As the blockchain industry continues to grow and mature, a heated debate has emerged between self-custody advocates and those who advocate for regulated institutions holding cryptocurrencies. In this article, we will delve into the complexities of self-custody and fragmentation in Web3 ecosystems and explore the potential solutions.

The Trouble with Self-Custody

Self-custody (holding your keys) offers absolute control over a user’s assets, but it is often associated with significant challenges. Managing private keys can be overwhelming for many users, especially those new to Web3. This complexity has led some to argue that relying on third-party custodians centralizes risk, weakens network security, and limits the development of advanced cryptographic features.

However, massive improvements have been made to improve a user’s overall experience with non-custodial wallets. Users can now create wallets by simply using their social accounts, including Farcaster, or even with Passkeys. This approach removes the complexity of managing private keys and seed phrases often associated with self-custodial solutions.

The Fragmentation Issue

Despite these advancements, users still face a daunting challenge: navigating multiple chains and wallets to transact on different ecosystems. With over 70 new layer 1s created in the first half of 2024 alone, it’s no wonder that users struggle to manage their assets across different blockchains.

The average user has between three and 10 wallets, depending on their experience with crypto. This complexity heightens the risk of human error, such as sending funds to the wrong address or forgetting private keys. In fact, around 20% of all Bitcoin lost was estimated to be due to user errors.

Multichain Self-Custody: A Middle Ground

A new development is emerging that seeks to address these issues: multichain self-custody wallets. These innovative solutions enable users to manage multiple chains and wallets from a single, unified account.

Wallet abstraction and chain abstraction are key steps towards realizing this vision. Advancements like ERC-4337 and EIP-7702 enable Externally Owned Accounts (EOAs) to function as intelligent accounts and delegate wallet control. This addresses the wallet fragmentation problem, empowering users to manage different accounts with a single, unified account.

Chain Abstraction: The Next Step

Chain abstraction is the next important step towards realizing true interoperability in Web3. Users should be able to seamlessly interact with any chain, regardless of where their assets are held.

Even with intelligent accounts, users cannot directly use funds from Chain X to conduct transactions on Chain Y. This results in a poor user experience, requiring users to first bridge funds from Chain X to Chain Y before funds can be used on Chain Y.

Chain abstraction helps achieve liquidity abstraction and improves the current state of gas abstraction. This streamlined approach to crypto will function similarly to Apple Pay, where users can easily select their credit card of choice for payments.

A Unified Interface: The Future of Web3

In the same way that users interact with the blockchain through a unified interface that allows them to view all their assets and balances across different chains, we can expect to see a unified account that remains self-custody.

This private key can be designed to suit every type of crypto asset holder. As Saylor later commented: "I support self-custody for those willing and able." Multichain self-custody will, in time, make everyone willing and able.

Conclusion

The fragmentation in Web3 ecosystems is a reality that we cannot reverse. It’s an evolutionary tale. As the industry grows, it is no longer about how we onboard users onto a particular platform or chain but how to make the Web3 ecosystem more user-friendly, functional, and interoperable by unifying crypto and trusting in self-custodial systems.

By embracing multichain self-custody wallets and addressing the complexities of fragmentation, we can create a more seamless and intuitive experience for users. The future of Web3 is bright, and it’s time to take the next step towards making it happen.

About the Author

Zhen Yu Yong is the CEO of Web3Auth. Web3Auth has built wallets for Binance.US, Trustpilot, and numerous Fortune 500 companies. Previously, Zhen worked at the Eth Foundation and Visa.

This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts, and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

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