- In Transit
- Posts
- Will the Wallet Wars heat up soon?
Will the Wallet Wars heat up soon?
Wallet Thesis Field Notes #1. Who gets to control the gates to the next layer of the internet?
The wallet is critical to the overall progress, growth, and adoption of web3. I've started writing my Wallet Thesis. As I do, I'll share a series of field notes – raw, work-in-progress ideas exploring different facets of web3 wallets. This is the first such note.
The rise of browsers spurred the Browser Wars between Netscape and Microsoft in the 90s. A battle for market share to control the gateways to the internet.
Bigger market share equaled more power to shape the user experiences of the internet, which standards to support, and so on. Both companies poured a lot of money, time, and energy into the race. The battle eventually ended in favor of Microsoft.
Distribution is king
The end of the "war" is an early example that distribution is the most critical power to wield in the internet age.
Microsoft already had a lock on the computer operating system market (established distribution). And they leveraged that to push Internet Explorer into the hands of users.
As users, we like to keep things simple. We're happy with defaults and pre-selected options. Unless the (cumbersome) alternative is 10x better, we can't be bothered.
During the browser wars, the benefits of going around the default (Internet Explorer) and actively choosing the alternative (Netscape) had to be significant for users to do so. And they weren't. The product experiences were similar.
And so, Microsoft's browser prevailed.
We've later seen the power of distribution play out again and again. Another example is the success of Apple's AppStore.
Control the gate, create the rules, and profit.
The end of the beginning
Now, we're on the verge of another significant paradigm shift for the internet. We call it web3. In simple terms, we're up-skilling the internet.
Web3 enables new features and capabilities like ownership, tokens, and internet-native payments. It's all powered by secure public databases called blockchains.
With these building blocks, we'll see new products, business models, and user experiences emerge.
It's a paradigm shift that will be as powerful as the original internet (when we look back at it in 20 years).
Like browsers were the gates to the internet, wallets are the gates to the blockchain-powered layer of it.
We use wallets for many different things:
Money and value
Digital items like art, tickets, membership passes
Proofs of activity
Identity markers
Actively verify our identity
And a lot more
In the future, wallets will be as familiar to internet users as the email inbox. Everyone will have wallets in some way, shape, or form.
The first generation of wallets is clunky and complicated to use. You have to really want to engage with web3 services to jump through all the hoops.
The user experience is further complicated because much of the underlying plumbing and wiring of web3 infrastructure is still visible to the end user.
There is not one blockchain but many different blockchains (or networks). Switching from one to the other might require users to change network settings in their wallet or switch to a separate wallet altogether.
It's as if you were required to care about which cloud service a website or service runs. Want to book a hotel through Booking.com?
"Sorry, it runs in the Google Cloud, and your browser is set for Amazon Cloud.
Please change browser settings and refresh the page to continue".
That would be cumbersome. Yet, it's the level of sophistication and detail required to navigate the web3 landscape today.
Which is... not good enough to onboard the average internet user.
We've reached the end of the beginning. This was the first phase of web3 adoption.
As the landscape of web3 continues to expand, we approach the next: mainstream consumer adoption.
It will require more sophisticated wallets that are simultaneously easy to use. It will require the plumbing to disappear behind a wall of sweet, sweet user interface.
The future of wallets
The current landscape of wallets is super fragmented. WalletConnect, a wallet aggregator technology that simplifies wallet integrations for web3 services, supports more than 200 different wallets. And there are more.
It's unlikely that all of them will thrive or survive, even. We'll probably end up with a Power Law-like distribution: A few wallet products taking the lion's share of users.
The wallets that win the war must win on two fronts: product experience and distribution.
The product experience of wallets will continue to evolve and improve. There are several different directions to explore:
Web3's still waiting for its mobile moment
Vertically embedded wallets inside products versus horizontal standalone wallets
How many wallets will an average user have?
I'll save all of them for a separate field note later. Let's move on to distribution. That's where the real battle will play out.
Imagine a situation where two wallet providers of equal product quality compete. One's got an established distribution engine; the other doesn't. It's easy to predict the outcome.
(It's the one with the established distribution channel that will win)
When considering distribution power for wallets, looking at the current market share distribution among existing wallet providers might be natural. But that's wrong. These providers have distribution within the web3 ecosystem. They can't leverage that distribution to attract users from outside the ecosystem.
Let's instead look at the players that already have a distribution engine that touches the future web users of web3—E.g., internet users that don't have wallets.
That train of thought only leads to one destination: Big consumer tech companies like Apple, Google, Meta, and Microsoft. All of them have well-oiled distribution machines.
The big question is how they'll navigate this whole web3 thing. For the time being, that's an open question.
On one side of the spectrum: Apple's effectively ended web3 adoption on mobile by tightening its AppStore rules.
On the other side: Meta's Instagram has implemented features to transact with and display NFTs on profiles.
Here are a few ways that could play out:
If Apple were to launch a native iOS wallet, they could insta-win a significant market share.
Apple, Google, and Microsoft all have browsers with significant market share. Most web3 products and experiences are desktop browser-based. Wallets serve as browser extensions. These wallets (as extensions) live at the mercy of the browsers they inhabit.
Instagram's already got some resemblance to a wallet/hub for digital identity. They've got some commerce features in there. People use it a lot. The badass move from Meta would be to give Instagram a full-blown wallet makeover.
The magic unicorn option
New wallet startups regularly enter the market. Most of them will struggle to differentiate and attract a significant user base.
The web3 user funnel is wallet-first. It requires users to understand and subscribe to the overall value proposition of web3 first (get wallet) and then experience it (use web3 product).
That creates a lot of friction.
Instead, I think the potential unexpected contender to the wallet wars could be a web3-powered product that breaks through.
'Blockchain needs a 'ChatGPT moment.'
Microsoft CEO, Satya Nadella
He means that AI developments have accelerated over the past years, yet most people haven't cared much about it until ChatGPT.
ChatGPT was the force that broke through the surface and into the public eye of attention.
The recipe? A simple user interface that everyone knows (chat) that displayed the power, value, and utility of AI in practice. Result? Fastest product ever to scale to 100 million active users (two months).
Web3 technology has yet to have its breakthrough moment. It's going to happen. And when it does, it can enable a new player to obtain massive distribution in a short amount of time.
I envision a breakthrough project with an embedded wallet experience that turns the funnel from wallet-first to product-first, removing much of the onboarding friction. As the product scales, they can spin off or evolve it into a full-fledged wallet with a built-in user base.
Ending notes
Where platforms own the user relationship in web2, wallets own it in web3. This makes the wallet layer very powerful.
We'll start seeing The Wallet Wars heat up this year. It's not a winner take all proposition, but there will inevitably be a few major providers.
The big question is whether the giants of web2 will leverage their existing distribution or a magical unicorn on the battlefield that draws the longest straw.