Embedded wallets, the gateway to mainstream stablecoin adoption?

Joel Monegro’s Fat Protocols thesis has had a long-lasting impact on crypto. While it’s been heavily debated, the overall vision stands true 10 years later - but for how long?

The thesis is fairly simple: blockchain protocols generate exponential value for end users as more applications (DApps) are built on top of them. Think how yield optimizers built on top of Dexes help users get more out of the same basis product. Everything is open source and interconnected, creating a virtuous growth cycle. This stands in stark contrast to Web2, where value is concentrated in monolithic applications.

This take stands true to this day, despite being 10-years old.

But as Web3 grows and welcomes newbies, it can feel like it’s dropping more and more of its initial identity. To provide smoother experiences, it becomes more centralised, sacrificing self-custody for the convenience of intermediaries.

In short, back to the old ways.

The growth of centralized applications raises a critical question: is crypto devolving into Web2, back to thin protocols and fat applications?

What’s thin, what’s fat?

Self-custody is at the root of what makes crypto the ecosystem it is today. Without it, there is no Ledger, no DeFi delta-neutral strategies spread across 57 DApps, no obscure Solana memecoins: crypto just becomes another inflexible speculative commodity.

Self-custodial wallets allow thin applications and fat protocols to thrive, so let’s see how they benefit end users. As opposed to their centralized counterparts (CEXs), they do not take wild fees whenever users interact with on-chain applications to trade, swipe or gamble money away.

Actually, wallets are so hands-off they can even struggle to generate revenues. Most of them take fees whenever users make a swap or bridge natively in their UX. This model pushes them to integrate as many chains as possible to capture hot liquidity, and thus generate as much in-wallet movement as possible (we discussed it here).

Users are the main beneficiaries of this monetization struggle - for them, this is a free playground (minus the gas). However, the UX complexity that comes with with self-custody creates significant entry barriers for newcomers.

This is where custodial wallets and centralized products come in. They offer a familiar, Web2-like experience that lowers the barrier to entry, making crypto more accessible. This is made possible by the fact that CEXs run for the most part off-chain - including all the trading activities, order matching, and ledgers.

CEXs are fat applications, and as such, they take fat cuts, sometimes as high as 2% per transaction. But they onboard new users. Therefore, a legit question arises:

Is web2 just… Better?

By Web2, understand fat applications and thin protocols. The Binance or Coinbase of this world when it relates to crypto. Is a great UX better than a higher value sum for end users?

Let’s start with the good news: traded volumes on the DEX/CEX ratio are looking up. This means that more and more volumes are traded on-chain than off-chain. But DEXs are still loosing the custody war: as of October 24, 85% of the volume is still traded on CEXs. This shows that the majority of users prefer simplicity over profit. Put otherwise, custody over self-custody.

Onboarding new users remains a very hard problem to solve because of the steep learning curve required to navigate in Web3. The process of setting up a wallet, securing seed phrases, and navigating various blockchain interactions is far removed from the intuitive experiences users have come to expect from Web2 applications.

In addition to that, it’s easy to get lost in the plethora of wallets out there. The market isn’t consolidated, which means there are solutions in every directions for all users type. This is all pretty confusing. And the switching cost from one wallet to another is pretty low: winning products will always be the ones with the better UX.

Currently, the better UX belongs to custodial solutions. CEXs for wallets/ trading/ yield generation aren’t the only applications that have a lot of success: Wirex for cards, BitStack for DCA, or Stake for gambling - all with impeccable and fun experiences.

But all is not gloom and doom. Self-custodial, decentralised products are catching back up: Aave for credit, Uniswap for swapping and staking, Legends or Infinex for wallets, Kulipa for cards.

All of this points towards one thing: fat applications might currently have the better UX, but DApps are catching up, and they have the advantage of added value through ecosystem synergies. Web2 might be better for non-tech savvy users now, but we’ll likely see a reversal in the coming years. And after all, what’s even the point of using Web3 if it’s not to leverage the value that fat protocols provide?

If not self-custody, why crypto?

