Understanding Web3 Wallets

Imagine a world where your mobile device isn't just a way to access your bank, but a standalone place to store value. A world where transactions aren't slowed down by middlemen, but flow as easily as sending a text message. Web3 wallets offer a decentralized, transparent, and direct method to store value on mobile devices and interact with digital assets.

What are Web3 wallets?

Web3 wallets are tools designed to store digital assets and interact with blockchain technologies. Unlike traditional bank accounts, these wallets allow the storage and management of blockchain-based digital assets, including:

• Stablecoins: Stablecoins like USDC can be stored, sent, and received using Web3 wallets. Web3 infrastructure allows stablecoin transactions to be settled more quickly and with reduced fees compared to traditional banking payments.
• NFTs: Non-fungible tokens represent unique digital assets, like art or collectibles, and can be securely held in Web3 wallets.
• Badges and loyalty gifts: Instruments like airline miles or rewards points from your favorite store can be tokenized and managed within Web3 wallets, providing a more direct connection between businesses and their customers. For example, Grab, a popular app in Singapore, is using Programmable Wallets to offer coupons for goods and services associated with high profile events like the Singapore Grand Prix.

Web3 wallets vs traditional digital wallets

The term “digital wallet” is often used to describe both Web3 wallets and traditional wallets, so it’s useful to clearly distinguish the two types of digital wallets.

Traditional digital wallets are electronic platforms or apps that enable users to store, manage, and transact with fiat currencies and traditional financial instruments like credit and debit cards (think, for example, of apps like Apple Pay or Google Pay). These wallets are typically tied to centralized financial institutions such as banks or payment service providers. They rely on legacy systems and integrations provided by these institutions, which means they operate within siloed networks with limited cross-platform interoperability. Security in traditional digital wallets is generally managed by the service provider, and users depend on these centralized entities for the protection and control of their funds.

Web3 wallets are often confused with traditional digital wallets, but they can have several key features that differentiate them from traditional digital wallets:

Custodial vs non-custodial wallets

Web3 wallets come in various forms, including custodial and non-custodial wallets.

• Non-custodial wallets: Non-custodial wallets (also known as self-custody wallets) do not entrust the custody of private keys to a third party. Instead, users maintain full control and responsibility over private keys and assets within the wallet. Non-custodial wallets are an essential tool for connecting to decentralized applications (dApps).
• Custodial wallets: Custodial wallets have private keys that are managed by a hosting business or other third party, which can enable account recovery and other features. Custodial wallets typically do not enable users to connect to dApps.

How to use a Web3 wallet

These are the steps required to get started with most Web3 wallets today:

1. Download and install: The first step involves downloading and installing your desired wallet. Some wallets function as part of a mobile app, while others may be desktop applications or browser extensions.
2. Set up the wallet: Once the wallet is installed, it needs to be set up. This usually involves creating a new wallet within the application, although existing wallet data can be imported using a private key or seed phrase from another wallet if available. This process may or may not be guided, and can take significant time to complete.
3. Secure the wallet: Upon creating a new wallet, users will be asked to set up a strong password and may also be provided with a seed phrase (also known as a recovery phrase) — a sequence of words that acts as a recovery key for the wallet. This seed phrase is extremely important, as it can restore the wallet if the host device is lost. Note that your seed phrase should always be securely stored and protected; anyone who has access to it can control (i.e., transfer or spend) the assets in its associated wallet.
4. Receive a public address: Once the wallet is secured, users will be able to view their public blockchain address. This is a unique identifier that can be shared with others when transferring cryptocurrency. It's a unique code similar to an email address that designates a specific wallet to receive crypto transactions.
5. Send and receive digital assets: The wallet is now ready to send and receive assets on the blockchain. Other wallet holders, exchanges, or applications can use wallet’s public address to transfer crypto or view public information like asset balances of the wallet.

Security measures for Web3 wallets

Here are some security best practices to keep in mind while using a non-custodial Web3 wallet:

• Safeguard private keys: For non-custodial wallets, users are responsible for securely storing their own private keys (or their wallet’s associated recovery phrase). It’s important that this crucial information remains private. Writing a recovery phrase down on paper and storing it in a secure location can be one effective method.
• Regularly update wallet software: Wallet software should be kept up-to-date, as developers may release updates that fix bugs and security vulnerabilities.‍
• Guard against phishing attacks: Web3 wallet users should be aware of phishing attacks, where scammers try to trick users into divulging private keys or connecting to malicious applications. Legitimate platforms and services will never ask for this information.

Web3 wallet innovations: Programmable Wallets

An interesting development in the world of Web3 wallets is the emergence of technology like Circle's Programmable Wallets. These wallets allow businesses to seamlessly integrate Web3 wallets into their existing applications or new products, simplifying the setup and usage process for end-users. For those less familiar with Web3 security, Programmable Wallets enable businesses to offer custodial wallets and securely manage private keys on behalf of customers. Features such as PIN code authorization reduce transaction friction, and users can easily access their public wallet addresses directly within an app. Programmable wallets thus help bridge the gap between complex blockchain technology and user-friendly experiences, making it easier for businesses to serve digital asset products and services to individuals around the world.

The future of Web3 wallets

As blockchain technology continues to mature and become embedded in everyday applications, Web3 wallets are poised to play a greater role in the internet financial system. As the digital asset industry grows, businesses should continue making these wallets as intuitive as possible, removing barriers for new users. Web3 wallets are a big step forward in the digital world, changing how we think about digital transactions and ownership.

FAQs

What is a Web3 wallet?

A Web3 wallet is a tool that allows users to store, manage, and transact with digital assets like cryptocurrencies, NFTs, and more. Some types of Web3 wallets also enable interaction with decentralized applications.

What are the different types of Web3 wallets?

Web3 wallets can be divided into two main types: non-custodial wallets (where users have full control over their private keys) and custodial wallets (where a third party provides custody over a user’s private keys).

How do I choose the best Web3 wallet?

Choosing the best Web3 wallet depends on your individual needs. Custodial wallets prioritize accessibility and ease of use, while non-custodial wallets give users greater control and can be designed to connect to more Web3 applications.

How do users secure Web3 wallets?

Web3 wallets are secured using a private key, which can be controlled by the user or by a third-party custodian.

Can I use my Web3 wallet to store non-fungible tokens (NFTs)?

Most Web3 wallets can be used to store, manage, and transact with NFTs, alongside other digital assets.

*Circle Technology Services, LLC (“CTS”) is a software provider and does not provide regulated financial or advisory services. You are solely responsible for services you provide to users, including obtaining any necessary licenses or approvals and otherwise complying with applicable laws. For additional details, please click here to see the Circle Developer terms of service.

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