An overview of Web3 wallet

Like traditional identity documents (IDs), wallets have always been our gateway to the crypto world. This article is about the Web3 cryptocurrency wallet and its differences from Web2 e-wallets like ApplePay or PayPal we used to know. In essence, the Web3 wallet also serves the purpose of storage and transactions like e-wallets in Web2. However, it improves the operating model, allowing users more freedom and security.

Web3 wallet landscape

The whole e-payments market is expected to reach 4.8 billion by 2025. Payment/wallet businesses have enjoyed revenue growth, especially since more and more applications are continually integrating with online payment.

The number of investments poured into the Web3 wallet applications is approximately $3.3 billion. Recently, the leading web3 wallet company ConsenSys – Metamask raised $450M, bringing the company’s valuation to $7 billion. As more new ecosystems are launched, the number of wallet addresses increases significantly because no one wants to miss this “dreamland”. At the same time, the expansion of ecosystems leading to the primary development trend of Web3 wallet projects today is to deploy multi-chain wallets (Figure 1).

Figure 1. Web3 wallet landscape

Operating model

  • The blockchain wallet can be interpreted as an interface for users to interact with the blockchain. Its primary function is to store assets or perform transactions.
  • Blockchain wallets are divided into two types: custodial and non-custodial. We can also classify this according to the connection of the wallet: cold wallet (offline) and hot wallet (online).
  • Each wallet will include a public key & a private key: When a user creates a new “account”, an encryption algorithm will generate a private key; From the private key, generate a public key; From the public key, and generate a wallet address.

Note that this path only goes in one direction; there is no reverse (ie, no one can know the private key even if they know the wallet address).

  • The private key works like a unique key to open your safe because every transaction on an account requires the signature of the private key.

Figure 2. How does a Bitcoin wallet work (Source: Blocktrade)

  • The only difference between custodial and non-custodial wallets is who manages the private key. Like its name, non-custodial wallets require the user to keep and manage the private key themselves, while in custodial wallets, the private key will be stored by a third party.

Key storage

Commonly used methods to store secret keys:

  • Store on hardware: this storage method is considered the safest, but they are also less convenient than the above storage methods.
  • Local key storage: The key is stored on the device and can be accessed from software that points to a specific location in a database. Although convenient and fast, this method is not secure and vulnerable to attacks.
  • Store with password (password-protected key): This method is similar to the above, but there will be an extra layer of security in the middle – only when the user enters the correct password then be able to access the private key. However, hackers can still steal passwords through spyware that tracks keystrokes or through brute force (a trial-error process on the computer to find the end result).
  • Password-driven key: The password will be used as a control directly from the public-secret key pair. However, hackers can still attack this method by using random passwords to find these public-private key pairs (i.e. from the password “iloveyou” will find a corresponding key pair). Therefore, hackers can easily trace the private-public key pair of a user’s wallet address if he/she sets a weak password.

Model shifting

The model of e-wallets in Web2 involved three parties: User, Bank, and Service provider. Users need the participation of 3rd parties such as banks to store and confirm transactions and service providers to perform payments and connect between banks and senders/receivers.

A custody crypto wallet is a service provided by a centralized exchange like Binance and Coinbase. The service is to support you in keeping your wallet signature, meaning that they can keep and manage your private keys on your behalf. In other words, you won’t have full control of your funds nor the ability to sign transactions, which is similar to the e-wallet at Web2.

In contrast, with the non-custodial wallet model, users do not need to worry about intermediaries like banks because they have complete control over their wallets and assets. Because of cutting intermediaries, users do not need to go through the complicated authentication process steps or share personal information (Figure 3).

Figure 3. E-wallet model shifting

Key functions to retain user

Figure 4: Key functions to retain user

The Web3 custodial wallet model has similar characteristics to the Web2 e-wallet, so it is suitable for less experienced users who need 3rd party support. Custody wallets such as Binance Custody are compliant and provide standard coverage for Binance accounts. Therefore, providing more legal security for the user in exchange for the user’s personal data (KYC).