It’s in these words that Ian Rodgers, Ledger’s Chief Experience Office, opened WalletConnects’ 2024 market statement:

In each bull run, new crypto or blockchain-focused companies compromise on self-custody, security, or both. Each time they have a very rational explanation for why this compromise is necessary, usually related to usability and “onboarding the masses.” Each cycle results in users getting rekt and broad distrust in the ecosystem. Little is as predictable.

This is what happens when fat applications win: everyone else gets the bitter end. FTX, Celsius, BlockFi… There are too many bankrupt centralized products to count already. That’s why crypto was created in the first place - to cut intermediaries playing with their client funds.

So how do we make self-custody more accessible? Probably by embedding self custody in familiar applications. Let’s take an example, like creating the CAC 40 of cryptos. Users can understand it very easily, making it more comfortable for them - and they benefit from the juicy APIs. They don’t need to know that it’s market neutral, hedged on Uniswap, etc. All of this is secondary. The important thing is that they already know and trust the high-level product.

Another example is the rise of social logins, with solutions like Argent or WalletConnect’s web wallets. Users can create a non custodial wallet just with their Google account: Web3 embedded in products retail already knows. From there, they can explore the wonders of dapps and digital collectibles.

It’s easy to imagine other embedded experiences - like FaceIDs to help users log in their favorite websites where their digital collectibles are, or instant settlement at payments, with stablecoin transfers on the backend. That’s one of the things we’re working towards with Kulipa.

Conclusion

It’s fair to say this centralisation of crypto is temporary. The space isn’t mature enough yet to onboard billions of non-tech savvy users, and familiar experiences provided by fat applications offer a great alternative.

We’re achieving scale with the rise of layer 2s, anonymity with ZK/ FHE technology, security with solutions like Ledger, but we’ve yet to solve user experience. Web3 isn’t devolving into Web2, it’s only sharing the long tail of retail end users with custodial solutions, to give itself the time to create more delightful and fairer products for everyone around the globe.

About Kulipa

Kulipa helps non-custodial wallets issue crypto payment cards. With Kulipa cards, wallets can generate more fund movement, easily develop new use cases and maximize organic acquisition. Get in touch here!

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Bitcoin started in 2008 as a mean of payment, and with Stripe re-authorizing stablecoins, we’re circling back to it. As their total supply hovers around all-time-highs in August at $154bn+, stablecoins potential is undeniable.

Problem is, stablecoins in and out of themselves don’t solve any problem - for now, they are mostly regarded as the safest way to be exposed to crypto. But their true potential is far greater: instant settlement, easy access to the dollar, free-of-charge remittance - the use cases are legion. However, such potential can only be exploited when stablecoins get more accessible, or better embedded in the existing financial infrastructure.

We need a way to do just that, and wallets with a Web2 UX like Opera Minipay, Sling or Payy might be the solution. The self-custodial products are embedded in a great user experience, enabling both decentralised operations while removing friction for the user. Could embedded wallets be the gateway to mass stablecoin adoption?

We sat down with Mathilde David, Product Lead for Stablecoin Movement at Paxos, to explore the challenges and opportunities ahead.

1. What are the current issues slowing down stablecoins adoption?

Despite their growing popularity, stablecoins are still grappling with a couple of important challenges before they can achieve mainstream adoption.

Top of the list is the lack of regulatory clarity. Governments worldwide are struggling to classify and regulate this new asset class, creating a climate of uncertainty that deters businesses from entering the market and ultimately slows down innovation.

Second is accessibility. Having to on and off-ramp creates a significant barrier to entry for non-tech savvy users. Because of that, most of stablecoins current usage isn’t focused on making our payments more efficient, but rather on creating profits on-chain. According to Visa, more than 90% of stablecoin transaction volumes are made by bots, automating transactions such as arbitrage, MEV plays or liquidity providing on the blockchain.

Stablecoins need a UX lift, and Mathilde agrees:

"Much work is needed to simplify the Stablecoin payment experience. Today, as an example amongst many, users often have to choose which chain they want to make payments from: should they pick Ethereum, Solana, Polygon? That's typically the type of complexity that should be abstracted."

Such complexities not only deters new users but also limits the potential use cases of stablecoins. To make them more appealing to mainstream audiences, the user experience needs to be simplified and streamlined. This means abstracting away the technical complexities of blockchain technology and creating a more intuitive and user-friendly interface.

