Crypto Wallets at the Crossroads, What it Might Mean to You?
- “It is an early stage industry and these business models are being iterated, tested and improved every day.”
- “Business needs to be profitable, otherwise it's going to be disrupted.”
Crypto often prides itself on being open-source and community-led. However, in the case of online crypto wallets, the free-to-use model can come with a number of disadvantages.
Most notably, the lack of funding and the use of open-source code can often put wallets at a disadvantage, as demonstrated by the unfortunate hacks that Electrum, Agama and Copay have suffered in recent months. By lacking a sustainable means of generating profit, online wallets lack the financial means of strengthening and securing their own services as much as they might like.
Still, while the current situation is defined mostly by unprofitable wallets, there are signs that things are changing. Wallets are looking to add paid features to their platforms, while some predict that they may become the focus of the crypto ecosystem in the future.
Looking for a business model
Instead of charging fees for sending or receiving crypto, many online wallets try to make money by charging for a variety of add-on services, from privacy-enabling mixers to fiat-to-crypto gateways.
For example, Atomic Wallet lets users buy crypto with their bank cards, and for this privilege it charges either a 2% commission or USD 10, whichever is bigger. By contrast, Wasabi Wallet is an open-source, non-custodial wallet that charges users for transacting Bitcoins anonymously using Chaumian CoinJoin.
"Most of the business models rely on providing extra services and value to their users," Nuno Coelho – BlueWallet's co-founder – confirms to Cryptonews.com. "Services like secure custody, Bitcoin on-ramps, physical hardware wallets, etc. It is an early stage industry and these business models are being iterated, tested and improved every day."
Given the crypto industry's current state of development and adoption, there isn't really any other way of monetizing a software-based wallet right now. Because as Mycelium project manager Dmitry "Rassah" Murashchik told the German website BitcoinBlog in 2016, “there is no way to make money with the wallet itself. There is the idea to charge for transactions, but then people leave and use other wallets."
It's hard to say how profitable such an approach is, largely because the makers of software wallets don't publish sales figures. However, some kind of very crude estimation and comparison is possible, and it would indicate that software wallets are nowhere near as profitable as their hardware counterparts.
For instance, Ledger revealed in October that it had sold over 1.3 million units of its wallets, and with these units selling at anything from USD 59 to USD 119, this equals a revenue between USD 76.7 million and USD 154.7 million.
By contrast, a recent denial of service attack infected 152,000 devices using the free Electrum wallet. And because Electrum is one of the most popular software wallets out there, it's likely that other online wallets – which do charge for optional add-on services – will have smaller user numbers, and smaller revenues (than Ledger).
It needs to be profitable
The failure to make any real profit from software wallets has, unsurprisingly, serious ramifications. As mentioned above, Electrum suffered a distributed denial of service attack in April, while in December a hacker stole Bitcoin worth around USD 750,000 from users of the wallet.
It's arguable that the absence of a significant revenue stream deprives Electrum, and wallets like it, of the resources necessary to develop the strongest and securest wallet possible. Another software wallet, Copay, was also hacked last year, while early in June, Komodo hacked its own Agama wallet, after being informed of a vulnerability that put users' funds at risk.
"Usually most of the projects are started by enthusiasts playing with the technology like ourselves," says Nuno Coelho. "But in the long run a business needs to be profitable, otherwise it's going to be disrupted, unable to keep innovating or unable to keep providing value to the users."
In the case of both Copay and Agama, their vulnerabilities arose because of how their corresponding wallets made use of open-source code libraries, into which hackers had inserted malicious script. Such occurrences are generally likelier with free-to-use software wallets, since they incorporate a bigger proportion of open-source code, and because they often don't have enough staff to proactively bug hunt.
The future of wallets
Nonetheless, most existing and up-and-coming wallets are planning on ways to increasingly monetize themselves and add layers of paid services onto their basic functionality.
For example, HODL Wallet recently wrote on Twitter that one of its ways of monetizing “would be exchanging bitcoin for prepaid value such as gift cards or other digital goods. Eventually we plan to give our users the ability to buy/sell bitcoin in a non custodial experience."
Some are looking even further ahead, with BlueWallet predicting that wallets could become the one-stop-shop for everyone's crypto needs.
"Wallets are going to be more and more the central self-sovereign interface for the individual," Nuno Coelho predicts. "These wallets' business models won't rely on fees, but rather on innovative services that we never seen before, they are going to be disruptive services."
As for what such services will involve exactly, Coelho isn't too specific, but what he says in conclusion suggests that the humble online wallet will have a sustainable future, assuming a sufficient level of wider crypto adoption.
"They will help you protect your Bitcoin portfolio, they will help you to spend better, they will make you more self-sovereign, they will bring you privacy for when you need it and they will make Bitcoin easier to use."
On the other hand, one thing that has become more likely with the advent of Facebook’s Libra is that wallet services in the future may very well be provided by big, established tech companies. This, at least, is what Wasabi Wallet co-founder Harmat Bálint suspects could happen if crypto becomes more mainstream.
“Soon ‘average’ people will also be widely involved in this space and they will probably be looking for some ‘trusted’ name,” he tells Cryptonews.com. “I do not think these would be today’s big exchanges, rather tech or fintech companies. It’s hard for me to imagine that, for example, Apple or Google are not working already on some kind of solution.”
And if big platform companies like Google or Apple get involved in wallets (as Facebook is doing), then it’s almost certain that such wallets will come as part of a whole suite of crypto-related services. It’s just not certain whether such services will make us more self-sovereign or not.