The CEX Dual Wallet Approach: A Path for Improved Security and Autonomy For Users
What got us here won’t get us to where we want to go
Centralized crypto exchanges (CEXs) and fintechs are at an inflection point: what drove the most recent bull market will not be enough for continued success going forward. First, the implosion of some high-profile centralized operators in 2022 is leading users to demand greater control over their assets. Second, there’s growing interest in use cases beyond speculation. For CEXs to survive, they need to give users the option to control their funds more directly while simultaneously curating access to a wider range of use cases. In fact, some of our customers have mentioned that they believe most of their business in the long term will consist of exactly this model, which gives users more flexibility in how they manage their funds and a greater variety of applications.
This demand for a more secure and autonomous user experience is most evident in financial services. Offering both custodial and non-custodial wallets (commonly known as Web3 wallets) is increasingly considered a necessity for centralized exchanges as they provide the level of flexibility and control users desire, boosting the product experience and overall security.
Breaking Down The Dichotomy of Who Manages Assets
In crypto, users have two primary options for how to manage their assets: custodial wallets, where the private keys are held by a third party, typically the exchange, and Web3 wallets, where the user retains full control over their private keys.
Custodial wallets offer the advantages of convenience and simplicity. The exchanges handle the intricate details of private key management, offering simpler recovery methods in the event of a lost key and even bearing the responsibility for security measures to protect the assets. This model is similar to traditional banking systems and thus may be more familiar to the average person entering the world of cryptocurrencies. On the other hand, Web3 wallets offer the user full control over their assets and transactions.
The Need for a Dual Approach
The infrastructure that is currently being used by CEXs across the board is not built with new use cases and applications in mind. If you’re not evolving your infrastructure, you’re getting left behind.
The dichotomy between custodial and Web3 wallets creates a forced choice for users: either choose convenience and trust a third party to secure their assets, or opt for greater autonomy at the expense of simplicity and safety nets. However, it doesn’t have to be an either-or choice. CEXs can offer both solutions to cater to different user needs and preferences.
Enhancing User Autonomy
By providing both custodial and Web3 wallets, exchanges can offer their users an option tailored to their risk profile, comfort level with managing their own keys, and understanding of Web3 technology. Newcomers may prefer the convenience of a custodial wallet, while more seasoned crypto users may opt for the autonomy granted by a Web3 wallet. Having this flexibility embedded in their exchange experience can significantly increase the adoption of digital assets.
Expansion To Gaming, NFTs, And DeFi
The needs of the users are expanding beyond just speculating on assets to include gaming, NFTs, DeFI, and more, especially as more applications start to enable wallet-based authentication. There is a major uptick in fintechs, exchanges, and more shifting their wallet infrastructure to be more managed with Portal’s infrastructure. The importance of expanding their capabilities to be for more than just trading has become significant with new decentralized applications (dApps).
Boosting Security and Trust
Offering both wallet options not only improves the user experience but also enhances security. Allowing users to hold their private keys with Web3 wallets can limit an exchange’s liability if a security breach occurs. Users control the private keys, the proof of ownership of the digital assets, meaning a user’s signature is required for any action. Other parties cannot gain access to the user’s funds. Furthermore, Portal’s offering gives users all the security guarantees of a custodial wallet while maintaining their own control, which in turn encourages wider adoption of the platform.
A Path Forward With Both MPC + AA (Smart Contracts)
Portal leverages advanced cryptography called Threshold signatures, which is a subfield of MPC, to build a modular experience to enable customers to manage where the keys actually sit.
Custodial offerings provide back-office solutions for organizations to hold their own funds or funds on behalf of their users. With Portal, a B2B2C infrastructure company, the keys are held by an organization’s end users directly on their own mobile device or browser to give users full control of their assets. The Portal implementation allows organizations to enable user-controlled wallets versus alternatives that manage assets as a custodian on behalf of the user.
Additionally, combining MPC with account abstraction (AA) improves the onboarding and user experience of Web3 and drives adoption across a whole new user base.
Conclusion
The narrative of custodial versus Web3 wallets sets up a false dichotomy. As centralized crypto exchanges continue to evolve, offering both wallet solutions will cater to a broader user base and foster greater adoption of crypto. It will also make it possible for users to access a much wider range of Web3 applications. It’s an approach that aligns with the diverse needs and preferences of users while improving security and trust across the ecosystem. In the ever-evolving landscape of digital assets, exchanges that embrace flexibility and choice will lead the way.
Already helping multiple partners and millions of users transition from the old infrastructure to the new one, Portal is transforming exchanges, enterprises, and platforms to accelerate into the new global blockchain economy. Partner with us!
