The Key to Web3 Service Success: Embedded Wallets and Optimized Onboarding Funnels

[TL;DR]

• Despite advanced technology, Web3 services struggle to attract general users due to complex wallet creation, management, and unfamiliar terminology.
• High drop-off rates occur at various stages of the onboarding funnel, particularly during wallet creation and the first transaction attempt.
• Embedded wallets can significantly lower Web3 service entry barriers by automating complex processes and providing a user-friendly experience.
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1. The Current State of Web3 Services

1.1 The Challenge of Acquiring Web3 Users

The biggest challenge in the Web3 market today is acquiring real users. Despite billions in investments and technologically advanced projects, the number of actual service users falls far short of expectations.

In the NFT market, apart from major marketplaces like OpenSea and Blur, most NFT platforms struggle to generate trading volume. Individual NFT projects receive initial hype during minting but see trading activity plummet afterward. Even community-based NFT projects lose engagement as initial enthusiasm fades.

The situation in GameFi is even more severe. Many projects attract users early through token airdrops and reward policies, only to see active player numbers decline rapidly over time. This happens because these games rely heavily on the Play-to-Earn (P2E) model rather than focusing on gameplay quality, leading to an unsustainable ecosystem.

DeFi services face similar challenges. While the total value locked (TVL) reaches billions, the number of active wallets engaging in transactions remains very low. This suggests that a small number of whales dominate the market. The complexity of financial products and high entry barriers make it difficult for general users to participate.

Decentralized social platforms also struggle. Many fail to differentiate themselves from traditional social media, and despite offering various incentives for creators, content creation and consumption remain low.

The fundamental reason behind these issues is the high entry barriers and complex user experience of Web3 services. Most projects focus on technological sophistication and token economics, neglecting the actual user experience and service usability.
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1.2 Comparing Entry Barriers: Web2 vs. Web3

Starting a Web2 service is straightforward. Users download an app, verify with a phone number, set up a profile, and begin using the service—all within five minutes.

In contrast, Web3 services require significantly more steps.

For example, if a user wants to try a blockchain game or dApp, they first encounter a "Connect Wallet" button. New users immediately hit their first barrier—realizing they don’t have a wallet. They must install MetaMask or Kaikas, an unfamiliar process that causes many to drop out.

After installing a wallet extension, the account creation process begins. Instead of a simple email and password, they must record a 12- to 24-word seed phrase. Warnings like "Never take a screenshot of your seed phrase" and "Store it in a safe place" add stress.

Even after creating a wallet, the hurdles continue.

To use a Web3 service, users need tokens, requiring them to sign up for a centralized exchange (CEX) like Binance or Upbit, complete KYC verification, link a bank account, purchase crypto, and transfer it to their wallet. This involves copying wallet addresses, selecting networks, and managing gas fees—concepts foreign to most users.

Once they finally return to the original service and connect their wallet, they must "sign" transactions. Prompts like "Grant permission to this contract?" confuse users. The fear of signing something wrong and losing assets discourages them from proceeding.

This entire process, taking 20–30 minutes and multiple steps, creates a significant entry barrier for general users. The fear of making mistakes and losing funds further worsens the experience.
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1.3 Major Bottlenecks in Web3 Services

The biggest problem Web3 services face is a complicated and intimidating user experience.

The first barrier is wallet creation and backup. Users encounter unfamiliar terms like private keys, public keys, seed phrases, gas fees, transactions, and contract addresses—all at once. The seed phrase backup process is particularly stressful, with warnings reinforcing the risk of loss.

The second issue is funding complexity. Users must sign up for a CEX, complete KYC, link a bank account, buy crypto, and withdraw it to an external wallet. Security alerts and hacking warnings increase anxiety.

Even after onboarding, more issues arise:

• Slow transaction speeds and unpredictable gas fee fluctuations.
• Unintuitive UX with excessive technical jargon and unclear error messages.
• Security risks, including irreversible transaction errors, phishing scams, and malicious contract approvals.