On the other hand, privacy protection is one of the most prominent features of Web3 non-custodial wallets (Figure 4). User personal data is safe and secure when it no longer needs to be provided to any 3rd party. Thus, it is possible to prevent the relevant leaking information actors.

In terms of security, hardware wallets have the highest safety, suitable for users for long-term investment and storage. Hardware wallets are not directly connected to the internet, thus ensuring a high level of security for large sums. Hot wallets are less secure and more vulnerable to attacks because they are stored and frequently interact over the internet. Recently, we saw a leak of users’ private keys from the Slope wallet platform, with a total loss of up to 6 million USD for users.

To solve the aforementioned security issues, Vitalik has come up with a solution called social recovery wallet. They combine the ease-of-use of single-signature wallet with the better security property of multi-signature wallet by adding a group of guardians: in case everything runs smoothly, users still use the social recovery wallet as the normal single-signature wallet, but in the case of being hacked, the wallet’s owner can send a request to the guardians group to change the current signing key of the hacked wallet to a new one of the owner (but they must wait 1-3 days to execute this). Nevertheless, the current infrastructure of Ethereum does not allow for direct implementation of social recovery wallet but a third-party relayer who will be responsible for re-submitting signed messages as transactions to the blockchain, adding up the transaction fees as well as the centralization of the protocols.

In terms of payment application coverage, Web2 wallets can pay for almost anything, especially in countries with mature financial infrastructure. Whereas Web3 has less utility for real-world assets, payments are primarily made to on-chain purchases. However, there have been more positive signs as more brands and products accept crypto payments, opening the door to growth for Web3 wallets.

Revenue streams

Figure 5: Revenue streams of Web3 wallet

Some examples for web3 wallet revenue models:

  • Transaction fee:
    • Metamasks charges transaction fee from 0.3% – 0.875%.
    • Phantom charges a 0.85% fee for all transactions.
  • Enterprise fees for integration: MetaMask offers MetaMask Institutions (MMI), an “institutional extension” of the MetaMask wallet specifically designed for funds speculators, crypto funds, financial institutions, market makers, etc.
  • Freemium version: Trust Wallet is free for users. All fees are paid to miners or validators. In addition, Trust Wallet also launched the $TWT token to control its own economy.

In general, Web3 wallets are heading towards building many different features aimed at acquiring and retaining users. Meanwhile, the main and most sustainable source of income is still transaction fees. Thus, we can view the Web3 wallet model as a variant of DEX that focuses more on payment and transaction utilities than DEX.

Some highlights

  • In Web2, the number of e-wallets is up to 2.8 billion wallets. Meanwhile, Web3 only reached about 300+ million wallet addresses. Obviously, Web3 has much room to expand further to reach the number of users who have used e-wallets in the past.
  • In addition, Web3 wallet applications witnessed impressive growth in 2021: Metamask is up 1800% and is up 72%. A large part of the growth in the number of Web3 wallet addresses is due to the GameFi/NFT boom in 2021.

Adoption of e-wallet

  • Southeast Asia and the Middle East will continue leading the growth of Web3 wallets due to their limitations with banking and credit cards. In other words, because of lacking financial instruments, the chance for web3 wallets to develop in these regions is higher than in countries with fully established financial systems. One example is the rise of the Axie Infinity game, which has brought a new inflow of users into the cryptocurrency market. Most participants are in developing countries, and Axie opens up new financial opportunities for users in these regions.
  • Slow growth in Western Europe, North America and China, as these are not crypto-friendly countries. These regions have a complete financial infrastructure, providing a variety of online financial services to the people. In particular, crypto creates problems with illegal money transfers and destabilizes the financial systems of these countries.

What’s under development

  • Integration: MetaMask launched Snaps earlier this year, a system that allows developers to extend and customize MetaMask wallet features in a different coding environment. Users are free to experiment with these new features, and the MetaMask team will consider integrating the most popular feature into their final product.

  • Multi-chain: This is an inevitable trend that almost all wallets aim for. The shift to multi-chain helps users conveniently transact between different chains on a single wallet interface. It also helps them better manage their assets by only having to store one private key/seed phrase instead of many complex private keys for different chains.
  • Simplify UX: Many new features have been launched to help users directly buy/sell/list coins or NFTs in the wallet. It even cooperates with CEX exchanges to shorten the time of transferring tokens between non-custodial wallets and CEX exchanges.
    • Native swap

Roses are red🌹
Violets are blue
But first, let’s check
What Native Swap brings to you?

