Why All Crypto Wallets Are Going To Be Smart Contract Wallets

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Wallets today present a significant challenge in onboarding everyday users to crypto.

In response, the industry must prioritize and push the transition towards solutions that are both more user-friendly and much more secure, without sacrificing the decentralized and self-custodial nature that crypto is all about.

Traditional self-custodial wallets – which often overlook the importance of user experience and place the entire burden of security on users – are in stark contrast to the seamless and frictionless experiences that have become the norm in the Web 2.0 realm.

This gap has led even the earliest adopters of cryptocurrency to favor custodial solutions and centralized exchanges.

However, a paradigm shift is coming with the advent of smart contract-based wallets.

These innovative wallets promise to revolutionize self-custody and are poised to facilitate the widespread adoption of cryptocurrency.

What are the main flaws in current crypto wallets

The fundamental concern is security and having the peace of mind that you won’t lose your funds.

A recent report from Chainalysis shows that hundreds of millions of dollars have been stolen from crypto wallets in the past couple of years.

The core issue with the security of current crypto wallets is their reliance on a seed phrase – a series of 12-24 words that act as the sole protector of a user’s wallet.

Even hardware wallets, at their core, are safeguarded by a seed phrase. If the seed phrase is lost, or if an attacker gains access to it, the user’s funds are at risk.

But why is the seed phrase so problematic? To understand this, let’s examine the three main security factors of user authentication.

• Something you know – a password
• Something you have – a physical device
• Something you are – biometric identity such as a fingerprint or face scan

While even basic Web 2.0 services implement at least two of these factors, most self-custodial crypto wallets today rely solely on the first factor – ‘something you know’ – which is considered the weakest of the three (with text passwords being particularly vulnerable).

This reliance makes seed phrases a significant security vulnerability, prone to phishing attacks and malware.

However, security is not the only issue. The overall UX (user experience) also presents significant challenges.

One notable example is the requirement to pay for transactions with a specific token (the gas token),…