The rise of cross-chain services adds further complexity. Users must learn bridge mechanics, manage native tokens per chain, and configure multiple networks. High bridge fees and slow processing degrade the experience.2. Analyzing and Optimizing the Onboarding Funnel2.1 Typical Web3 Onboarding StagesThe Web3 onboarding funnel consists of four key stages: Awareness, Sign-up, Experience, and Engagement.

• Awareness: Users first discover the service, often through token rewards, NFT minting, or airdrops. However, these incentives mostly attract short-term speculators rather than long-term users.
• Sign-up: The most friction-heavy stage. Users drop off due to wallet creation, seed phrase backups, and KYC authentication.
• Experience: Users attempt their first transaction (e.g., paying gas fees, minting an NFT, staking tokens). Complexity and fear of mistakes lead to high attrition.
• Engagement: Users continue using the service regularly. Most Web3 projects fail to retain users beyond the initial incentive-driven phase.

2. Analyzing and Optimizing the Onboarding Funnel

2.1 Typical Web3 Onboarding Stages

The Web3 onboarding funnel consists of four key stages: Awareness, Sign-up, Experience, and Engagement.

• Awareness: Users first discover the service, often through token rewards, NFT minting, or airdrops. However, these incentives mostly attract short-term speculators rather than long-term users.
• Sign-up: The most friction-heavy stage. Users drop off due to wallet creation, seed phrase backups, and KYC authentication.
• Experience: Users attempt their first transaction (e.g., paying gas fees, minting an NFT, staking tokens). Complexity and fear of mistakes lead to high attrition.
• Engagement: Users continue using the service regularly. Most Web3 projects fail to retain users beyond the initial incentive-driven phase.

2.2 Web3 Funnel Analysis

Initial user acquisition through marketing is often strong, especially with airdrops and NFT mints attracting tens of thousands of sign-ups. However, conversion rates to actual users are extremely low.

• Only ~10% of those who join Discord/Telegram visit the website.
• An even smaller fraction attempts wallet creation—many drop out at the seed phrase backup stage.
• First transaction attempts drop significantly due to funding complexity and security concerns.
• Long-term retention rates are abysmal, with most Web3 projects seeing sub-1% 30-day retention.

Most Web3 services focus on technology and tokenomics while neglecting onboarding optimization. Addressing this gap is crucial, and embedded wallets offer a promising solution.
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3. Embedded Wallets: The Key to Lowering Entry Barriers

3.1 Issues with Traditional Wallets

Traditional wallets like MetaMask, while essential to Web3, act as the biggest barrier for new users due to:

1. Complicated setup: Installing browser extensions, creating wallets, and managing seed phrases overwhelm users.
2. Security concerns: The burden of securing seed phrases and avoiding phishing scams discourages engagement.
3. Poor usability: Frequent wallet connections and transaction signatures disrupt the user experience.
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3.2 Benefits and Implementation of Embedded Wallets

Embedded wallets seamlessly integrate into Web3 services, eliminating friction:

• User-friendly onboarding: Users can create wallets via email or social logins, with seed phrases managed in the background.
• Improved security: Transactions can be simplified into clear actions like "Buy" or "Stake," reducing user confusion.
• Cross-chain convenience: Users don’t need to manually select networks or manage gas fees—transactions happen automatically.

3.3 Successful Applications of Embedded Wallets

Embedded wallets have proven effective across various sectors:

• NFT Marketplaces: Users can buy NFTs with credit cards, stored automatically in embedded wallets.
• DeFi: Swaps and staking become as intuitive as using traditional financial apps.
• Web3 Social Apps: Users can join communities with just an email and start engaging immediately.
• Blockchain Games: Gamers can create accounts and start playing without dealing with crypto complexities.
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4. Conclusion: Unlocking Web3 Mass Adoption

Embedded wallets eliminate the most significant barrier to Web3 adoption by automating wallet creation and enhancing usability.

Despite technological advancements, Web3 services struggle with user retention due to poor onboarding experiences. Focusing on usability, rather than just technology or tokenomics, is critical for Web3’s success.

By integrating embedded wallets, Web3 platforms can enable seamless user experiences, allowing mainstream users to benefit from blockchain technology without its complexities. The future of Web3 lies in usability innovation, and embedded wallets are the first step toward mass adoption.