No more manually checking on multiple AMMs to find the best prices. Just select Blockchain & proceed with your transaction right away🚀

Get your #Coin98 updated 👉

— Coin98 Super App (Formerly Coin98 Wallet) (@coin98_wallet) August 4, 2022

    • Direct listing

Listing NFTs on @MagicEden from Phantom is available to everyone on all devices! Did you know that you can also use your wallet to edit prices and remove listings?

It’s super convenient from our mobile apps when you (or floor prices) are on the move!! 🧹🧹

— Phantom (@phantom) July 28, 2022

  • Social recovery wallet: social wallet brings more convenience for users to get their assets back if they lose or get hacked into their wallets. The confusing numbers of private key or mnemonic passphrases will no longer be a big obstacle for users.
  • New revenue models: The revenue generation models of Web3 wallets were “imported” from Web2, but there has not been much improvement in adding revenue. The revenue from transaction fees still contributes to the bottom line in bringing profit for both the e-wallets in Web2 and Web3. In the future, Web3 wallets will need to introduce new features, not swaps, stakes, or yield farms but also products that provide data to help users with their better investment strategies. Additional services such as insurance, in-app shopping, consulting, etc., in Web2 can be extended to Web3 wallets. Although these services cannot replace the primary source of revenue from transaction fees, it will diversify products to attract and retain users.

The resonance of Music NFT

Let’s be honest here. Web3, Web4,… Webn 🧐 I don’t think that you care, neither do I. We are here for the Music, it’s all that matter! “Will/how the changes impact us as a fan or an artist” is a different story and maybe it doesn’t even matter to listeners.

If you are curious, let’s dive in!

Just a short brief

(i) Art + NFT, Game + NFT and now Music + NFT

What was the last time you opened music from a cassette or DVD?

You may not probably recall. That’s the beauty when technology meets music. It comes with the promise of giving artists more chances to thrive and giving users a better experience with music, not just listening but also engagement.

The rise of NFT in 2021 has seen the birth of a new model in the music industry, altering the power position of the parties that keep the wheel running in Web2: Publishers and Record labels to the hands of artists and fans.

(ii) Artists don’t get paid as they deserve

In the current system, artists only receive about 12% of the royalty fees for their products, and most of it goes to the pockets of major record labels or music streaming platforms (Spotify, Apple Music, etc.). Meanwhile, artists at Web3 can earn 100% of their profits from selling their NFTs. In addition, artists also receive a royalty fee, determined by artists, for every time users trade NFT.

Problems there. Worth changing if Web3 can.

Digging into the current problems of Web2 music

(i) Power has never been in the hands of artists or fan

Before the internet era, Record Labels is the third wheel of the relationship between fans and artists 

In the 60s and 70s, musicians needed to be contracted by record labels for song rights. Therefore, record labels monopolize the entire industry because they have money, own production studios and provide distribution channels. Those are things that are luxuries for artists these days. Thus, royalties for recordings by musicians are the price in exchange for these services. Monopoly always comes with the hand of power and manipulation. At this time, artists and fans are both depended on the Record labels.

⚠️ Artists → Record labels → Fan

After the internet came, Publishers replaced Record labels to become the next third wheel 

Since the 2000s, the popularity of desktop computers and MP3s have opened new doors for artists as they can now compose at home and distribute on the Internet. With the opening of the streaming industry, many distribution service platforms like Spotify, YouTube, etc., have become alternatives for Record labels. Record labels since then have lost their exclusive privileges to production and distribution.

But again, power and manipulation don’t just disappear; it just transfers from one to another. Now, the primary control between artists and fans is the music streaming platforms.

⚠️ Artists → Publishers → Fan

(ii) Artists’ loss of ownership, a higher requirement for entry and a lower income

Fundraising: Record labels dominate the fundraising market, artists have nowhere to go.

