Sorry, self-custody is not the solution to the FTX crisis yet
Main page Opinion, Wallet, Crypto Market, FTX
Hot topic
Dec. 12, 2022

In the aftermath of the FTX collapse, we can't help but wonder why an industry that was created so that you can be your own bank actually ended up trusting single bad actors with tens of billions of their own hard-earned money.

Bitcoin was created as a form of digital money that liberates us from banks, enabling true self-custody, protecting us from financial disasters caused by someone else mishandling your money. However, in reality, the norm right now is to keep your crypto on a centralized exchange, which is significantly less safe than using an actual bank.

It’s a constant cycle in our industry: newcomers place their trust in centralized exchanges, leaving significant amounts of funds, sometimes even their life savings, leaving them vulnerable to hacks, misappropriation, and even regulation-imposed account freezing.

Why do newcomers prefer centralized exchanges to self-custody?

The reality is, self-custody is hard.

In order to set up a self-custody wallet, you usually need to install a browser extension, write down a seed phrase and keep it safe. All of those sound relatively easy, but in a world where we’re used to signing up for financial services like Robinhood and neobanks like Revolut in mere seconds, those are a lot of hoops to jump through. It’s intimidating.

Anyone who’s helped their friends set up a crypto wallet knows how unrealistic it is to expect most people to have the patience for this. The onboarding process of a centralized exchange is unarguably 10x easier.

Furthermore, the seed phrase is still misunderstood by many - even by people with plenty of experience. The seed phrase is essentially one very large number that unlocks your wallet. But it is not only that - IT IS your wallet. If you lose it, there’s no recovery. Similarly, if someone else has it, they can spend all your funds.

Many of the crypto "hacks" are actually social engineering exploits (see Bored Ape Yacht Club), where users are tricked into giving away their seed phrases. This works because there are legitimate cases where you need to input your seed phrase, such as restoring your wallet from it when you change your device, or when a software update accidentally wipes it. This is clearly dangerous UX.

In short, self-custody isn't really a solution: in it's current form, it’s more difficult, error prone and frankly risky to recommend self-custody to someone who’s used to the comfort of a centralized exchange.

How do we make self-custody easy?

Clearly, we need a solution that’s as easy as centralized exchanges, but as safe as self-custodial wallets.

The solution has been right in front of us the whole time. Vitalik Buterin has been talking about smart contract wallets since the beginning of Ethereum, most recently at the latest DevCon in Bogota on the account abstractions panel.

To understand why smart contract wallets solve so many issues, we must first understand how normal wallets work. They work through a very large number (private key) that you need to keep secret and to protect. The seed phrase is just a way to write this number down. The problem with this is that this is single factor authentication - if you lose it, your funds are gone, and it’s very easy for it to get compromised, either through social engineering or malware.

But what are smart contract wallets? Smart contracts themselves are pieces of code that enforce some sort of business logic on the blockchain itself. When applied to wallets, this means that the wallet itself can contain some sort of logic beyond the simple “secret number unlocks it” principle of normal wallets, allowing multiple functionalities that we’re familiar with from normal apps, such as two-factor authentication (2FA), account recovery, paying transaction fees in any token and many more. With the introduction of account recovery, safeguarding a seed phrase is no longer necessary. As such, onboarding can be optimized to be on par with modern fintech apps like Revolut and Robinhood.

They also pave the way for more advanced security features, such as spending limits and fraud monitoring, ensuring that anyone can keep their wallet safe regardless of their experience level.

Also, thanks to multi-factor authentication, wallets are protected from malware, as compromising just one device isn’t enough.

Who is building this?

There are not that many wallets in this space: the technology is still cutting-edge and little understood by developers, but there have been recent big advancements.

It all started back in 2018 with the Gnosis Safe multisig wallet (now rebranded to Safe) and Argent, which debuted at DevCon in Prague and presented the first user-friendly mobile wallet based on smart contract wallet technology.

As of today, Safe safeguards billions of dollars of value, and has weathered multiple crypto storms without any issues. Safe has seen over $400 million inflows following the collapse of FTX, showcasing its dependability once again.

But something has always lacked when it comes to rivaling the incumbent, MetaMask. All smart wallets were somewhat niche — Argent is mobile only and only supports Ethereum (there’s a separate app, Argent X, for StarkNet), Safe is focused specifically on multi-signature use cases, which is a great fit for DAOs and corporations.

But what about regular retail use? Ambire Wallet claims to tackle this — it's web based, cross-chain, and has a unique feature: email/password signup, which essentially allows the best of both worlds: the smooth user experience of a centralized exchange with the self-custody and safety provided by a wallet.

Ambire Wallet looks like a newcomer to the space, but it actually spun off AdEx Network, which had a built-in smart contract wallet since 2018. Since its launch in early 2022, Ambire Wallet has grown to over 100,000 signups, and supports multiple blockchain networks and Web3 apps.

Are smart contract wallets the future?

We believe that for crypto to grow, it needs to rid itself of its dangerous and unwelcoming wild west nature. As the past years have shown, your coins are not safe – neither on exchanges, nor on regular wallets.

Clearly, a better solution is needed – and smart contract wallets seem to combine the best characteristics of exchanges and wallets – you are still your own bank, without any compromises to UX or inherent dangers or footguns.

This is why the Ethereum community has been talking about incorporating smart contract wallets for years – you'll often hear "account abstractions," which is a way to make smart contract wallets “native” on Ethereum and other EVM chains. Regardless of account abstraction implementation, smart contract wallets exist today and still offer all the aforementioned benefits.

It appears that the time for SCW adoption has never been better, and it can change the way we self-custody for good.

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