Exchanges enter the wallet market: Traffic competition is an eternal theme across cycles

Exchanges are deploying wallets in advance from an acquired perspective. This is a competitive trend and also a top-level sense of smell in the upper reaches of the industry food chain.

Recently, exchanges have been active in the wallet market, and the signs of a bear market are becoming stronger.

On August 10, the Web3 multi-chain wallet BitKeep completed its brand upgrade and changed its name to Bitget Wallet. Previously, Bitget Exchange invested an additional $30 million in it and became the controlling shareholder;

A week ago, OKX announced the launch of the AA smart contract wallet, taking the lead among many CEXs in implementing account abstraction.

Whether it is investment acquisition or independent research and development, the investment of CEX in wallets is obvious. Note that this is not a custodial wallet on a traditional CEX, but a wallet that users can fully control and carry the CEX brand.

Many years ago, as an old investor, I did not realize the popularity of non-custodial wallets. Deposit, buy, sell, withdraw...it seems that CEX is the traffic entrance of the entire crypto world, and wallets are more like an exit for withdrawing assets.

Today, as decentralization is increasingly emphasized and hot spots on the chain are increasingly dispersed, "interaction" has re-endowed wallets with the possibility of serving as traffic entrances; in addition, the emergence of account abstraction also makes people more expect that tomorrow's wallets will be able to obtain traffic outside the circle in a more friendly manner.

When CEXs began to roll up their wallets, under the calm surface of the bear market, the undercurrent was surging:

The fight for traffic is the eternal theme that transcends cycles.

In Web3, infrastructure is the traffic entrance

In the Internet we live in, a basic consensus is that applications control the entrance to traffic.

For example, an article on a WeChat official account can become a hit with 100,000+ views. In this process, you only need to worry about whether the content itself is attractive, and don’t worry about not having an audience. The potential audience is all WeChat users, and the application itself has a huge traffic pool.

But if we go back 10-20 years, this was not always the case.

In the 2G or 3G era, the key to traffic flow lies with the infrastructure providers, i.e. telecom operators. Operators work hard to build networks, lay cables and provide communications, and also launch VAS (Value Added Services): ringback tone, MMS, mini games and mobile newspapers... All services come from our operators, and we use phone bills to pay for the services.

These businesses are a little unfamiliar to the new generation of young people, but at the time everything seemed natural:

The infrastructure providers make a large investment in infrastructure construction at one time, and then slowly recover the costs through telephone charges and value-added services with almost zero marginal costs. Considering the huge number of users, it is basically a stable and profitable business.

Does it have a bit of CEX flavor?

A large investment is made to build the exchange's trading system, supplemented by continuous operation and maintenance and iteration, and then the cost is recovered by earning transaction fees (spot/contract). After the basic foundation is established, more services and fields can be expanded.

Ten years ago, CEX was the undisputed main entrance to traffic in the crypto world, without a doubt.

Six years ago, the ICO model emerged, where users could directly access a smart contract with their wallet assets to obtain tokens;

Five years ago, CryptoKitties appeared; almost in the same year, Opensea was founded, and then the NFT hype wave came. Users can access the platform through their wallets to trade NFTs.

Three years ago, Compound first launched liquidity mining, which triggered the summer of DeFi. Users can directly interact with DApps and obtain token income...

Don’t forget that since Web3 traffic has its own transaction attributes, wherever there are profitable transactions, there will be traffic.

As the first infrastructure for any transaction, wallets have gradually improved their status as traffic portals in the changing narrative and paradigm shift, which also contributed to the success of Metamask, which was established in 2019.

In this process, CEXs were a little late to the party. As the traffic hegemons in the early days of the crypto world, the traffic began to be divided during the development process of frequent hot spots on the chain and the rise of NFT, just like the telecom operators were divided by WeChat and Alipay.

So CEXs also started to do IEOs, make wallets, build NFT platforms, support BRC-20, and provide more convenient entry points for liquidity staking or mining... everything became a natural thing.

Maintain the basic business base, keep up with the pace of changes in on-chain hotspots to compete for traffic entrances, and use the advantages of accumulated trading users to direct traffic to your non-custodial wallets and other businesses.

Data from grandviewresearch shows that as of August 2022, the number of global crypto wallet users will reach 84.02 million, up from 76.32 million in August 2021; the global crypto wallet market size in 2022 is US$8.42 billion, and is expected to grow at a compound annual growth rate (CAGR) of 24.8% from 2023 to 2030.

Faced with this scale, even if we do not accurately calculate the overlap between wallet users and CEX account opening users in the data, it is a very reasonable choice for CEXs to enter the wallet construction market just by looking at the market size and growth rate.

Why not get more traffic?

Looking at tomorrow from the day after tomorrow

20 years ago, telecom operators were the main entrance to communications and value-added services. But we have all witnessed what happened later. After 3G, mobile Internet rose, upper-layer applications flourished, and traffic was divided by various vertical applications. Operators, once the most popular infrastructure providers, gradually became lower-layer pipelines - only building roads, but unable to collect more tolls from traffic.

History does not simply repeat itself, but it always rhymes.

A day in the cryptocurrency world is like a year in the real world. In an external environment where DEXs are rising, global regulatory pressures are rising, and narratives are changing rapidly, will CEXs also worry about traffic and falling behind?

The answer is of course yes. At present, CEX is a wallet that connects with its own public chain, empowers its own platform currency, and provides similar experience and services to the on-chain app, which can at best "keep up with the times".

But to become a leader, you need to look at tomorrow from the day after tomorrow.

If the crypto market has a future, seeking large-scale user adoption is definitely an unavoidable topic; and how to better plan for large-scale adoption, from a technical point of view, trends such as account abstraction, ERC-4337 and smart contract wallets have gradually emerged.

Some L2s, such as Starknet, have gradually begun to support only AA accounts instead of EOA.

Although from today's perspective, in most scenarios, it is not necessary to have a smart contract wallet, not to mention the issue of who will pay for the gas fee after using AA. Its advantages of programmability, batch operation and non-main chain gas are more like a foreshadowing for the future:

That is, the wallet and interactive experience after large-scale adoption should be like this.

Therefore, the author believes that exchanges are deploying wallets in advance from an acquired perspective. This is a competitive trend and also a top-level sense of smell in the upstream of the industry food chain.

For example, OKX’s release of a smart contract wallet at this point in time is not good from the perspective of the overall market environment. At the same time, if you experience it carefully, you will also find that the entrance to OKX’s smart contract wallet is actually relatively deep and not directly exposed.

But if we consider the future, it is sensible to launch the product when the market is in a low and stable state, and then quickly iterate and conduct small-scale trial and error. By the time the market situation reverses, the product experience may have been polished enough, and you will naturally be more confident when facing more traffic coming in due to good market conditions.

Exchanges have suffered from the previous "others have what we don't", so they will inevitably "be better than others" at this stage. Whether it is acquisition or self-development, wallets as traffic entrances cannot be lost, and there is also the potential to play a flower in combination with their own business.

In addition, think about it from another perspective. If there is really mass adoption, you can use this wallet or that wallet. For ordinary new users outside the circle, brand endorsement, incentive activities, and user experience are far more important than the dispute between CEX and DEX, and they will not fall into the fundamentalism of "CEX is not centralized so I don't use it". Therefore, CEX, with its capital and scale advantages, may be able to strike back when the next wave comes.

After all, his first wallet must be Metamask.

In the eternal battle for traffic, user experience will always be the winner.