Though with the development of technology allowing artists to be independent in producing music, in 2021, Record labels still account for 70.1% of the market share of the entire music industry compared to independent artists, so-called indie artists. The record labels remain the key player capable of providing artists with resources to produce music.

Ownership: Copyrights mostly belong to record labels and streaming platforms.

Before the Internet era, the Record labels monopolized the supply chain for the music industry, dominating the production and distribution of music products in the market. As the Internet became more popular, the Record labels’ monopoly in distribution was replaced by music streaming platforms. However, as mentioned above, the Record labels are still crucial in the production stage.

Artists depend on third parties in both the production and distribution phases. Thus, they need to share music copyrights with Record labels or Streaming platforms.

Income: artist’s income is dominated by Record labels and Web2 streaming platforms.

When artists lose a lot of copyrights to Record labels and streaming platforms, their share is as low as 12% royalties from their music.

Next, 33% of all new Spotify artists discovered happens on playlists personalized by Spotify for users. “Personalized for users” is a fancy word, but it’s actually Spotify’s playlists. Like other social media platforms, they navigate what we listen and what they want us to listen. Control from streaming platforms has become a significant barrier for artists as the review and selection processes become more challenging on those platforms. Because, as you know, that’s their golden egg for maximizing profits.

Web3 and its better offers to take over Web2 music

(i) Power back in hands of artists and fan

Web3 cut off all third wheels, Fans and Artists are closer than ever

Finally, we see the association between artists and fans have changed into a two-way relationship. Now, fans can directly contribute to the artist’s success with NFT through activities such as fundraising, voting on the development of the campaign, and more.

💡 Artist ↔ Fan

Model artist-direct-to-fan works in traditional music before

  • Neil Young, who has turned his back on Spotify and built his own streaming platform, earned himself 25,000 subscription fans with a total of $600,000 in membership fees yearly.
  • Another artist is Melissa Etheridge, who launched her own subscription platform and earned over $500,000 annually.

(ii) Artists take back ownership, entry as will and earn more income

Fundraising: No need for record labels, artists have fans

With the innovation of Web3 technology, the music industry model has shifted power from intermediaries to musicians and fans. Music NFT becomes a tool for artists to raise capital and distribute directly to their fans. Conversely, the fans themselves can become a “self-record label” for the artist by investing in that artist’s music products and receiving a portion of their copyrights in return.

Ownership: Third wheels have gone, copyrights are back in the hands of artists (and fans as will)

Artists can now raise money through fans without needing Record labels; artists can also distribute their own music on Web3 streaming platforms without needing a Publisher on Web2. And guess what? When they no longer depend on any intermediary to bring their work to the audience, the artist has full ownership and control over the work’s copyright.

Income: No more domination means a higher income

Web3 allows fans to invest in an artist’s NFT, unlocking many other income sources for artists. For example, Alan Walker collaborated with Web3 artist fundraising platform Corite to launch his NFT collection called Alan Walker Origins. In particular, users need to own 25 NFTs corresponding to the pieces of music to combine into one perfect song. The Alan Walker Origins campaign raised $355,380 for the artist. Besides allowing the artist to raise funds from the fan community, the artist can also receive a portion of the fee from each NFT transaction.

In 2021 alone, NFT has helped big-name artists raise millions of dollars in sales. Of which 3LAU earned $11.7 million for the Ultraviolet collection, Steve Aoki took in $5.8 million from the WarNymph Collection, Vol. 1 and $4.25 million for the Dream Catcher.

The new model of Web3 Music

Record labels will continue to fall further in their position with the artist. With tools and platforms like Corite and Audius, NFT enables a more direct and independent way of funding and go-to-market through Music NFT sales. By empowering fans to directly become individuals/communities to perform Publishers tasks like marketing, music distribution, or even joining the artists’ development plan for their creation and campaign, fans minimize Publishers’ power over artists’ success. These new and exciting tools allow artists to increase the value of their work while maintaining ownership of their music.

What I found challenging for Web3 Music

(i) New tech and highly independent may not be for everyone

Considering that being an artist is a profession, the ‘direct to the fan’ approach is not something that works for every artist. Daniel Allan is a case that prefers to go for third parties rather than do-it-himself in Web3. More independence in creative power, more ownership, and potentially higher income are undeniable benefits of Web3, but that’s in exchange for a much larger workload.

