blockers like those used by Uniswap Wallet, OKX Wallet, Flashbots Protect, and Blink, which regulate search strategies such as banning front-running and sandwiching.

Do not underestimate the value of user order flow in the MEV supply chain. While significant attention has been paid to the substantial transaction fees accumulated by Metamask Swap, one often-overlooked detail is that Metamask's default RPC endpoint is Infura. And you guessed it, both Metamask and Infura belong to the same parent company, ConsenSys. In short:

• Who controls the wallet controls the RPC endpoint.

• Who controls the RPC endpoint controls the order flow.

• Who controls the order flow controls the MEV.

This hierarchical relationship of control underscores the strategic importance of wallets that extends far beyond their user interface or asset management capabilities. They hold a central position in the MEV supply chain, influencing users' transaction processes. Therefore, competition among seekers for valuable transactions will empower wallets to profit through payment for order flow (PFOF).