Why is self-custody important even in WaaS?

Author : Yoo Minho, Chief Strategy Officer (https://www.linkedin.com/in/minho-yoo/)

[TL;DR]

• WaaS (Wallet-as-a-Service), a form of wallet built into Web3 services, must maintain the principle of self-custody while providing user convenience.
• Self-custody ensures users exclusively manage their private keys and are not dependent on wallet providers or Web3 service providers.
• Self-custodial built-in wallets allow for a smooth user experience while securing true digital asset ownership.
• WaaS contributes to the popularization of blockchain technology, offering a balance between user convenience and asset security

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Introduction

The digital asset and blockchain technology landscape has evolved rapidly over the past few years. This includes Bitcoin, the most prominent blockchain mainnet. Since Bitcoin's Taproot upgrade in November 2021, the Bitcoin ecosystem has begun to expand significantly, with various protocols like Ordinals, BRC-20, and Runes emerging. Ecosystems of other Layer 1 or Layer 2 mainnets are also expanding quickly.

The expansion of the blockchain ecosystem means that more diverse assets are being tokenized. As the number of tokenized assets increases, the need for various decentralized applications (DApps, Web3.0 services) has also grown. At the center of this evolution are wallets, one of the crucial components of Web3 services.

IOTrust, the creator of WEPIN wallet, has been dedicated to wallet development since its founding in 2017, focusing particularly on self-custody solutions. In this article, we'll explore why it's important to maintain the value of self-custody while pursuing convenience and user-friendliness in WaaS (Wallet as a Service).

As most Web3 services adopting WEPIN wallet are retail services targeting end-users, it's important to understand the characteristics of these built-in wallets.

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The Role of Wallets in the Blockchain Ecosystem

Tokens and DApps are closely related to wallets, tools that allow users to manage and interact with digital assets. In the blockchain world, wallets are broadly classified into two types based on who has authority over the wallet's private keys:

• Custodial wallets: Wallets where the company has authority over the private keys
• Self-custodial wallets (or non-custodial wallets): Wallets where individual users have authority over the private keys

Custodial wallets are commonly used in centralized exchanges, and there are also WaaS with custodial wallet forms. Custodial wallets are often used to provide user convenience as users don't need to manage their private keys.

However, this convenience sacrifices true ownership and control, values that Web3 aims to pursue. The phrase "Not Your Keys, Not Your Assets" well summarizes the risks associated with custodial wallets. Various risks exist, including hacking, restrictions on deposits and withdrawals, and the absence of unique addresses.

While using custodial wallets relieves users from the burden of asset management, it also means losing direct control over their assets. This could result in situations where users can't access their assets if the service provider is hacked or accounts are frozen due to legal issues. Therefore, self-custody is essential for true digital asset ownership.

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Built-in Wallets, The Value of WaaS

WaaS (Wallet as a Service) is a B2B solution that directly integrates wallet functionality into services, eliminating the need for users to install separate wallet apps. While not all WaaS include this, many come with features like social login to enhance user experience.

This built-in wallet model allows users unfamiliar with Web3 or blockchain technology to interact smoothly with Web3 services. WaaS can contribute to the popularization of blockchain technology by lowering entry barriers, especially for new or tech-unfamiliar users.

The main advantages of WaaS include:

1. Convenience: Users can use the service without installing or managing separate wallets, improving user experience and making blockchain technology more accessible.
2. Integration: By providing wallet functions directly within the service, users can manage everything on a single platform. This is valuable for Web3 service providers and allows users to engage more closely with the service.

However, providing this convenience doesn't mean WaaS must abandon self-custody. Rather, self-custodial WaaS like WEPIN wallet offer opportunities to maintain self-custody principles while enhancing user experience.

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The Importance of Self-Custody

Self-custody remains important in WaaS, which provides convenient user experiences built into services, for the following reasons:

1. Ownership and Control: In Web3.0, ownership is one of the most important characteristics distinguishing it from Web1.0 or Web2.0. In blockchain wallets, users must control their private keys (wallet keys) to ensure true asset ownership.
2. Security and Autonomy: The wallet's private key holds the authority to move assets recorded on the blockchain. Losing control of this private key means losing control of the assets. Self-custody ensures that only the user can access and manage the private key.

The most crucial aspect of self-custody is private key security. The private key is a very large, randomly generated number that allows users to move assets. Therefore, safely storing and protecting this key is essential. For this, WaaS requires additional security measures like two-factor authentication (2FA) and abnormal access detection.

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Conditions for True Self-Custody

For a wallet to be considered self-custodial, it must meet two important conditions:

1. Exclusive Accessibility: Only the individual should be able to access the private key. This means that if the key is lost, no outsider, including the service provider, can recover it.
2. Independence from Service Providers: The wallet should not be dependent on the service or provider. This means that even if the service shuts down, the wallet's private key should be independently manageable.

Self-custodial wallets provide means for users to safely protect their assets and guard them from external threats. Users need to know how to safely store their private keys and transfer them to other wallets if necessary. Wallet providers should offer tools and features to help users easily perform these tasks.

Integration of Self-Custody and WaaS

Users can conveniently use services while maintaining control over their assets. To implement self-custody in WaaS, the following approaches are necessary:

1. Enhanced Security: To provide exclusive accessibility to users, wallets must offer strong encryption and security features. This allows users to safely store their private keys.
2. Maintaining Compatibility: WaaS should maintain compatibility with other self-custodial wallets. This allows users to transfer their private keys to other wallets whenever they wish.

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Conclusion

In the journey towards blockchain technology popularization, WaaS plays a crucial role in combining the convenience of custodial wallets with the autonomy of self-custody solutions. This allows users to maintain control over their digital assets and ensure the core values of ownership and security that define Web3. Good Web3 services can emerge on this foundation, and the emergence of good services will lead to the popularization of Web3.

If you'd like to know more about WEPIN wallet, which can provide simple integration and a smooth user experience while preserving the value of self-custody, please feel free to contact us anytime :)