Cryptocurrency custody has stagnated in 2021

Despite significant investments and real technical advancements, today’s cryptocurrency custody solutions remain stubbornly stuck in the past. Whether it’s providers like Web3Auth offering “wallets as a service” using multi-party computation or “smart wallets” like Argent, everyone wants to make it easier to hold, retrieve, and use cryptocurrencies. And yet, custody still seems stagnant in 2021. The reality of adoption has been mostly disappointing.

The Conundrum of Convenience

Traditional finance, despite its flaws, still offers unmatched convenience and peace of mind (at least in middle- and high-income countries). Forgot your password? Send a quick reset link to your Gmail. Have you been charged unauthorized fees? Easily dispute them and freeze your card through the mobile app.

These safeguards allow you to confidently interact with the TradFi ecosystem, but they’re virtually absent in the crypto world (outside of risky centralized parties like Celsius, now bankrupt). Managing private keys and securing transactions is complex and unforgiving, and demands a level of technological know-how that most users simply don’t possess. It’s harder to use crypto than it is to buy it, which is already hard enough to put many people off in the first place. The result? crypto has been adopted more in gambling than as a better version of finance for everyday life that people can actually use (savings, lending, borrowing).

As the primary entry point to cryptocurrencies, custodial solutions must offer more utility than simply holding assets. Users must feel secure when interacting with the DeFi ecosystem.

TVL is not use

Consider Gnosis Safe, now rebranded as Safe. This platform is an industry leader in controlling funds and conducting transactions, while separating the private key requirements of an account (even requiring multiple signers to approve a transaction). Yet despite having over $100 billion in assets stored in these vaults, their potential remains woefully underutilized.

More than 5,000 vaults are created on the ethereum mainnet alone every month, but these vaults are primarily used for cold storage of cryptocurrencies rather than active interaction with DeFi. These smart contract-based accounts allow users to rotate their keys or ask a friend to confirm each time these assets are moved.

Ideally, these vaults would become the primary way that vault creators/owners/signers interact with DeFi. Over 100 apps (including custom transaction builders and helpful DAO tools) exist to facilitate the use of vaults directly in a standard browser. However, despite these tools, many users still rely on their externally owned accounts (accounts that are protected by a private key and are inherently risky) when interacting with DeFi. Whether purchasing an nft on Blur, trading on Uniswap, staking on MakerDAO, repaying an Aave (AAVE) loan, or simply sending tokens to a friend, people often create vaults with their EOAs and then continue to use their EOAs — a risky practice firmly entrenched in 2021.

The data is telling: excluding pure ethereum (eth) (which is not an ERC20 token) for the ethereum mainnet specifically, between 99.4% and 99.9% of token transfer volume (in USD terms) happens through a Secure Creator’s EOA, not their Vault. This isn’t just a statistic; it’s a clear critique of the industry’s current approach to combining utility and security through cryptocurrency custody.

Using raw eth may be a positive sign

To put this into a broader perspective, consider how blockchains are used today. Raw eth, not being a token contract, is typically “wrapped” into Wrapped Ether (WETH) via a 1:1 smart contract to allow it to be more easily used in DeFi. However, less than 3% of ethereum’s supply is wrapped. A disproportionate amount of activity in crypto is basic peer-to-peer sends of the native asset, and only a small portion of human-operated addresses actually interact with DeFi protocols.

Unlike DeFi tokens, we see Safe creators using raw eth through their Safes. When comparing raw eth transfer volume between Safes and Creator EOAs, we not only see an increasing pattern for Safes, but as of May 2024, Safes are seeing higher raw eth usage than the EOAs that created them, with monthly volume of nearly $2B on the ethereum mainnet alone.

The way forward: simplification at the custody level, not at the protocol level

To be clear, there has been real progress in protecting users since 2021, especially at the wallet layer with projects like Rabby, Rainbow, Coinbase Wallet, and industry leader Metamask heavily focused on preventing user losses through transaction spoofing, approval management, and warnings of potentially malicious contracts. However, these still operate within the framework of private key management by users controlling their funds 1:1.

The industry is experimenting (and investing) heavily in alternatives to this framework, including proposals to: hand over your account to a smart contract (EIP-3074), turn your account into a smart contract (EIP-7702), abstract how transactions are created and managed (EIP-4337). These “account abstraction” projects differ in complexity and assumptions and require changes to ethereum itself.

Striving for widespread consensus on a single, complex, one-size-fits-all solution (such as the idea that “all wallets should just agree to use the same single contract”) is likely a dead end. Instead, the industry should focus on practical UX solutions that can be easily adopted without each app generating N wallets for a user or messing (too much) with ethereum’s inner workings.

The good news is that we are headed in the right direction. More L2s are being added every week, driving down the cost of DeFi. The industry is tired of hearing about infrastructure and having more difficult conversations about organic user growth rather than farmers doing airdrops. Apps are launching more mobile-native experiences, including integrating wallets-as-a-service and social curation. The mission for a decentralized, robust, permissionless, censorship-resistant alternative to modern financial systems is alive and well.