Until these challenges are addressed, stablecoins will likely remain confined to the crypto-native space, limiting their potential to revolutionize the broader financial landscape.

So let’s talk about just that: if it needs to be simple to pay with stables for people to start using them, what would the ideal payment experience in stablecoins look like? Embedded wallets might have the answer.

2. Embedded wallets, the gateway to mainstream stablecoin adoption?

Let’s think about the money sending process for a Venmo user. Enter a phone number and a PIN, and voilà, a payment has been made. No IBAN to register in the app, no beneficiaries to add to your bank, and god forbid, no QR code to scan.

Isn’t it the user experience stablecoins need to become mainstream? Stripped down to the bare minimum: pay with a phone number.

For Mathilde, it’s pretty clear - consumers habits are already there, they’re just waiting on the UX:

“There's definitely habits and a lot of trust from consumers to use digital wallets. It makes it natural to adopt crypto wallets with an intuitive experience, such as Metamask or Phantom. The next step is ensuring users can easily make payments with these wallets."

Reading this, one might think that delightful payment means like CEX cards (Binance, Coinbase etc) already exist, and such payment experiences are already available. Then, why hasn’t it been widely adopted yet?

Well, there are 2 reasons for that:

1. Most cards aren’t self-custodial (since they are issued by CEXs). As such, they often have hefty fees (as high as 1.5% on every payments) and are subject to all the issues CEXs have faced in the past (FTX, Genesis etc).
2. The few self-custodial cards that exist, like Ledger’s CL card, are pre-paid for the most part, adding significant friction in the user experience prior to paying, and limiting adoption.

At the end of the day, actually getting self-custodied stablecoins is very hard for the average user, and the options for paying with them are currently not optimal (although we’re working on it at Kulipa with pure debit cards).

So let’s say embedded wallets grow their user base, and that stablecoin-based means of payments are improved. Well, it’s just the beginning of the story. Wallets might be the best enabler for stablecoins payments, they won’t help with global acceptance just by themselves. They are merely the distribution tool, and we need the rest of the party to join. And who might that be?

3. Payment infrastructure providers are the next adopters

Wallets and their end users are only one part of the equation. Merchants and payment infrastructure providers are the two others.

For merchants, stablecoins are just a net positive, because it solves two of their biggest problems: long settlement times and intermediaries costs. Mathilde explains:

“I spent a lot of time with US merchants during my time at Square. From their perspective, any dollar counts. They are focused on minimizing the costs to operate payments, and stablecoins on low cost chains are a great solution for this”

Another interest merchants have in accepting stablecoins is the access to a global pool of consumers. It’s very expensive and a lot of work for merchants to be able to accept payments from any place in the world; a painful country by country integration is usually the way to go. On the other hand, 560 million people worldwide hold crypto. This is as many international consumers within reach without much work to do.

So it’s pretty clear that merchants are pretty incentivized to accept stablecoins. That’s 2 out of 3 parts of the equation validated. What about payment infrastructure providers? You know, those who build the apps, the payment rails, the protocols.

After some tough love in the last couple years, providers are coming back to stablecoins. In 2024, there has been a large number of good news for stablecoin’s acceptance.

Just to name a few:

• Revolut launched their own crypto payment cards two weeks ago,
• As mentioned, Stripe’s validation is pretty big for the industry,
• PayPal Xoom now offers free cross-border payments in 160 countries using PYUSD,
• Block has partnered with Yellow Card to facilitate affordable transactions in Africa,
• Grab, Southeast Asia's ride-hailing giant, has begun accepting stablecoin payments
• Mastercard announced exploring blockchain payments with 5 web3 startups, including Kulipa.

Things are moving. Startups are launching in the space, and incumbents are progressively integrating this new mean of payment. But for Mathilde, stablecoins shouldn’t limit themselves to getting adapted to traditional finance (TradFi). It’s only the beginning of true innovation:

“Stablecoins offer a chance to innovate beyond traditional finance.  There’s a real opportunity to create a better financial system for everyone. Paxos did this with the Lift Dollar, a dollar-backed stablecoin that automatically distributes daily yield when held in your wallet, turning it into a savings account.”

