The Crypto Wallet Is Broken - Newsletter #207
Protect yourself by learning how to manage the broken crypto wallet today
This week’s newsletter is on the long side, because the crypto wallet is such a key part to the blockchain experience. While I touch on some topics that we haven’t explored in-depth yet, to truly understand how the wallet is broken and how it can be fixed requires a big picture understanding of the wallet’s utility.
As always, feel free to reply to this email with any comments or feedback. After traveling to the National Association of Broadcaster’s conference in Las Vegas this past week, it’s clear that there’s a need to help educate a large number of business leaders so that they can intelligently navigate this upcoming transition to how work and social interactions are done. My goal is to help provide clear explanations and insights to speed along the learning process.
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The Crypto Wallet Is Broken
By Elliot Koss, Founder @ Future Mints
Technical Level: 🛠️
As we discussed last week, the crypto wallet is a critical part of using the blockchain. It functions as your user account, bank account, and debit card. While the crypto wallet is incredibly important, the experience today is broken, and until it’s fixed, blockchain cannot go mainstream.
In order to understand how the crypto wallet is broken today, let’s talk about what it should be able to do. Perhaps this will also provide some inspiration for the teams building today.
The crypto wallet is the entry point to the blockchain. You use it to prove your online identity, secure your money and assets, and pay for things. In last week’s breakdown of DeFi Money Movement, I walk through the wallet’s utility for money storage and movement, so let’s assume that we agree on the utility. Let’s spend a little time talking about how your wallet is also your online identity.
Your Online Identity
A wallet as your identity may sound odd. It is a new concept that’s unique to blockchain. After all, because centralized finance (ie what we use today) is inherently private, there’s no way for your bank account to be public.
Remember, one of the blockchain’s main features is transparency. This creates a unique duality with your wallet where it is both your money and identity in a single place.
As I’ve written before, every wallet has a unique address. In one sense, it’s like an email address where things can be sent to or received from it. But a crypto wallet is much more than your email.
Every action that you take ‘on-chain’ must be authenticated by signing a blockchain message with a signature from your wallet. The only way to sign these messages is with the permissions granted to who controls your wallet (this is important, and we’ll review further below what to do when your wallet is compromised).
I find that examples are a better way to engage with a new concept.
At some point in the near future, a new social media platform will come into existence (Meta, Twitter, TikTok and others will try to do it but it’s more likely that a start-up will build this from the ground up). To login to this new platform, you will connect your wallet and sign a message to prove your identity. This will replace using your email and password.
Now that you’re logged in, each of your interactions will be stored on-chain. This may sound useless, because your actions are already stored somewhere today. Why is the blockchain needed?
Social Media platforms earn their money by selling you ads. What they’re really doing is selling your information so that you receive targeted ads. The advertisers may not know your name or email, but they know based on your activity that you already like the things they’re advertising to you.
However, the only way that advertisers can present ads to you is by paying the social media middleman, because the social media platform is where your information is stored.
Because the blockchain is open and transparent, your actions on a blockchain-based social media platform would be available for anyone to see. This would give advertisers a way to directly market to you. On the surface, this sounds like a nightmare. After all, you probably already have a separate email to use when signing up for things today, because you are sick of advertisers reaching out to you.
But think of this. If an advertiser is willing to spend money to directly market to you, what if they don’t have to spend that extra money on a social media platform? Perhaps their offers to you will be better, or perhaps they’ll give you a small amount of money simply for engaging with their ads.
This is the promise of Web3 - enabling a way for you to monetize your own data and activity.
Expanding on this further, social media platforms today present you with ads, but a competing social media platform could also use your blockchain-based interactions to recreate everything you’ve done in a different platform that paid YOU for each ad you were presented. This may sound difficult to digest, and we’ll dig into it deeper down the road (the possibilities around social media and blockchain are head-spinning, amazing, and also terrifying).
The important thing to know is that not only will the blockchain present you with mobility when it comes to social media platforms, but it will also present a way to directly compensate you for actions that you are already taking.
