Will Self-Custody Crypto Wallets Allow DeFi to Survive for XR Platforms?

In a world accelerating towards concepts like the “metaverse” and “Web 3.0”, extended reality is playing a significant role in how consumers are likely to interact with brands, entities, and experiences in the years ahead. We’re already seeing evidence of new XR-ready economies emerging in this digital landscape, from the rise of NFTs, to the use of cryptocurrency in the metaverse.

Cryptocurrencies built into XR environments are allowing consumers to safely purchase a range of virtual assets, from in-game features to land in the metaverse. In some cases, companies are even allowing consumers to shop in virtual reality marketplaces, using their own decentralised wallets.

However, the rise of this decentralised economy isn’t without its challenges. Assets held on the blockchain can’t be stored in physical wallets or bank vaults, which means they’re reliant on software-based storage solutions and “cold” hardware wallets.

“Decentralised Finance” or “DeFi” solutions are the tools that have emerged in the crypto landscape to help manage transactions in the virtual environment. While traditional DeFi tools are based around the concept of “crypto custodians”, new innovations are beginning to emerge in the form of “self-custody” crypto wallets, which could offer consumers more control over their assets.

An Introduction to DeFi Solutions and Crypto Custody

Most cryptocurrencies can only be managed and accessed using private keys or “private addresses”. These keys are a crucial component of the DeFi landscape, and they act as “blockchain passwords”, proving an indivduals ownership of a specific number of assets.

In the standard cryptocurrency landscape, there are two forms of DeFi “wallets” consumers can access to control and manage their virtual finance. The first form is the “custodial wallet”. These wallets hand cryptocurrency assets over to a third-party for storage and management, so users don’t have to worry about taking care of their assets on their own.

While custodial wallets have earned a lot of negative feedback from the crypto community over the years, they do have their benefits. For companies and individuals who struggle with computer security, it can often be a good idea to hand ownership of assets over to a third party who can ensure access to assets isn’t somehow lost. Many custodial wallets are even a necessity for people who want to access trading options on popular exchanges within the XR world.

Unfortunately, custodial wallets are also relatively risky, as they involve handing the full safety and security of a set of assets to someone else. If a custodian’s security strategy is breached by an attacker, assets can be stolen in an instant. Additionally, using custodial wallets means essentially taking a “decentralised” currency like crypto, and placing it in a centralised environment, similar to a bank.

For XR companies and consumers hoping to embrace the new “decentralized” age of metaverse interactions and web 3.0 experiences, custodial wallets don’t make a lot of sense. They can also be a serious security issue for companies who are using cryptocurrencies to develop their own XR experiences and environments.

What are Self-Custody Crypto Wallets?

Otherwise known as “non-custodial” wallets, self-custody crypto wallets are an alternative to the centralised, and safety-risk-laden custodial wallet alternatives. Non-custodial solutions allow users to keep all of their assets to themselves, and maintain complete control over their resources. In traditional finance terms, the difference between custodial and non-custodial wallets is essentially the same as the difference between keeping money in a bank, or locked in a safe at home.

According to crypto wallet manufacturer, Ledger, self-custody wallets are likely to be the future for cryptocurrency, particularly in a time when the metaverse is gaining more attention. With a self-custody wallet, a user maintains complete control over their cryptocurrency assets, and can make transactions without having to request assistance from a third-party.

In some cases, non-custodial wallets can allow users to access more advanced features of the cryptocurrency world, such as the “Lightning Network” for non-custodial transactions. Plus, companies and individual users can opt into different levels of security, service, and protection, depending on the threats they may be facing.

For instance, companies like Ledger allow consumers to access “self-custody services”, which ensure they maintain full access to their currencies, while still giving them access to extra support and security from a crypto-focused company.

What Do Self-Custody Wallets Mean for XR?

Ultimately, non-custodial wallets don’t require companies or individuals to place their trust in another third-party custodian. These wallets are censorship resistant, because the user controls the private key, and they can be a great way to protect users from unexpected crypto confiscation.

For the evolving XR environment, self-custody could be an extremely important tool. In emerging XR environments like the metaverse, “ownership rights” are key. Indeed, the more consumers invest in virtual worlds, the more they can benefit from incentives and rewards. For instance, in some metaverse environments, consumers can engage in games and activities to earn cryptocurrencies and NFTs which they can trade on other platforms.

As consumers and companies alike continue to build new lives and environments in the metaverse and XR environment, it will be come increasingly important for everyone to ensure they maintain full ownership over their virtual assets. With self-custody wallets, individuals can retain complete control of all of their assets, and trade them however they like.

Even if a metaverse environment was to shut down overnight, a self-custody wallet would still feature all of the NFTs and assets gathered from that environment, allowing users to preserve their investment. Similarly, companies building environments in metaverse landscapes and XR platforms won’t have to worry about suddenly losing access to their assets because a blockchain environment suddenly changes.

As XR and the metaverse become more crucial components of our everyday lives, concerns around possession and security are becoming increasingly paramount. Self-custody wallets could be the key to providing users with more peace of mind when they transition into the decentralised world. However, consumers will need to ensure they’re caring for their non-custodial wallets correctly. Losing access to one of these tools could be disastrous.