Multichain self-custody is the future

Opinion by: Zhen Yu Yong, CEO of Web3Auth.

Ethereum founder Vitalik Buterin didn’t pull punches in a recent X exchange criticizing MicroStrategy executive chairman Michael Saylor’s dismissive attitude toward crypto’s self-custody ethos. Saylor’s arguments were akin to advocating regulatory capture undermining crypto’s mission, Buterin said. 

Saylor argued that moving Bitcoin (BTC) into the hands of regulated institutions provides a layer of security and legitimacy that self-custody may not. He believes that established financial entities, like BlackRock and Fidelity, are less likely to face government seizure or intervention owing to their integral roles in the economic system. Self-custody advocates raged and continue to argue that relying on third-party custodians centralizes risk, weakens network security, and limits the development of advanced cryptographic features.

There’s a middle ground emerging between Saylor and Buterin’s seemingly bipolar views. A new development for degens and institutional investors is coming: multichain self-custody wallets. 

The trouble with self-custody

While self-custody (holding your keys) offers absolute control over a user’s assets, it is often associated with a significant challenge — managing private keys can be overwhelming for many users, especially those new to Web3. Saylor is right about that.

Yet, massive improvements have been made to improve a user’s overall experience with non-custodial wallets, as users can create wallets by simply using their social accounts, including Farcaster, or even with Passkeys. This approach removes the complexity of managing the private keys and seed phrases often associated with self-custodial solutions. 

Buterin also correctly states that self-custody has a future. These advancements, however, only apply to each chain. Users must still use multiple custodial and non-custodial wallets to transact on chains. 

Users have different wallets on different chains for various purposes. Removing this complexity will create further innovations and onboard users beyond hodling a little crypto for the sake of it.

More chains, more wallets, more room for errors. Mo’ wallets, mo’ problems.

In the first half of 2024 alone, more than 70 new layer 1s were created, surpassing 50 new layer 1s in 2023. Combine that with countless more decentralized applications built on different chains, and users struggle to navigate and manage their assets. Siloed blockchains create a fragmentation issue across Web3. 

On average, a user has between three and 10 wallets, depending on their experience with crypto. This complexity heightens the risk of human error, like sending funds to the wrong address, the wrong chain, or simply forgetting their private keys. Around 20% of all Bitcoin lost was estimated to be due to user errors.

New chains will further complicate the burden and complexity for users. The problem: Fragmentation means a poor user experience.

This fragmentation of ecosystems affects liquidity and interoperability. Users might have assets spread across different wallets and blockchains, making it difficult to use them efficiently. For example, assets on one chain cannot be used as collateral in a lending protocol on another. 

Consider that while you’re at a shopping mall, you must ask what currency they accept whenever you enter a new store. That’s the reality in Web3 right now. Fragmentation hampers the seamless transfer of assets and affects the overall user experience. 

Addressing these issues is critical for creating a more usable and cohesive Web3 ecosystem.

What’s the solution?

Wallet abstraction and chain abstraction are steps to realizing that vision. Advancements like ERC-4337 and EIP-7702 enable Externally Owned Accounts (EOAs) to function as intelligent accounts and delegate wallet control.

Traditionally, users would need to manually transfer funds between wallets. With EIP-7702, Wallet A and B can delegate control to Wallet C, enabling Wallet C to use their funds without additional transactions. That addresses the wallet fragmentation problem, empowering users to manage different accounts with a single, unified account.

Chain abstraction

Chain abstraction is the next important step toward realizing true interoperability in Web3. Users should be able to seamlessly interact with any chain, regardless of where their assets are held. Even with intelligent accounts, users cannot directly use funds from Chain X to conduct transactions on Chain Y. This results in a poor user experience, requiring users to first bridge funds from Chain X to Chain Y before funds can be used on Chain Y. 

The above scenario is often referred to as liquidity fragmentation. Chain abstraction helps achieve liquidity abstraction and improves the current state of gas abstraction. This streamlined approach to crypto will function similarly to Apple Pay, where users can easily select their credit card of choice for payments. 

In the same way, users will interact with the blockchain through a unified interface that allows them to view all their assets and balances across different chains and spend crypto as if it were a single unified account.

We can’t undo the past.

Coming back to Saylor’s arguments, both institutions holding Bitcoin as an asset and degens can have a single unified account that remains self-custody. The user interface and UX design for that private key can and will likely be designed to suit every type of crypto asset holder.

Saylor later commented: “I support self-custody for those willing and able.” Yet, Multichain self-custody will, in time, make everyone willing and able. If we continue with self-custody, and a large part of this crypto movement will use self-custodial mechanisms, we must get it right. 

The fragmentation in Web3 ecosystems is a reality that we cannot reverse. It’s an evolutionary tale. As the industry grows, it is no longer about how we onboard users onto a particular platform or chain but how to make the Web3 ecosystem more user-friendly, functional and interoperable by unifying crypto and trusting in self-custodial systems. 

Zhen Yu Yong is the CEO of Web3Auth. Web3Auth has built wallets for Binance.US, Trustpilot and numerous Fortune 500 companies. Previously, Zhen worked at the Eth Foundation and Visa. 

This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts, and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.