And your crypto wallet will be the key way that this all happens.
It’s relevant to your online identity to keep in mind that, just like in the real world, the things you own are a part of your identity. If you drive a truck, sports car, or mini van - that’s a part of your identity. In the blockchain world, everything you own would have some digital representation in the form of a Non-Fungible Token (aka NFT) that would sit in your wallet.
Going back to the social media example, if you connected your wallet with a Tesla NFT you’d immediately have the ability to join a group that’s specific for Tesla owners. Or have easy access to maintenance scheduling with your vehicle’s entire history.
What if you received an NFT that was tied to your college degree, job, or country club? This digital representation of your identity would allow you to gain entry to an online community of other people with the same digital identity asset.
There is so much more to explore here, and I cannot wait for it. For now, that’s how your crypto wallet will be critical for your personal identity.
Of course, as you’ve read this, you’ve probably already started thinking about the obvious problems. What happens if you lose access to your wallet? What happens if someone steals your wallet? This is a juicy topic that we’ll dig into shortly.
How The Crypto Wallet Is Broken
One of the benefits of the blockchain is that everything is decentralized and transparent, but this is also one of the key limitations today.
What happens if you need to return your purchase? Let’s say that your car has a problem or your yacht breaks down. Or even more likely, what if you buy something and simply want to return it.
Today, we rely either on retailers who want to keep their customers or legal requirements. For instance, Amazon has done an amazing job making returns incredibly simple. Other retailers have not spent this time or attention. So what are you to do?
In these situations, it’s critical that there are legal protections. If you’ve made a purchase with your bank account or cash, you’re generally less protected. You can report the retailer and the transaction to your state secretary of state / commerce and you can try to sue the retailer. But that’s about it.
If you’ve used a credit or debit card, then you have more consumer protections in the US. In these situations, you have a certain time period to take action, but you can attempt a ‘chargeback’ where you complain to your credit / debit card company that you want the transaction refunded to you. And if you have the right documentation and do it within the right time period, then you’ll get the refund.
But a crypto wallet doesn’t have the same credit card protections. If you make a transaction on the blockchain, there is no mechanism to reverse that transaction.
What’s worse, let’s say that you try sending money to someone’s crypto wallet, and somehow you make a mistake with the wallet address you’re sending money to. Then you will LOSE all of that money. What you’ve technically done is ‘burned’ the crypto that you’ve sent. When something is burned in the crypto space, it can never be redeemed. Just like burning is a one-way action in the physical world, so too is it a one-way action in blockchain.
In the centralized finance world, you could at least talk with your bank and try to get a bad transaction reversed. What’s better, if the fault is your banks, they’ll probably just make you whole because they made the mistake.
So no refunds and it’s possible to just lose money for making a mistake. I told you the crypto wallet is broken today. And we’re not done.
There are a few other broken experiences today.
Let’s say that you somehow connect your wallet to a scammer’s website thinking it’s legit. Perhaps you’re trying to mint a new NFT that has high demand, so you feel like you’re under some time pressure to act quickly. You click a few buttons to trigger a message for you to sign with your crypto wallet, and about 5 minutes after you sign it, all of a sudden, all of your crypto tokens and NFTs begin to disappear. You’ve just been scammed by a sophisticated scammer.
What’s likely happened in this scenario is that you signed a transaction with your wallet that actually gave the counterparty complete control to move everything in your wallet.
It sounds crazy that this is possible. Agreed. This is another reason why the crypto wallet is broken.
Let’s say that someone steals one of your NFTs. Perhaps they hacked you. Perhaps you signed one of these scam messages. That NFT is now gone. You could try reporting it to an NFT exchange like OpenSea, but the best they can do is flag that the NFT has been reported stolen and prevent it from being sold on OpenSea. There are many other exchanges that the scammer could use and there is always the option of a direct transaction with someone. So again, you’re Shit Out of Luck (aka SOL, though not to be confused with the blockchain SOL).
