This article was first published on https://shannonlow.substack.com
The vast majority of web3 wallets today are Externally Owned Accounts (EOA) - addresses on the blockchain which are controlled by private keys owned by users which enable the owners to send transactions to other accounts. EOAs are either custodial (where the private keys are held on behalf of the user by a custodial provider like a crypto exchange, e.g. Coinbase or FTX), which we’ve seen can potentially lead to users losing control of their assets, or non-custodial (where users hold their own private keys and have sole control over their account), but which also have a number of disadvantages that contribute to a bad user experience for those new to crypto including:
Account abstraction, based on ERC-4337, a standard deployed to the Ethereum Mainnet in March 2023, enables the creation and operation of smart contract (SC) wallets - a non-custodial wallet built as a SC account that can be directly owned by a user (who can also securely authenticate their ownership of and therefore control said SC account). This enables the SC wallet to be programmable (not just an address to hold a balance entry in a distributed ledger), enabling features such as:
By improving the wallet user experience, allowing more flexible management of accounts, and enabling developers to build apps with less friction (during wallet setup and usage) and apps that feel familiar to everyday Internet users, SC wallets are crucial to enable mass adoption of web3.1 The details, benefits and impact of account abstraction have been well-covered in numerous articles by Vitalik Buterin, MetaMask, Alchemy and Visa, so instead, we’d like to take a closer look at the opportunity in the web3 wallet space presented by a potential shift to account abstraction.
If web3 becomes mainstream2, it’s clear that everyone will need a SC wallet, and the dominant SC wallet(s) will be in a position to mediate mass market users’ experience of web3, akin to how superapps and other aggregation, discovery or distribution platforms3 mediate users’ experience of web2. Such wallets that have the potential to become the front-end of web3 will own the user relationship and control the user experience at a critical juncture of any user’s journey, enabling them to enjoy significant revenue opportunities by gatekeeping what the user sees, experiences or does at that juncture. They can enable cryptocurrency swaps, sell ad space, enable discovery, facilitate distribution, etc.
For example, both StepN and Sweat started as move-to-earn apps, but upon amassing hundreds of thousands of MAU, they began allowing users to swap (i.e. trade) cryptocurrencies directly in their app, with StepN at one point becoming the largest DEX on Solana by swap volume based on this strategy. In the EOA wallet space, Metamask has generated substantial revenue from its in-app swap feature. And swaps are just the beginning of how wallets could capitalise on their position.
Today, the most popular web3 wallet is MetaMask, an EOA wallet with more than 30M monthly active users (MAU) and an estimated 80-90% of market share.4 Because of this, many believe that the (Ethereum) wallet space is now saturated with a single winner, and therefore no longer winnable. But if we believe that MetaMask may take time to pivot and migrate users to their own SC wallet5, there might be an opportunity to reset or gain market share during this transition period. i.e. The transition to account abstraction is an opportunity for other SC wallets to win market share from MetaMask and for new winners to emerge.
Some SC wallets may already enjoy a head start with crypto-native/DeFi users, but they’ll need a different Go-To-Market (GTM) strategy to acquire mainstream users, so it’s not a given that these wallets will win. They may also not be best positioned or have the right expertise to execute a broader superapp/platform-based business model.
Hence, while the EOA wallet market is currently saturated, the SC wallet market is not, with no clear winner dominating the market yet, and if SC wallets are expected to eventually supersede EOA wallets (i.e., EOA wallet users will need to transition to SC wallets at some point), then here are a few things we would look out for in an investable SC wallet proposition:
As account abstraction rolls out and gains adoption among wallets and applications, it’ll be interesting to see if new SC wallet entrants will be able to shake out the sleepier EOA wallet incumbents and how these wallets may eventually compete as platforms.
1. Note that we’ve just listed a necessary condition for mass adoption of web3, not a sufficient condition. It will still take the right mass market use cases (e.g. games, entertainment, music and social) for mass adoption to happen.
2. This is by no means a given yet, but something we may believe (otherwise we wouldn’t be investing in the space). Right now, only a few people are interested or care about the financial rails that power their everyday experiences, so DeFi may not be an effective funnel for onboarding the mass market to web3. For web3 to become mainstream, we’ll need to see apps/experiences that mass market/mainstream users actually care about and want to use, e.g. gaming, entertainment, music, social, etc.
3. Diverse examples of which include: WeChat, Gojek, Google Search, Facebook, Amazon, etc.
4. To put this in perspective, though, this is still small compared to mobile game developer King’s total MAU of 243M users across its suite of mobile games including Candy Crush Saga, Candy Crush Soda Saga and Farm Heroes Saga, which gives some comparison of what mass market adoption of an application could look like.
5. MetaMask can and will likely build an independent SC wallet, given that they already have offerings like MetaMask Institutional. Their challenge will be to migrate users from their EOA to SC wallet without too much churn or losing users to competitors who may have better offerings out earlier, or have more effective Go-To-Market strategies to win mass market users early.