Web3 Wallets and Centralization: Can They Coexist?

Web3 Wallets and Centralization: Can They Coexist?

Web3 wallets have become a crucial tool in
the new era of the Internet, where decentralization, blockchain, and
cryptocurrencies are at the forefront of innovation. A Web3 wallet, also known
as a crypto wallet, is a digital wallet that enables users to store, send, and
receive cryptocurrencies, interact with smart contracts, transact NFTs, and
access dApps on different blockchains.

As the use cases of Web3 wallets
continue to expand, the question of whether centralization can play a role in
managing these wallets arises. I will explore the concept of Web3 wallets
managed by Centralized Exchange (CEX) and discuss whether it aligns with the
principles of Web3.

What Is CEX + Web3 Wallet?

CEXs (centralized cryptocurrency exchanges)
act as intermediaries for buying, selling, and trading cryptocurrencies in a
centralized manner. They offer a user-friendly platform where users can conduct
various cryptocurrency transactions. However, users must trust the exchange to
manage their funds securely, as the exchange controls the wallets.

Web3 wallets provided by CEXs claim to
integrate with decentralized ecosystems and allow interactions with dApps and
blockchains. Despite this claim, the underlying nature of these wallets remains
centralized, as the exchange retains control over users’ private keys and
funds.

The centralization aspect of CEXs extends
to their Web3 wallets in various ways:

  1. Users entrust the exchange with storing and managing their
    private keys, relying on the exchange’s security measures.
  2. The infrastructure supporting Web3 wallets, such as servers and
    network nodes, is owned and operated by the centralized exchange.
  3. Transactions from CEX’s Web3 wallets undergo internal approval
    and validation before being broadcasted to the blockchain, introducing a
    centralized control point.

For users seeking decentralization and full
control over their funds, self-hosted software wallets or hardware wallets may
be more suitable.

While Web3 wallets and centralization can
coexist to some extent, the level of centralization varies depending on
specific implementation and design choices by wallet providers. Understanding this
relationship can shed light on how these elements interact.

Case Studies

Let me share some examples:

Case
Study 1: OKX Wallet

OKX, a well-known player in the Web3
technology space and the second-largest cryptocurrency exchange in terms of trading
volume, recently unveiled a significant upgrade to its OKX Wallet. This upgrade
introduces groundbreaking features that position it as the first Web3 wallet to
integrate advanced multi-party computation (MPC) technology.

Integrating MPC technology into the OKX
Wallet eliminates the need for traditional key and seed phrase storage methods.
Instead, the user’s private key is divided into three parts, significantly
enhancing security and reducing the risks associated with a single point of
failure. Leveraging MPC ensures that users retain complete control over their
wallet assets while enjoying the highest level of security.

OKX Wallet operates
as a fully decentralized and non-custodial solution, empowering users with full
ownership and control over their funds. Unlike centralized exchanges, OKX does
not hold users’ assets, creating a secure environment that allows individuals
to have custody of their cryptocurrencies.

The wallet offers multi-blockchain support and automatically recognizes and connects to supported networks, providing a
convenient solution for users engaged in decentralized finance (DeFi),
non-fungible tokens (NFTs), and decentralized applications (DApps).

The upgraded OKX Wallet introduces an
innovative asset recovery feature called „independent Emergency
Escape,” revolutionizing the recovery process. In critical situations,
users can regain access to their assets through using two out of three access
credentials: a device, a cloud backup, or an OKX account login. This unique
feature enhances user security and autonomy, allowing individuals to regain
control of their assets without relying on OKX’s involvement.

In addition to its robust security
features, the OKX Wallet provides complete
control and ownership of funds, facilitating faster withdrawals without
withdrawal approval. The wallet allows seamless management of multiple chains,
eliminating the need for manual network switching.

Users can import multiple
seed phrases and derive addresses within the wallet. Easy connectivity is
ensured through the OKX Wallet web extension and dedicated iOS and Android
mobile apps. Integration with the OKX DEX, an integrated decentralized exchange
aggregator, enables multi-chain and cross-chain transactions.