We’re getting there

Embedded wallets are the best gateway for stablecoins, as their user experience gets clearer and easier to handle. Payments rails are progressively integrating stablecoins after some much needed ecosystem consolidation - and merchants are all for it.

At the end of the day, stablecoins true potential might be just within reach, much closer to reality than what we expect. Will the rest of Web3 follow in their steps?

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About Kulipa

Kulipa helps non-custodial wallets issue crypto payment cards. With Kulipa cards, wallets can generate more fund movement, easily develop new use cases and maximize organic acquisition. Get in touch here!

The views expressed in this article are solely those of the author and do not necessarily reflect the official position or opinions of Paxos.”

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Do we need a Spotify for Wallets? with Alexandre Gabadou from The Big Whale

With 400 million active on-chain personal wallets last year, we're still in the early stages of the Web3 adoption cycle. That's a mere 7.5% of the world's online population, or 5.35 billion people (with the over-optimistic assumption that 1 wallet equals 1 user). The good news? You're still early.

To onboard the remaining 5 billions, Web3 will have to get a design upgrade and get simpler. The challenge, however, remains: how can wallets achieve both simplicity and security?

To answer this, we spoke with Alexandre Gabadou, Head of Product at The Big Whale (TBW), France's leading Web3 media outlet. We'll explore what diversification means for wallets from both user experience & business models standpoints, to make them mainstream-friendly.

4 high-friction UX problems that slow down wallets adoption

Before diving into onboarding the non-technical majority, let's identify user experience pain points plaguing wallets today:

• Onboarding friction: The UX cost of the first transaction is too high. To enjoy the wonders of Web3, newcomers have to achieve the following steps: they first need to convert fiat to crypto through an exchange, send it to a wallet, understand gas fees and pay them. They can also opt for the on-ramp solution, but which comes with a KYC. The number of steps to cross is way too high to onboard non-tech savvy people.
• Transaction abstraction problem: All of the steps in a transaction are abstracted in Web2 (except for 3D Secure in some cases). They’re not so much in Web3. To get their funds from A to B, users are faced with a variety of different options they need to get familiar with: bridge, stake, send, lock, provide liquidity, and many more. All this lingo coupled with manual tasks adds complexity for the mainstream user.
• UX Competition: A battle for dominance unfolds whenever users connect to a DApp. Coinbase Wallet, Metamask, and the entire crew pop up at the same time in the browser, fighting for attention. It creates needless confusion due to a lack of standardization.
• Validating transactions: While conceptually interesting, validating a transaction before payment creates a clunky experience for Web2 users. To them, payment IS an authorization, and both usually happen at the same time. Web3 could benefit from a similar approach for simplicity.

On this last point, Alexandre shares a good example: Web3 operations applied to Web2 businesses.

To illustrate, we attempted offering crypto payments for TBW subscriptions. Renewals were riddled with manual tasks and limitations, resulting in a 50% higher churn rate for crypto payers compared to fiat. This is because we had to manually remind crypto renewers to go through Coinbase Commerce and recreate a transaction. Fiat users had everything automated with Stripe. We’re excited to see similar options in Web3 subscription systems emerge, such as SubsProtocol.

While these four examples highlight UX limitations hindering wallet adoption, it's unfair to solely focus on Web3's shortcomings. The entire ecosystem is a playground for innovation and new use cases, and it should also be part of the equation. Perhaps the best way to illustrate this might be from emerging monetization patterns.

Complexity breeds flexibility

Let's talk business models. Subscriptions are the bread and butter of many Web2 businesses. But what if Web3 could add a twist to it?

Alexandre continually explores how crypto could complement revenue generation sources for TBW:

We researched NFT models for TBW, considering not just monetization but also community engagement. It's allowed a significant shift from traditional subscriptions, which in my opinion became irrelevant in the age of free information for established media outlets. NFTs have the power to enhance user retention through gamification and foster a strong community around our brand.

Staking presents another alternative: the more users stake, the more functionalities they would unlock within the product. Staking offers a compelling alternative to subscriptions, allowing users to provide liquidity on a DApp and earn yield, while retaining control over their assets.

