Back in June, my colleague Beth Canova highlighted the crucial importance of securing your crypto assets using wallets.
She stressed how vital it is to protect your investments in the volatile world of cryptocurrency. And being the only one with access and authority over your cryptos is a big step in doing just that.
Building on that discussion, I want to introduce you to smart wallets. This innovative leap secures your assets and enhances your interaction with the blockchain ecosystem.
What Are Smart Wallets?
Smart wallets leverage smart contract technology — the backbone of decentralized finance — to offer capabilities far beyond what we’ve previously seen.
Basic wallets that store your private keys, facilitate transactions and store your crypto assets, smart wallets, on the other hand, can handle far more complex operations.
Here are the five key benefits they have over traditional self-custody wallets:
- Enhanced Security: Features like multi-signature transactions reduce the risk of unauthorized access and add layers of protection.
- Automated Transactions: Users can automate payments or transfers based on preset conditions, enhancing convenience and efficiency.
- User-Controlled Asset Recovery: Unlike traditional wallets, Smart Wallets can include recovery options. This minimizes the risk of losing asset access.
- Gasless Transactions: Smart wallets offer a more cost-effective user experience. They allow developers or platforms to cover transaction fees — also known as gas fees — for the user. While not every entity ops in, it does mean some transactions can be cheaper just by using a smart wallet vs. a regular self-custody wallet.
- Multi-Chain Compatibility: These wallets allow users to manage assets across multiple blockchain networks from a single interface. For example, users can manage assets across the Ethereum (ETH, “A-”) and Solana (SOL, “B”) ecosystems without juggling the complexity of multiple wallets. Smart wallets can also bridge assets from one blockchain to another within the wallet, simplifying the user experience. This is particularly important as the blockchain ecosystem continues to diversify.
This combination of features improves security and usability and makes smart wallets an ideal solution for both seasoned crypto users and those new to the space.
Coinbase’s Smart Wallet: A New Era for Crypto Wallets
One smart wallet I want to highlight was recently rolled out by a leading name in crypto: Coinbase. Its smart wallet builds upon the core principles I just outlined.
But where it stands out is in how it streamlines the onboarding process. Coinbase has structured its smart wallet to eliminate the need for complex security protocols or recovery phrases.
Instead, it uses Passkeys — developed by industry leaders like Apple (AAPL), Google, Microsoft (MSFT) and the FIDO Alliance — to add an extra layer of security. These passkeys are generated on the user’s device and are never shared or stored on any server.
The public key — which is what’s logged on the blockchain every time you make a transaction using your smart wallet — is securely stored on Coinbase’s servers. Meanwhile, the private key remains on the user’s device, protected by native authentication methods like biometrics or a PIN.
This approach simplifies security while maintaining robust protection.
For context with other wallets, you’ll be given a seed phrase — a string of 12 or 24 words. This seed phrase will give you access to your wallet on any device, anywhere, anytime.
But you have to record it and store it yourself. We always recommend keeping it offline to prevent it from getting stolen via a hack. That means writing it on paper and putting it someplace safe.
Naturally, that approach has its own issues, as this reviewer points out:
But overall, it is a relatively secure method … if you’re responsible with your seed phrase.
Coinbase’s Passkeys changes the game, though. You no longer have to manage your own private key.
I will note that this approach can come with a higher risk. By keeping your private key stored on your device, you risk losing access to your funds if your device is stolen and you haven’t recorded your private key elsewhere.
You could choose to store your private key in the cloud or on a password manager. That would allow you to access funds no matter what device you’re using. But that comes with the risk of a hacker getting access to your data.
There are other smart wallets out there — such as Avocado and Trust Wallet SWIFT — that have stuck to the traditional security method of a seed phrase and still have the benefits listed above.
Still, the accessibility and ease of use that Coinbase’s Smart Wallet offers cannot be overlooked. Especially for those new to the crypto market.
For those eager to start using Coinbase’s smart wallet, it just involves two steps:
- Download the Coinbase App: This is available on iOS and Android and is your gateway to the smart wallet.
- Create Your Wallet: Follow the app’s intuitive setup process to create your account and smart wallet, bypassing the traditional complexities of wallet creation. (If you’d like, we have a step-by-step guide to setting up your Coinbase account here. This will take you through most of the process, as well as how to buy crypto on the exchange.)
Once your wallet is set up, you can explore its key features, including gasless transactions and multi-chain support.
The Implications and Future of Smart Wallets
The release of Coinbase’s Smart Wallet marks a pivotal moment in the evolution of cryptocurrency wallets and could significantly affect the broader crypto ecosystem. And by addressing long-standing challenges such as transaction fees and user accessibility, it paves the way for a more inclusive and efficient crypto ecosystem.
While smart wallets are gaining traction within the crypto community, Coinbase’s offering brings this innovation to a broader range of potential users — ones most likely to benefit from its seamless and cost-effective features.
Coinbase has even incentivized developers with up to $15,000 in gas credits to incorporate smart wallets into their platforms, signaling a strong commitment to driving innovation.
For users, the smart wallet’s features make the blockchain world more accessible. This usability will likely encourage more people to embrace digital assets, potentially accelerating the mainstream adoption of cryptocurrencies.
I’ll be watching this trend closely, especially in anticipation of the next bull market rally where an influx of new crypto users could really get things pumping.
So whether you’re new to crypto or a seasoned investor looking to make navigating DeFi and self-custody easier, I suggest reading up on which smart wallet may be best for you.
Best,
Mark Gough