Case
Study 2: Bitverse

Introducing Bitverse, an innovative MPC +
AA Wallet leading the way in building the „Credit Creates Wealth”
Web3 ecosystem. Bitverse combines artificial intelligence, Oracle credit
protocols, and advanced cryptographic techniques to create a secure,
decentralized, and user-friendly environment for controlling and managing
assets.

It aims to promote user engagement and loyalty with engaging features
like lucky packets, event guessing, non-fungible tokens (NFTs), and airdrop
tools. We will explore the key advantages and how it is shaping the landscape
of Web3.

One of the primary advantages is its
implementation of the Bitverse Credit Protocol (BCP) and Credit Oracle. BCP is
a decentralized credit protocol that leverages AI and Oracle technology. It
establishes a hybrid credit system (OCC + RWC) that operates on both the
blockchain and off-chain.

Extending credit capabilities to both realms ensures
that credit is accessible and convenient for all industry members and users.
This innovative approach addresses common pain points in the industry, such as
low fund utilization and limited benefits for high-credit users.

To
achieve robust security, it employs MPC. It also prioritizes convenience for its
users and incorporates a secret key partition management system with
cryptography principles, zero-knowledge proofs, trusted execution environments
(TEE), and robust authentication mechanisms.

In its development, it is actively working
on an Account Abstraction (AA) wallet that supports non-main chain currencies.
This AA wallet enables users to pay gas fees using alternative tokens. For compatibility, it supports single-signed wallets using
traditional mnemonic phrases. This compatibility ensures a seamless transition
for users already familiar with existing Web3 wallet practices while expanding
the user base.

With its unique features and user-centric
approach, it is shaping the future of decentralized finance and revolutionizing
how users control and manage their assets in the digital world. It’s worth
noting that Bitverse is integrated into the Bybit exchange, further
expanding its reach and capabilities.

Can CEXs Manage Web3 Wallets?

The examples provided above serve to
illustrate two distinct aspects. The first example showcases how a CEX can develop its own Web3 solution, while the second demonstrates
the integration of a third-party solution. Both integrations have their merits
and represent a positive step towards enabling users to experience the
functionality of Web3.

In contrast, Web3 is founded on the
principle of decentralization, ensuring that no single entity maintains control
over the network. Decentralization enhances security, transparency, and
resilience against attacks by eliminating a central point of failure.

So, can CEXs manage Web3 wallets?
Technically, the answer is yes, but it contradicts the principles of Web3. When
users entrust their assets to a CEX-managed Web3 wallet, they place their faith
in the CEX, which undermines the concept of decentralization.

CEXs have a history
of security breaches, and if it is hacked or goes bankrupt, users may
permanently lose their funds. Moreover, they may impose restrictions on users’
funds, such as freezing or seizing them, which contradicts the financial
sovereignty that Web3 aims to achieve.

Another concern with CEX-managed Web3
wallets is the risk of censorship. They may comply with government regulations
and limit users’ access to specific decentralized applications (dApps) or
blockchains, eroding the idea of an open and permissionless internet envisioned
by Web3 further.

However, it is essential to note that not
all CEXs are identical. Some have taken steps towards decentralization by
adopting non-custodial features, enabling users to retain control over their
private keys and assets while benefiting from the user-friendly interface of a
centralized exchange.

Many also offer cross-chain interoperability, allowing
users to access multiple blockchains from a single platform, which can be
convenient for those who trade various cryptocurrencies. Nevertheless, despite
these efforts, CEX-managed Web3 wallets still diverge from the core principles
of Web3.

In Conclusion

Web3 wallets managed by CEXs may offer a
user-friendly interface for cryptocurrency trading and accessing different
blockchains, but they deviate from the fundamental principles of Web3.
Decentralization is a pivotal aspect of Web3, distinguishing it from
traditional Internet and financial systems.

While Web3 wallets and centralization can
coexist, users should be cognizant of the degree of centralization involved and
make informed decisions based on their priorities. For users seeking
decentralization, the ideal scenario entails utilizing wallets prioritizing
client-side control, locally stored private keys, and open-source code allowing
independent verification.

The usual „Anndy Lian” quote to
end the article: „Whether championed by a centralized or decentralized
entity, this is the journey of Web3. We must respect this entire process.”

This article was written by Anndy Lian at www.financemagnates.com.

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