The battle for wallet supremacy is underway

In the past year, crypto has seen wallet launches from centralized exchanges including Kraken, Coinbase and Bitget, NFT marketplaces like Magic Eden, TradFi firms Naver and CoinFlip, and of course DeFi protocols such as Osmosis’ Polaris Wallet, Uniswap, and Aave which announced its own Family wallet at Devcon last week.

All these are in addition to the hundreds of already-existing wallets that work perfectly fine. This begs the question: Why do crypto users need more wallets?

But that’s the wrong question. The right question is, why does every company want their own wallet? It turns out that owning the end-user via a crypto wallet is quite a prosperous business.

Wallets are typically the first front-end touchpoint for crypto newbies wanting to buy their first crypto tokens. This puts wallet providers in a uniquely close position to the end-user, in turn granting them the bargaining power to command a take-rate.

This take-rate is primarily exercised through in-wallet swaps on “fee-insensitive” users (i.e. normies). MetaMask for instance, makes about a weekly average of $1.5 million on wallet swaps.

Wallet providers also enjoy privileged oversight over transaction order-flow, a fancy way of saying that wallet providers know the trades that thousands of users are making. That knowledge is highly valuable because wallet companies are potentially selling that order-flow to professional block builders who extract MEV.

The latter is, of course, somewhat dubious. It’s possible that wallets like MetaMask already do so, and we know for a fact that Telegram trading bots (with integrated wallets) like Banana Gun are doing so and divvying up MEV profits with block builders.

Wallets are also becoming increasingly the preferred interface for onchain activity. There is some data to show that DEX front-ends are increasingly relegated to the back-end as wallets, solver models (CowSwap, 1inch Fusion) and DeFi aggregators take over.

Source: Delphi Digital

This thesis is more popularly known as the “Fat Wallet” thesis, yet another one of the crypto industry’s tendencies to predict trends in one grand proclamation. The thesis is not new — it first emerged in early 2023, but is now seeing some attention again thanks to a well-articulated update from Robbie Petersen.

Builders and investors banking on the Fat Wallet thesis also believe that there will be potentially valuable ways for wallets to monetize their users down the line. 

As wallets increasingly move away from a utilitarian barebones “send and receive crypto” design toward feature-rich hubs that are plastered with trending onchain dapps, mints and messaging capabilities, it may not be surprising to see something like a 30% Big Tech tax on this distribution.

An example of old vs new wallet user interfaces

Wallets also have strong natural synergies for B2B integrations with crypto payments services. We’ve seen this lately with wallets like Zeal or Fuse which let you spend your DeFi yield or idle stablecoin holdings via Visa integration.

The Fat Wallet thesis may very well amount to just another failed investment theory, but it does provide a convincing rationale for why the industry is seeing a new wallet launch every other week.

With hundreds of competitors looking to grab the new wave of users that onboard every bull market cycle, wallets are competing in myriad ways.

Coinbase Wallet is turning to the tried and true strategy of market incentives, announcing today a 4.7% APY on USDC holdings.

Magic Eden has promised claimable airdrops for its native ME token — but only if you’re using Magic Eden’s very own wallet.

Everyone wants to be the first wallet to bind the user. It’s a tough business. The good news is that free market competition is the most effective check on economic concentration, and consumers can rest easy that no one wallet will probably ever dominate the market.

Start your day with top crypto insights from David Canellis and Katherine Ross. Subscribe to the Empire newsletter.

Explore the growing intersection between crypto, macroeconomics, policy and finance with Ben Strack, Casey Wagner and Felix Jauvin. Subscribe to the Forward Guidance newsletter.

Get alpha directly in your inbox with the 0xResearch newsletter — market highlights, charts, degen trade ideas, governance updates, and more.

The Lightspeed newsletter is all things Solana, in your inbox, every day. Subscribe to daily Solana news from Jack Kubinec and Jeff Albus.