And the final scenario that we’ll touch on today, what happens if you lose access to your wallet. Perhaps you lost your password to your wallet AND lost your seed or recovery phrase. Unfortunately, because everything is decentralized, there’s no one who can help you. You can find countless scenarios where someone bought Bitcoin 10 years ago, and then lost the keys to their wallet. So they’re sitting on literally millions of dollars that they can’t access. And they never will.
There Is A Solution To The Broken Crypto Wallet
Just because something is broken today doesn’t mean it can’t be fixed for the future. This doesn’t mean that if you lose your crypto wallet keys today that you’ll somehow get access to that wallet in future. It just means that it will become substantially harder to lose your keys in the future.
I won’t explain each of the solutions in detail, but the way the crypto wallet works today is like a high wire performer operating without a safety net. Safety nets will be built over the next few years. And when they are built, that’s when crypto has the chance to go mainstream.
What I’ve found weird about the crypto wallet is that it exposes you to risk in both your bank account and credit / debit card without any protections today. In centralized finance, your bank account and credit / debit card are kept separate. Compromising your credit or debit card doesn’t automatically expose all of your assets. Even if it did, you have bank and legal recourse to help you manage the situation including quickly and easily canceling your card.
At some point, your wallet will be able to detect that a wallet address your sending funds to doesn’t exist or have any funds in it. You’ll know when you connect your wallet and are ready to sign a message that there’s malicious code that could give the other person complete control of your wallet. There will be safety nets in place that will help reverse transactions or provide some level of customer service. It’s doable. It just requires more time,
One more thing…
Cold and Hot Wallets
The general hack solution for getting around these security limitations today is to use a cold wallet for storing your assets. Your cold wallet is never connected to anything that puts your assets or money at risk. It only serves as a vault where you put your valuables. And you use a hardware wallet that includes enhanced security protections.
Then, you use multiple other wallets as your hot wallets. These wallets are intended for short-term use. If they’re compromised, you lose little by design. And the assumption is that you are going to get hacked or compromised. So you keep your guard up. Make sure to confirm the security of every transaction. And remain constantly vigilant. And paranoid.
Next Week
There’s so much more that I could write about the solutions for improving the crypto wallet, but those are problems someone else will solve. Hopefully we’ve helped articulate a few of these problems in a way that helps provide some ideas for entrepreneurs.
Just because the crypto wallet is broken today doesn’t mean the future isn’t bright. On the contrary, there is so much possibility. And I’m excited to see it all come together.
Next week, I’m going to write about the FTX failure. Unlike today’s topic, the FTX failure has nothing to do with blockchain, and the way people discussed what happened, it’s clear that the wide majority of people didn’t understand that nuance. My goal is to be honest about where blockchain is today, and that means confronting uncomfortable truths such as the broken crypto wallet. But it’s also critical to dispel the misinformation that undermines people’s faith in blockchain.
There is a revolution coming, and not only do I believe it’s inevitable, I want to help as many people as possible see that this bright new future presents an incredible amount of opportunity.
I cannot wait for next week and the rest of this year. This is getting exciting!
News of the Week
Sotheby's is preparing to sell an expansive collection of NFTs seized from bankrupt crypto hedge fund Three Arrows Capital. The first sales from the infamous collection will take place during Sotheby’s marquee sale week this May in New York.
Despite heavy pressure throughout his five hour testimony, SEC Chair Gary Gensler declined to make a formal declaration of whether he views ETH as a security or commodity. "It depends on the facts and the law," Gensler said repeatedly during the line of questioning, refusing to say yes or no.
Andreessen Horowitz (a16z) has revealed its blockchain infrastructure plans: Magi, a rollup client for Optimism. Magi acts as the consensus client (often called a rollup client in the context of the OP Stack) in the traditional execution/consensus split of Ethereum," wrote Noah Citron in the announcement.
While the Cool Cats continue to tumble under 1 ETH, the team released their newest collection, Shadow Wolves. This new collection was met with a mix of praise and criticism.