Author: Zhen Yu Yong, CEO of Web3Auth.

Ethereum founder Vitalik Buterin recently criticized MicroStrategy Executive Chairman Michael Saylor's dismissive attitude towards the concept of self-custody in cryptocurrency during a discussion on the X platform. Buterin pointed out that Saylor's arguments resemble those advocating for regulatory capture, which essentially undermines the core mission of cryptocurrency.

Saylor believes that entrusting Bitcoin (BTC) to regulated institutions can provide security and legitimacy that self-custody methods may not achieve. He firmly believes that established financial entities like BlackRock and Fidelity face a lower risk of government seizure or intervention due to their indispensable roles in the economic system. In contrast, self-custody advocates strongly oppose this view, continuously arguing that reliance on third-party custodians leads to risk concentration, undermines network security, and limits the development of advanced cryptographic functionalities.

Amidst these seemingly opposing viewpoints from Saylor and Buterin, a compromise is emerging: multichain self-custody wallets, a new development aimed at cryptocurrency enthusiasts and institutional investors.

While self-custody (holding one's own keys) gives users absolute control over their assets, it often comes with a significant challenge—managing private keys can be overly burdensome for many users, especially Web3 newcomers. Saylor is correct on this point.

However, the user experience of non-custodial wallets has significantly improved, allowing users to easily create wallets through social accounts (including Farcaster) or even passkeys. This approach effectively eliminates the complexity of managing private keys and seed phrases typically associated with self-custody solutions.

Buterin also accurately points out that self-custody has a bright future. However, these technological advancements only apply to their respective blockchains. Users still need to use multiple custodial and non-custodial wallets to transact across different chains.

Users have different wallets across various blockchains for multiple purposes. Eliminating this complexity will foster more innovation, attracting users to participate not just for holding a small amount of cryptocurrency.

The more chains there are, the more wallets there are, and the greater the potential for errors. As the number of wallets increases, so do the problems.

In just the first half of 2024, over 70 new layer-one chains have emerged, surpassing the record of 50 new layer-one chains in 2023. Coupled with the countless decentralized applications built on each chain, users face significant challenges in navigating and managing their assets. Isolated blockchains create severe fragmentation issues in the Web3 space.

On average, a user has between 3 to 10 wallets, depending on their cryptocurrency experience. This complexity increases the risk of human error, such as sending funds to the wrong address, the wrong chain, or simply forgetting private keys. It is estimated that about 20% of all Bitcoin losses stem from user operational mistakes.

The continuous emergence of new chains will further exacerbate the burden and complexity for users. The core issue is that fragmentation leads to a poor user experience.

This ecosystem fragmentation affects liquidity and interoperability. Users' assets may be scattered across different wallets and blockchains, making it difficult to utilize them effectively. For example, assets on one chain cannot be used as collateral in a lending protocol on another chain.

Imagine a shopping mall where you have to ask what currency is accepted every time you enter a store. This is the current reality of Web3. Fragmentation hinders the seamless transfer of assets, impacting the overall user experience.

Addressing these issues is crucial for building a more practical and cohesive Web3 ecosystem.

Wallet abstraction and chain abstraction are key steps in achieving this vision. Technological advancements like ERC-4337 and EIP-7702 enable externally owned accounts (EOAs) to operate as smart accounts and delegate wallet control.

In traditional models, users must manually transfer funds between wallets. However, with EIP-7702, Wallet A and B can delegate control to Wallet C, allowing Wallet C to use their funds without additional transactions. This effectively addresses the issue of wallet fragmentation, enabling users to manage multiple different accounts through a single unified account.

Chain abstraction is the next important step toward achieving true interoperability in Web3. Users should be able to interact seamlessly with any blockchain, regardless of where their assets are stored. Even with smart accounts, users cannot directly use funds from Chain X to transact on Chain Y. This leads to a poor user experience, forcing users to bridge funds from Chain X to Chain Y before they can use those funds on Chain Y.

This situation is often referred to as liquidity fragmentation. Chain abstraction helps achieve liquidity abstraction and improves the current state of gas fee abstraction. This simplified cryptocurrency interaction will operate similarly to Apple Pay, allowing users to easily select their preferred credit card for payment.

Similarly, users will interact with blockchains through a unified interface, enabling them to view all assets and balances across different chains and use cryptocurrency as if they were using a single unified account.

We cannot change the history that has already occurred.

Returning to Saylor's point, whether institutions holding Bitcoin as an asset or cryptocurrency enthusiasts, everyone can have a unified account that maintains the nature of self-custody. The user interface and experience design for that private key can and likely will be specifically tailored for various types of cryptocurrency holders.

Saylor later stated, "I support those who are willing and able to self-custody." However, multichain self-custody will ultimately enable everyone to be willing and able to do so. If we continue to promote self-custody, and most participants in this cryptocurrency movement will use self-custody mechanisms, we must ensure we do it right.

The fragmentation in the Web3 ecosystem is an irreversible reality. It is an evolutionary process. As the industry develops, the focus is no longer on how to guide users to specific platforms or chains, but on how to make the Web3 ecosystem more user-friendly, functional, and interoperable through unified cryptocurrency and trusted self-custody systems.

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 Ethereum Foundation and Visa.

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This article is for general reference only and should not be considered legal or investment advice. The views, thoughts, and opinions expressed in the article are solely those of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.

Original article: “Multichain Self-Custody is the Future”

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