It is almost impossible to discuss defi and its features without talking about wallets. In fact, all cryptocurrencies are managed through some form of wallet. Crypto transactions such as buying, selling or holding a crypto cannot happen without the crypto wallet. It is not surprising that many crypto wallet platforms continue to spring up each day and still take a share of the market.
Defi however thrives because of a special type of wallet know as web3 or decentralized wallets. They make defi services complete, enabling users to complete transactions without any intermediaries. Before I go on to explain how web3 wallets enhance decentralization, here are the two major categorization of crypto wallets.
Custodial and non-custodial (web3) wallets.
So basically, crypto wallets are grouped into two major groups - custodial and non-custodial wallets.
Custodial wallets: The basic idea here is that custodial wallets are those wallets managed on behalf of the user by third parties. Most commonly, custodial wallets are provided by centralized crypto exchange platforms enabling users to buy, sell or hold crypto. With custodial wallets, the exchange or other provider retains the keys to the wallets, essentially having full control of the funds in the wallets. The risks associated with this type of wallet is well documented.
Non-custodial wallets: Non-custodial wallets are also called web3 or decentralized wallets. This type of wallet is fully managed by the owner since they are the ones with the private key. Funds sent to this type of wallet is more secure and allows the users full ownership to their funds. This type of wallet is the on used on decentralized applications and web3 projects. Security of funds and full ownership of assets are guaranteed by web3 wallets.
Having understood the mean difference between the two types of wallet, we can go on to see reasons why non-custodial wallets remain a crucial component of all defi projects.
Why defi needs web3 wallets to work
Decentralized finance opens up a lot of opportunities for users to access financial products without censorship or intermediaries. This would not be possible without web3 wallets. Consider the value that web3 wallets bring to defi:
- full ownership: Web3 wallets are completely decentralized. It means that the owner retains complete control of all activities going on through the wallet. The owner has all the keys needed to perform a transaction. This is completely different from custodial wallets where the platform retains a copy of the private keys and can make decisions or transactions on the funds stored in the wallet.
Consider for example what happens when a crypto operator becomes bad. In the case of a custodial wallets, the operator can just steal all the funds in the wallet and move it elsewhere. This can lead to massive loss of investments as we have seen in the recent crypto SBF saga. Users lost their funds and never recovered them. But that would not have been possible with a non-custodial wallet. The owner of the funds hold the keys and no one can tamper with the wallet if they do not have the keys.
- Interoperability: Blockchains today are siloed a lot. This has created communication problems, making it difficult for projects to interact and share resources. Web3 wallets however enhance interoperability by allowing easy integration into any defi projects. Users can easily connect their web3 wallet to any defi project and do a transaction no matter the blockchain type the project is hosted on.
With this capacity to integrate on projects built across platforms such as on Ethereum, Polygon and many other blockchains, web3 wallets make it easy for blockchains to overcome interoperability issues.
- Beyond asset management: Many web3 wallets are not just a place to store and mange digital assets. They provide a lot of other useful features such as allowing users to vote on community proposals to participate in governance. Other useful features includes allowing for a direct swapping of tokens from the wallet without leaving the environment.
Another feature of many web3 wallets is the provision of a built-in browser which gives users a tool to explore the defi space. Through the browsers, users could search for web3 games, NFT's, lending projects, DAPPS, and other things. Web3 wallets also offer many staking and liquidity pool products while others offer developers a platform to work on. Basically, web3 wallets are not all about storing, buying or selling crypto. As can be seen above, they offer far more functionality than that.
Trustless transactions: Web3 wallets together with smart contracts ensure that users complete transactions without the need for any third-parties. Decentralized and trustless transactions are fully supported by web3 wallets. There is no need to fear or trust any parties in the transaction. With web3 wallets, users can transact and be sure that their funds will never be stolen or lost in any manner.
Security: Security of digital assets is very important with so many instances of hacking occurring more recently. Web3 wallets are some of the most secure because control and ownership of the wallet is handed over to only one person - the owner. This makes it rather difficult for bad actors to steal user funds.
Even if the wallet is deleted, or the device on which it was stored was damaged or stolen, web3 wallets offer recovery phrases to the owner. This phrase ensures that the web3 wallet and funds could easily be recovered on any device at all. Many web3 wallets also implement various two-factor authentication processes, ensuring that any transactions pass through double checking or security layouts before they are confirmed and authenticated. Providing continuous updates and implementing security patches have also made web3 wallets more secure than ever.
- Many forms: Web3 wallets usually come in many forms, allowing users the opportunity to choose what is best for them. For example, web3 wallets usually come as DAPPs that could be installed on mobile devices. But they also have other iterations such as the web wallets managed as browser extensions. This makes it possible for users to manage their wallets on more than one device. This is also a cool way to widen the userbase of web3 wallets, allowing for both mobile and desktop users to get involved.
Popular web3 wallets
There are many web3 wallets, but here are some of the most popular ones. Feel free to check them out:
Conclusion
Defi would not be complete without web3 wallets. Beyond being just a store for digital assets, they allow users to fully participate in web3 projects and securely manage their funds too. You can take a look at some of the web3 wallets above and choose whats best for you.