At the current stage of the industry’s development, digital asset adoption is strongly reflexive. As prices ebb and flow, so too does consumer interest. However, appealing to those who are speculatively inclined can provide access to growth capital and a userbase from which to hone products. As Derek Walkush from Variant Fund noted this week:
Boom-and-bust patterns are not isolated to crypto. Financial markets the world over contended with manias in their early days and even established exchanges see bouts of euphoria that drive prices to nonsensical levels. As the conversation around workplace watercoolers, in Ubers, and on the mainstream news starts to centre around a new hot trend, retail investors become increasingly compelled to get involved. Agile institutional allocators will also wade in. Some corporates will use lofty valuations to bolster their treasury or offer stock to make acquisitions, others will squander the opportunity on excessive marketing budgets and lavish events. In the end, a segment of investors loses out, but many entrepreneurs secure capital to advance their innovations. The hype cycle dies down, only to be renewed again when the survivors begin to deliver on their earlier promises.
Looking at the latest Global Crypto Adoption Index report from Chainalysis, we can see the routine playing out in digital asset makers again.
As the confluence of a new interest rate regime, excessive speculation, and malfeasance brought a dramatic decline in digital asset prices last year, we’ve seen adoption fall as well. The authors of the report highlight some important geographies where this trend is not as pervasive, but that’s a conversation for another day.
In this edition of Digital Dives, I’d like to discuss an important infrastructure development that should assist blockchain applications that found product-market fit during the last cycle scale-up to reach a much larger audience when price action attracts the public’s attention once again.
To be clear, there have been several recent innovations that should help. Critically, the Ethereum roll-up landscape and other innovations provide a faster, cheaper, and more interoperable on-chain experience. Further, real-world assets offer diversified sources of return, gaming studios are set to release AAA-quality entertainment, social experiments continue to proliferate, and more. However, I think one of the most important recent developments is account abstraction.
Account abstraction in a cryptocurrency context changes the nature of wallets such that they become programmable smart contracts. By decoupling the traditional linkage between private keys and user accounts, this feature simplifies interactions with blockchain networks, paving the way for better security and user-centric enhancements. Applying web2 sign-in methods, newcomers to an application enabled with this functionality obtain a wallet “behind the scenes”. Gas fees for transactions can even be covered by dedicated third party wallets to further streamline early activity. Series of operations can even be batched into a single transaction. All this unlocks a richer, more customizable, and interactive experience, which should attract a broader userbase and foster innovation. Keeping with the hype cycle, it also removes friction for would-be speculators.
ERC-4337 is a standard that was deployed on the Ethereum Mainnet in March 2023. Its introduction to the ecosystem facilitates account abstraction without having to modify the underlying core protocol. By offering a new standardized method for defining permissions within the Ethereum ecosystem, ERC-4337 is poised to significantly influence how user accounts evolve into advanced smart wallets. The potential outcome is a much smoother experience while engaging with EVM-based chains. Here we can see that the growth in operations conducted by these new smart contract wallets has steadily risen since launch.
User Operations from ERC-4337 Smart Accounts
With account abstraction, it's possible to use various methods for authentication and authorization, such as using mobile phones to sign transactions with fingerprints. Further, traditional crypto wallets rely on seed phrases for account recovery, which can be cumbersome and insecure if not managed properly. This is a significant impediment. 61% of people claim they won’t go near Web3 for fear of losing everything if they forget their passwords. Account abstraction allows for safer and easier management of private keys, eliminating the reliance on seed phrases, even facilitating retrieval mechanisms like social recovery systems, where a group of trusted individuals or a commercial service can assist in regaining control of a smart account if private keys are lost or stolen.
To see how these developments make for easier adoption, let’s consider Friend.tech (FT), a new social craze in the web3 space, which also taps into the speculative tendencies of crypto’s early adopters. In short, you can buy social tokens or “keys” of creators/influencers which provide access to a chatroom only available to holders. If you have a following of your own, then you can sell keys and earn fees on secondary trading. New users to the platform can authenticate via SMS, Google, or Apple, and behind the scenes Privy (FT’s onboarding partner) uses ERC-4337 to create a self-custodial embedded wallet for each user. There’s even credit card functionality to make it easier for the not-yet-crypto-converted. Activity levels have been choppy, but the adoption has been impressive. For a thoughtful discussion on SocialFi, check out this note from Decentralized.co.
Friend.tech Transactions (in thousands)
Visa has written on the topic of account abstraction, too. They’ve discussed automating payments and recently dug into the idea of streamlining blockchain user experience using Sponsored Paymaster contracts. By circumventing the need to hold various tokens to pay for gas fees, digital asset transactions can approach the simplicity of using a credit card, but with faster settlement times for merchants. Circle and the Southeast Asian “superapp”, Grab, just announced feeless stablecoin transactions.
The process of abstraction in technology involves hiding the complex underlying workings of systems, making them more user-friendly and accessible to a broader audience. This simplification has historically played a significant role in driving technology adoption. Before graphical user interfaces, interactions with computers were typically carried out by command line prompts, but introducing intuitive visual and kinetic elements like icons, buttons, and windows, significantly lowered the barrier to computer usage. Cloud computing removes the complexities of setting up and managing physical servers and data centers. With cloud services, individuals and companies can access computing resources and storage on-demand without having to understand the underlying infrastructure, leading to widespread adoption. Just wait until we get a better handle on what artificial intelligence and large language models can unlock.
Creating order out of chaos is the art of abstraction. The journey of technological evolution suggests that as we dissociate complexities, we inch closer to mass adoption. By embracing innovations like ERC-4337 and the broader notion of smart wallets, the crypto ecosystem is laying a solid foundation for a more intuitive user experience. The ripple effects of such developments could very well propel digital assets into the mainstream consciousness. But first, they’re likely to make it easier for more people to speculate.
At Aquanow, we help institutions unlock the potential of digital assets, so if you or anyone you know is considering this functionality, then please get in touch. We’d be glad to leverage our expertise to help you outperform.
If you want to contribute to the web3 movement, Aquanow is on the look for curious and motivated folks to join our team. Feel free to reach out directly or check out the current openings here.