Self Custodial Wallet
One of the basic principles of Web3 is ownership. Blockchain networks offer users the ability to communicate with their assets in such a way that they do not depend fully on centralized intermediaries. But this approach also implies a change in the party that ensures security regarding access to these assets.
Crypto wallet is the link between a user and a blockchain network. Crypto wallet allows you to store credentials of your account, sign transactions, see balance, and interact with decentralized apps.
In this ecosystem, self-custodial wallet development became one of the main trends due to the fact that it implies transferring control over the wallet credentials from the third parties to the user.
The design of such wallets requires more attention to some aspects than just the wallet interface itself.
What Is a Self-Custodial Wallet?
Self-custodial wallets are wallets where users have control over the private keys used for the authentication of blockchain accounts.
When using a custodial solution, private keys are managed by the centralized platform. The user can access blockchain assets via an account provided by this platform. When using a self-custodial solution, the wallet is created in such a way that a user remains in charge of credentials required to authorize transactions.
Thus, self-custodial wallet development differs from the development of regular apps in that the system should be developed in such a way that credentials are in the hands of the user.
The recovery phrase, private key, or any other wallet credential allows gaining access to blockchain assets. Loss of exposure of such credentials may cause serious problems due to the fact that blockchain transactions cannot be reversed by a central authority.
How Self-Custodial Wallets Work
It all starts with the wallet generating its cryptographic credentials.
Depending on the wallet architecture and networks being supported, a seed phrase can serve as the basis for deriving private keys and public addresses associated with them. Wallet standards supporting hierarchical deterministic wallets will derive multiple accounts and addresses out of a single seed.
At the time of the user sending funds, the wallet will generate transaction data, which can comprise the recipient’s address, the amount of funds sent, the network fee, nonce, and other data specific to the blockchain.
Once generated, the transaction is signed with the appropriate private key locally. The signed transaction can later be submitted to the blockchain network.
The main idea is that there is no need to transfer a private key to a remote server in order to sign the transaction.
This transaction flow is key to developing a self-custodial wallet because transaction signing is one of the core operations of the wallet.
Core Components of a Self-Custodial Wallet
Modern wallets are a composition of various layers functioning together.
Key Management
Key management deals with generation, storage, securing and using of cryptographic credentials. Methods of storage can differ based on the platform of wallet execution: whether it is a mobile application, desktop software, browser extension or hardware.
Blockchain Connectivity
The wallet requires a reliable way to connect to various blockchain networks. This might depend on the architecture and can include various blockchain nodes, RPC services, indexers and other components.
Using this connectivity wallet obtains balances, estimates fees, gets transactions data and broadcasts signed transactions.
Transaction Engine
Different blockchains have their own specificities in terms of transaction structure. Therefore wallet requires transaction engine that would be able to accommodate particular network specifics but would provide consistent user experience.
User Interface
Interface should explain blockchain operations to users. They should understand what is signed, what assets will be transferred, and what are the fees.
Even a technically safe wallet can present danger for users when an interface does not clearly show transaction information.
Security Considerations
Security is the basis for developing a self-custodial wallet.
The private keys, seed phrases must be secured at all times. There must be no unnecessary exposure of sensitive information via application logs, network calls, analytics, and insecure storage.
Encryption is a good way to secure local wallet data, and there could also be security features provided by the device.
Another aspect is the approval of transactions. The wallet should give the user all the necessary details before signing the transactions. This is especially true for dealing with decentralized applications where the user could get tricked by malicious contracts, interfaces.
Other things that developers have to keep in mind include phishing, compromised devices, malicious code, insecure dependencies and backup issues.
Security testing and code reviews can help spot possible vulnerabilities.
Multi-Chain and dApp Connectivity
A contemporary Web3 user usually works with several blockchain networks. This is why self custody wallet development nowadays requires multichain solutions.
Working with several blockchain networks is not just about connecting to several RPC endpoints. The networks may have a different address format, transaction format, token standard, fee system, and other differences.
The wallets serve as gateways to the dapps. Connecting your wallet to the dapps through wallet-connectivity standards and browser/mobile wallet integrations is possible via wallets.
This means that wallet security is much wider than only protecting the stored assets. The wallet serves as the authentication layer for between the user to the applications they work with.
Challenges in Building Self-Custodial Wallets
One of the difficulties is finding the right balance between security and usability.
In case security protocols are too complex users may face difficulties managing their wallets. If the user experience becomes too simple, valuable security data will be hidden from users.
Wallet recovery is also a challenging issue. Users should have efficient options to recover their access in cases of losing their device, whereas the wallet should be designed in a way that supports the concept of self-custody.
Support of multi-chain protocol adds to the complexity of development process since it requires continuous testing and maintaining blockchain standards.
As we can see, the development of a self-custodial wallet is far from just building its interface.
The Future of Self-Custody
The use of wallets is growing as Web3 products become more developed. The function of wallets is changing into being an identity layer and authorization layer instead of simply a tool used to view balances.
Account abstraction, smart contract wallets, multi-party computation, and hardware-based security are some of the technologies that are bringing a new way of managing keys and authorizing transactions.
This could make it simpler for the general public to custody their funds without reducing control over digital funds.
However, the development of crypto wallets must adjust to new blockchains, new transaction patterns, security requirements, and user demands.
The future of self custodial wallet development would most likely be geared towards ensuring decentralization in ownership without complicating it.
Conclusion
Self-custody constitutes a critical aspect of the Web3 ownership principle. As opposed to having an intermediary party manage the wallet credentials, the user is able to retain full control of the keys necessary for conducting blockchain transactions.
Development of such a wallet requires consideration of factors including cryptography, key management, transaction signing, blockchain integration, multichain capability and user experience.
In light of the continued growth in decentralized apps, crypto wallet development shall remain closely tied to the developments in Web3 technology.
Understanding Self-Custodial Wallet Development in the Web3 Ecosystem was originally published in Coinmonks on Medium, where people are continuing the conversation by highlighting and responding to this story.