Cryptocurrency wallets are essential tools for managing digital assets in the blockchain era, and have witnessed significant evolutionary phases reflecting advancements in security, user ownership, and functionality. This report explores crucial stages of cryptocurrency wallet development, challenges, innovations, and optimized solutions that have shaped the landscape of cryptocurrency wallets.

Introduction to Cryptocurrency Wallet Evolution:

With the advent of blockchain in 2009, blockchain wallets were then introduced and entered an initial period of development. Subsequently, the number of crypto wallets exceeded 50 million with the rise of ethereum, which led to the proliferation of smart contract wallets, a sharp rise in transaction activity, and DeFi liquidity mining being all the rage. Apparently, crypto wallets have entered a period of rapid expansion.

After the year 2021, with the massive expansion of the blockchain ecosystem and the prosperity of NFT, DAO, Layer 2 dapps, and many public chains, users’ demand for wallets goes beyond storing, trading, and cross-chain assets and focuses more on security, the diversity of interactive functions, and users’ control experience (preferring to treat wallets as multi-chain, multi-asset management platforms). And according to coinweb.com‘s estimation, the total number of crypto wallets worldwide is 84.02 million as of August 2022.

In brief, the development of crypto wallets can be divided into four periods：

Chart 1: The Periods Followed by Crypto Wallets Development

Up to date, all kinds of crypto wallets can be categorized into centralized and decentralized wallets based on whether or not users’ hold their own private keys. For a very long time, users have opted for centralized wallets (custodial wallets), especially Coinbase、Binance、OKX、Gate、YouHolder

The reason is that:

• The key management is simple
• Higher wallet availability
• Transactions are efficient and can be made in real time
• No need for mnemonics, password can be retrieved when forget

However, the FTX and Celsius events reminded the industry that “it’s not your key, it’s not your coin.” Security and controllability have become more talked-about aspects of wallet products. Within a very short period of time after the FTX revelations, Safe saw a net inflow of more than $800 million, Ledger’s sales hit multiple all-time highs within a short period of time, and Trezor’s sales spiked by 300%. ZenGo saw triple-digit growth overnight, and deposits reached an all-time high. Developers have begun to turn their attention to the technologies of non-custodial wallets, which are more secure in droves. Besides, the industry’s centralized wallet projects are also facing technical transformation to cater to the demands of the market.

Digital Signature Framework：

Overview of Digital Signatures for Blockchain Transactions:

Digital signatures are crucial for blockchain transactions, where a user signs a message (e.g., a transfer request) with a private key to obtain a signature. The process involves generating a hashcode of the message through a hashing algorithm and then signing the hashcode using a private key through a cryptographic algorithm, which is then verified on-chain by the corresponding public key.

The signature algorithm can be represented as follows:

Sig = Alg Sig(Alg Hash(K), Pri Key)

• Pri Key is the signing private key
• K is the transaction info
• Alg Hash is the hash function
• Alg Sig is the signature algorithm
• Sig is the resulting signature

However, the formula might be a bit confusing due to the nesting of function calls and the use of shorthand notation. Here’s a breakdown to simplify and explain the process:

1. Hash the Transaction Information:
   First, the transaction information K is hashed using a hashing algorithm Alg Hash.
   Hashing is the process of converting data into a fixed-size string of characters, which is typically a sequence of numbers and letters.
   Formula: H = Alg Hash(K) where H is the hash of the transaction information.

2. Sign the Hash:
   Next, the hash H is signed using a private key Pri Key with a signature algorithm Alg Sig.
   Signing is the process of generating a unique string of characters that can verify the authenticity of the data.
   Formula: Sig = Alg Sig(H, Pri Key) where Sig is the digital signature.

So, the entire process can be broken down into these two steps, and the formula can be rewritten in a more step-by-step manner as follows:

H = Alg Hash(K)
Sig = Alg Sig(H, Pri Key)

This breakdown simplifies the process into two separate steps, which might be easier to understand for individuals unfamiliar with cryptographic processes.

Obviously, according to the formula, how private and public keys interact is critical to the implementation of decentralized wallet functionality. Digital signature technology is the thread that connects them, and it also inspires the way of wallet development and improvement.

Single Signature(EOA Wallets)：

• Example: Externally Owned Account (EOA) wallets like Metamask, Bitkeep, Phantom, Rabby, Rainbow, trust wallet, Math Wallet, Backpack, MyEtherWallet
  Cipher, Trezor, Ledger, Exodus

• Strengths and Weaknesses: Single-signature wallets are straightforward but lack advanced operations like social recovery, batch trading, and one-click follow-up orders. Also, it often leads to single points of failure, like missing mnemonics.

To be more explicit:
A single signature only needs to correspond to a pair of public and private keys, which can be used to complete digital currency transactions between the corresponding addresses. In other words, Single-sig is not responsible for multi-signature confirmations and time-consuming on-chain calculations. Hence, the gas fee is relatively low. Additionally, the majority of the above EOA wallet examples support OTC trading.

Chart 2: How EOA Wallets control the balance

However, the limitations of Single-sig wallets are: 1. Only carrying out single-signature transactions. 2. Inadequate security due to high dependency on single-signature private keys. 3. Cyberattacks are simple and easy to single-point-blast. 4. Signature mode does not meet business clients’ needs.

Conculsion:

In response to this series of pain points of single signature, and catering to the needs of enterprises and individuals who need multiple people to manage their accounts together. Wallet developers adjust the underlying systematic logic of signature, which led to the introduction of multi-signature, MPC wallet technology.