How Crypto Wallets Are Evolving For Investors

Making crypto wallets easier to use is key to getting more people to use cryptocurrencies. Right now, many people, especially those new to cryptocurrencies, might find these wallets hard to use because they are complex and require strong security. To bring in and keep more users, crypto wallets need to be simple. This means it should be easy for everyone to find their way around the wallet, make transactions, and understand how to keep their money safe.

Also, making these wallets work better with different types of cryptocurrencies and connecting smoothly with other financial services can make a big difference in how people feel about using them. If it's simpler to handle various digital money and connect with the wider world of money, it can help blend traditional finance with the new world of digital currencies.

The Evolution of Crypto Wallets

One technology that stands to improve crypto wallets is account abstraction, which Vitalik Buterin endorsed. This technology makes digital asset management easier and more accessible for everyone.

Account abstraction is a method to make blockchain accounts more flexible, secure, and user-friendly by using smart contracts instead of traditional externally owned accounts (EOAs). It enhances the blockchain's interaction with accounts, allowing for programmable logic and operations through smart contracts, offering greater functionality than the basic EOA system. 

This approach hides the complexities of blockchain operations from users, providing a simplified, human-friendly interface for interactions powered by smart contract accounts beneath the surface. Originally proposed by Ethereum co-founder Vitalik Buterin, account abstraction has evolved with community support, notably through ERC-4337, to improve the blockchain user experience by enabling more advanced and secure account features.

Account abstraction offers several improvements over traditional blockchain account management, primarily focusing on user experience and security. It simplifies the process of executing transactions, enabling users to conduct them with fewer steps and less potential for confusion. 

This simplification makes engaging with cryptocurrency more approachable for a wider range of users. In terms of security, account abstraction reduces the risk of wallet management errors, which often cause security vulnerabilities. Making the user interface simpler and more intuitive decreases the likelihood of mistakes that could lead to breaches. 

For example, Ambire Wallet, a web-based cryptocurrency wallet uses account abstraction. Automatic transaction fee management is used to enable the sending of crypto tokens without having to hold the gas tokens for that network, i.e. an ERC-20 token can be sent without having to hold Ether (ETH), similar to how exchanges let you use the token you’re holding to pay transfer fees. 

It looks something like this, let’s say a user holds the coin “Random Ethereum Token” (RET) in their wallet, RET is an ERC-20 token on Ethereum so transaction fees are paid with ETH. Instead the user can pay transaction fees using RET, with the RET being swapped for ETH on the backend via smart contracts, which is then used to pay the gas fee. This way the user doesn’t need to buy ETH or have it stored in their wallet to transfer RET or use the token with DeFi protocols.

The wallet also enables account creation using email and passwords instead of recovery phrases while maintaining its non-custodial nature. Additionally, before executing transactions, users are presented with detailed previews that break down the actions in an understandable manner. It also enables direct-fiat deposits features and a mechanism for prepaying gas fees to optimize costs. 

Beyond token management and transfers, account abstraction facilitates easier access to decentralized finance platforms. The reduction in technical and security barriers allows users to explore and participate in DeFi more comfortably. This opens up opportunities for users to interact with innovative financial products and services within the DeFi ecosystem, which might have been difficult to access or navigate previously due to complexity and security concerns.

Impact on Decentralized Finance and Yield Farming

Account abstraction can streamline how crypto investors interact with decentralized finance, yield farming, and other financial activities on the blockchain. At its core, it transforms the complexity of managing blockchain transactions into a more user-friendly experience. 

This is achieved by shifting from traditional blockchain accounts, which often require a technical understanding to navigate, to smart contract-based accounts that can automate and simplify many processes.

For crypto investors, engaging in DeFi and yield farming typically involves a series of steps that can be daunting: managing private keys, understanding transaction fees (gas), and interacting with smart contracts directly. Account abstraction addresses these challenges by encapsulating the technical details within smart contracts. 

Investors can execute transactions, participate in yield farming, or interact with DeFi platforms through much more straightforward interfaces. This abstraction layer means that users no longer need to manually manage each transaction's minutiae.

Furthermore, account abstraction can enhance security and reduce the risk of errors. Simplifying the interaction model minimizes the chances of making costly mistakes, such as sending funds to the wrong address or failing to secure one's private keys adequately. For DeFi participation, this is crucial, as the stakes can be high and the processes complex.

Account abstraction can also foster innovation within the DeFi space. By lowering the entry barriers and making it easier for a broader audience to participate, there's potential for increased liquidity and the development of new financial products and services.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.