This is where, despite their complexity, these new models bring modularity. They enable individuals to decide how much to spend, when to pull back, and to get proper skin in the game to support their favorite projects. That’s what current users find so fascinating about Web3.

Let’s rewind to some 30-40 years ago. In the early days of the internet, innovators like the CERN in Geneva used to stock their first datasets onto physical tapes. They indeed came to the conclusion that taking such datasets out of the system altogether was the most secured way to store them. Sounds familiar to a certain way to save on-chain assets?

Alexandre offers another interesting adoption example: when music used to be free during the Limewire era.

For a while, music didn’t have a CD sales-led business model anymore, Limewire and peer-2-peer downloads killed it. But eventually Spotify came up, and simplified access for everyone. We think that in the media industry, there is an opportunity to do the same, to change how users interact with content, to make it worth the experience.

Early birds in Web3 thrive in its complexity: it’s free, it’s wild, it’s flexible. But the learning curve to get there was costly. To bridge the chasm and appeal to the mainstream market, a Spotify might be necessary for wallets. One that would bring simplicity in the user experience, even if it comes at a premium.

A diverse spectrum of wallet solutions

The future of Web3 wallets doesn't lie in a one-size-fits-all solution, but in a diverse ecosystem catering to various user profiles. Web3 usage will soar when users will have a choice between several solutions that align with their needs.

• A Spectrum of security options: Cold wallets will remain the go-to choice for security-conscious users, while hot wallets and delegated on-chain custody solutions (like Kiln for staking) will cater to those seeking a balance between convenience and security.
• Wallets tailored to use cases: Today's Web3 users manage their assets across blockchain ecosystems (e.g., Metamask for EVM chains vs. Keplr for Cosmos) or by risk level (cold vs hot wallets). Web2, however, has a use-case based approach: people have different accounts for savings, risky investments, and joint accounts, each with appropriate security and freedom levels. A similar approach in Web3 would significantly improve the user experience.
• Flexible business models: Most wallets currently generate revenue through in-app transactions. But there's more to explore! This model diverts development from user-centric solutions (as discussed in our previous Deep Dive article on The Liquidity Chase). Instead, users should have access to wallets with monetization models that works best for them, such as flat subscriptions (SubsProtocol), freemium with paid features, token-based (Trust’s $TWT), or NFT gatekeeping (Tokenproof).

Let's revisit staking as an example. According to Alexandre, current Web3 mechanisms should persist, but with beginner-friendly options.

Imagine a tiered subscription model for our platform. The higher the tier, the more content and features readers unlock. After paying in fiat, they're informed they can actually get their payment back anytime, because we've seamlessly on-ramped and staked it on the backend. This simplifies and streamlines staking for everyone.

Embracing diversity for a thriving Web3

It's widely acknowledged that current on-chain users have endured a steep learning curve to get there in the first place. They're accustomed to the Web3 equivalents of Limewire and Linux, valuing their free and flexible nature. It's also a commonplace opinion to say that the mainstream audience might prefer the simplicity of a Spotify or iOS experience, even if it comes at a premium. A mature Web3 ecosystem thrives on both modularity and its ability to abstract complexity. It's a world where iOS and Linux coexist, just like today.

On this point, Alexandre offers a compelling benchmark for success: the Grandma Test.

Can your grandma make an on-chain transaction? It seems far-fetched now, but it's a useful metric to gauge Web3's UX readiness for the non-technical majority.

The path to a flourishing Web3 ecosystem isn't paved solely with simplicity, but with diversification. The space won't succeed by abandoning early adopters or resorting to uninspired Web3 experiences through over-centralization, custodial services, or intermediaries. True growth lies in enabling all these options to thrive together.

About The Big Whale

In an ecosystem full of opportunities and dangers, The Big Whale helps individuals and companies make the best decisions in Web3. Access high quality content about the latest in crypto, top events and an engaged community, all from a single source.

About Kulipa

Kulipa helps non-custodial wallets issue crypto payment cards. With Kulipa, wallets can create new use cases, onboard users, and generate more movement through your wallet. We provide a one-stop-shop payment solution with branded cards, flexible infrastructure, best-in-class payment experience for users, and comprehensive support tools to supercharge your team.

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