Slow Burn
Building Passports To The Internet.
This week's post features insights from Raj Parekh, Co-Founder and CEO of Portal. Portal is an embedded wallet infrastructure provider in the Slow portfolio. Raj, previously the Director of Visa's Global Crypto Product, brings a uniquely qualified perspective to combining traditional fintech with crypto.
Every company will eventually offer a wallet–not a traditional digital "wallet" (e.g., Starbucks' Mobile Pay), but a crypto wallet. It will serve as a passport to the internet, and provide users access to limitless on-chain experiences. Few companies fully appreciate the wide range of complementary on-chain opportunities they can offer, or understand how to integrate them organically into their existing products.
The Slow Burn team's recent posts highlight the power of two significant wallet advancements: Multi-Party Computation (MPC) and Account Abstraction. These enhancements can streamline the distribution of wallets across consumer, institutional, and enterprise products. At Portal, we’ve enabled embedded wallets in a wide variety of legacy products, and deeply believe wallets are set to become massive entry points to on-chain adoption. However, hurdles to implementation persist, and we believe MPC, in particular, will be a crucial solution to these existing and future challenges.
Why care about wallets?
From a business perspective, wallets’ main appeal is payments-related – primarily powered by stablecoins. Many companies are investigating how stablecoins can facilitate direct entry into the payments ecosystem, bypassing traditional intermediaries like processors and payment networks. In essence, wallets are evolving into the new credit cards, enabling users to make verified, global payments in mere seconds. As frustration grows with the fees charged by existing payment facilitators, remittance providers, and banks, this technology is becoming increasingly essential.
Additionally, the emergence of Decentralized Finance (DeFi) use cases is undeniable. Many exchanges and fintechs face operational challenges in managing a centralized order book, ranging from constant counterparty monitoring to slow token listing. DeFi liquidity pools provide an efficient solution, enabling the rapid launch of robust trading products while still driving revenue through spread charges. Consequently, we are witnessing a convergence of DeFi and payments, which results in a refactored clearing and settlement system. This performance improvement allows all parties to send and receive their preferred currency, massively simplifying operations.
However, many companies face technical and regulatory hurdles when adopting wallets. Key questions include avoiding collusion among corporate entities, blocking user actions, user autonomy over wallet transfers, and transaction initiations. The answers determine whether the business takes a custodial role (managing the user's assets) or allows the user to bear responsibility for their wallet.
Looking ahead and beyond highly regulated products, we’re witnessing a flurry of excitement about use cases in gaming, messaging, decentralized social platforms, and integrating the “real world” with on-chain rails.
What enables companies to adopt wallets as a feature, and what challenges do they face?
On the technical side, smart contract wallets (enabled by Account Abstraction) and cryptographic protocols like MPC are the primary entry points to the on-chain world. However, the challenge lies in the fact that both these routes require highly skilled teams for implementation and comprehensive audits by top security firms post-implementation. Due to these complexities, many companies prefer not to build these systems from scratch, resulting in partnerships with platforms like ours for embedding.
MPC presents an immediate solution for embedding wallets. Specifically, Threshold Signature Schemes (TSS) offer a robust key management mechanism, enabling multiple parties to participate in the signature process. This mechanism provides a secure recovery option for enterprises—akin to a "forgot your password" option for crypto—and allows companies to offer multi-chain experiences from day one rather than being restricted to a specific chain.
Despite considerable progress, room for improvement remains in MPC/TSS, particularly for developer experience during implementation, signature speeds, and protocol security. Here, Account Abstraction can bridge some of these gaps by enabling transaction cost subsidies, transaction customization, and transaction batching, thus reducing user friction and transaction costs.
That said, Account Abstraction-enabled smart contract wallets (SCWs) do have trade-offs. Unlike MPC wallets, generating SCWs is cost-intensive, as each new user necessitates the deployment of a new fully-fledged wallet on-chain. Furthermore, routine actions such as signing transactions and recovering wallets carry transaction costs that can add friction to the user experience when compared to MPC. Lastly, SCWs still necessitate some form of key management system. As a result, developers deploying these contracts will need to secure the keys associated with the contract itself.
Ultimately, MPC and Account Abstraction address critical gaps in wallet experiences but effectively focus on different aspects of the tech stack. MPC excels at resolving key management issues, while Account Abstraction empowers your wallet with on-chain capabilities, such as gas subsidizing and customizable signatures. By combining these two wallet enhancements, we anticipate a limitless array of experiences that can be facilitated within traditional fintechs and exchanges, and across a spectrum of consumer products.
About Slow Burn
Weekly explorations into emerging crypto trends and how to navigate 2023 from the Slow Crypto Team, Sam Lessin, Clay Robbins, and Caroline Cline