While third parties may no longer be the sole gatekeepers in production and distribution, their value lies in experience, resources, and connections for achieving large-scale success in the music industry.

In addition, most artists who’ve successfully raised a handful of money in Web3 are well-known artists in the tradition. At the same time, the target audience for Web3 is new and for unknown artists, it is tough for them to do everything by themselves. As mentioned above, 1/3 of new artists are discovered through the suggestions of streaming platforms. Some artists are better trying their luck on Web2 instead of Web3 streaming platforms with a limited number of users.

(ii) Things don’t change overnight, major income for artists’ products still comes from Web2 streaming

There are many alternative ways for artists to make money on Web3. However, their music products’ primary income source still comes mainly from major Streaming platforms such as Spotify, Apple Music, etc. In Web3 royalty platforms such as Corite or Audius, the artist can share revenue with NFT owners through the streaming revenue on Web2 Streaming platforms. As noted above, it doesn’t bring many benefits for users especially when Web2 media are still dominating the supply.

(iii) It’s still a new technology, hacks and exploits are inevitable

The hack happened to the Audius platform that caused a total loss of $6M in the community pool of Audius. The hacker posted four governance proposals to the Audius project, and one of them was approved. The fact that hackers are able to steal and sell tokens is a testament to the potential risks of this technology to the interests of the artists and fans involved. In this case, the artist will need to hold and stake tokens to unlock more beneficial features.

What if a more sophisticated hack led to malicious admin proposals to the platform? Users will suffer hefty losses. This is often seen in the cryptocurrency market.

(iv) Let’s be honest here. Fans just want music and that has no problem in Web2

  • The majority of current users of Music NFT products are crypto-native.
  • In users’ views, NFT products have high prices, accompanied by other costs such as gas-fee.
  • Lack of benefits and guidance are users’ biggest concerns.
  • Streaming platforms like Spotify are doing just fine by optimizing the experience for both artists and users.

The Music NFT landscape

💡 Web3 is gradually replacing most of the roles in Web2 Music, including both production (Support tools, news and research) and distribution (streaming platform, community, and other logistical tasks required by artist).

Closing thoughts

(i) Small market, good growth, positive experiment with a similar model for Web3 gaming

Music NFT has a total market share of $1.2B, approximately 1/24 times that of the digital music industry which has a total market capitalization of up to $29.4B. On Spotify, there are 11 million artists, and Apple Music with more than 5 million people. So far, the number of artists participating in Web3/NFT in general is just under 30,000 people.

As more and more artists realize that they similarly can become businessmen for the products they create, a form of direct artist-to-fan experience is emerging more than ever. According to the ConsenSys report, the number of Metamask wallet addresses has recently bloomed, reaching 30 million monthly active users, a growth of 600% in just 14 months.

Music NFT paradigm shift is similar to the current GameFi model. More and more people understand and use web3 after the success of GameFi and NFT. Thus, many traditional markets will transform into similar models applied by GameFi. If Music NFT can solve the above concerns effectively, it will be another attractive market for not only artists but also businesses, and fans.

(ii) Web3 sounds great, but we are here for the music. How/when will Web3 music mass adoption?

  • We learned from GameFi that the game experience should come first, not the monetization factor. Music NFT is no different. The monetization factor plays an incentive role, and we stay for the music.
  • Behind Spotify and Apple Music’s success stories is the massive data collection and personalization for a better user experience in listening to music and choosing songs.
  • To do this, Web3 must onboard as many indie artists as possible to join.
  • Web3 platforms need to provide utmost support for artists’ needs as it’s not only about better income but also more convenience for artists in logistics and product promotion. Let’s assume artists’ work is just performance.
  • Web3 streaming platforms must be widely promoted, and the apps’ infrastructure must be simple to optimize the user experience.

The more Web3 tooling supports artists, the more artists join Web3. Thus, Web3 will be further enhanced in terms of user data, optimizing like what Web2 is doing now. Then it will be the time for mass adoption.