As we continue our deep dive into the world of non-custodial wallets, we've already explored the key differences between custodial and non-custodial wallets, the rising popularity of non-custodial solutions, and the essential dos and don'ts for users. But this brings us to a critical question: if non-custodial wallets offer so many advantages, why haven’t they already gone mainstream?

I recently suggested splitting a bill with a friend using USDC.

Although my friend was familiar with USDC, he wasn’t a regular crypto user. What followed was an enlightening experiment in onboarding a new user into the non-custodial world. Almost immediately, a series of questions surfaced:

• What is USDC?
• Which wallet should I use?
• What’s the difference between different blockchains?
• How can I cash out?
• What happens if I lose my private key?
• Can I spend USDC like regular money?

These are real, practical concerns that demonstrate why non-custodial wallets, despite their potential, are not yet ubiquitous. In this post, we'll explore these challenges in detail and highlight the innovations that are making non-custodial wallets more user-friendly and accessible to the broader public. We will also share our opinions on what we think is missing.

Crypto branding

Crypto still struggles with a bad mainstream reputation, largely due to high-profile scams, market volatility, and regulatory uncertainty. For many, "crypto" is synonymous with speculative trading or platform failures like FTX. This perception overshadows its real-world potential, especially in areas like payments and non-custodial wallets.

Other than developing regulatory structures (which we discuss below), the question is what else can the crypto community do to improve its mainstream reputation? One way to think of it is how the community can play its part on different levels:

Crypto users and enthusiast

Word of mouth is one of the strongest drivers of trust and adoption, especially in emerging industries like crypto.

It's essential to be self-aware of your risk tolerance and understand the fine line between offering financial advice and providing educational insights. While advocating for the fundamentals of crypto, it's important to do so in a way that is clear, simple, and mindful of your audience's needs. Emphasizing why moving on-chain can benefit everyone—whether for enhanced security, financial inclusion, or faster cross-border payments—can help demystify crypto for newcomers.

Even if you're experienced with the technology, it’s critical to stay vigilant and avoid common pitfalls like phishing scams or unreliable platforms, as the space continues to evolve rapidly.

💡 What is missing? In our opinion, there is still a gap in the market for confidently recommending crypto services to mainstream users. It should be very easy for a crypto enthusiast to recommend a particular service to a new user without being worried that they end up losing money.

Crypto businesses and foundations

Large crypto companies like Coinbase are driving user education and adoption, with initiatives like Stand With Crypto, with over 1.4 million advocates, raising awareness and promoting decentralized finance. They also provide accessible educational content through blogs and webinars.

Similarly, crypto foundations like the Ethereum and Bitcoin Foundations focus on expanding education and improving transparency. The Ethereum Foundation, for instance, funds projects to make the blockchain more secure and user-friendly.

DeFi Education Fund is setting a great example of what can be done to educate regulators on important concepts like non-custodial wallets and sound DeFi policy. This is a must watch open remarks by Amanda Tuminelli at a recent congress hearing:

💡 What is missing? We believe there is a lot of opportunity for more direct support and education to onboard mainstream users, which overlaps with our previous point of being able to confidently recommend trustworthy and simple services. This may even be in the form of physical locations or upskilling the new wave of financial advisors to adequately help users get started.

Private key management

One of the biggest challenges with non-custodial wallets is the responsibility placed on users to manage their private keys. If these keys are lost or compromised, the assets associated with them are irretrievable. Not only is it important to back up keys, but understanding the steps in between like encrypting your backup is critical.

To address this, wallet providers like Argent and Gnosis Safe have introduced solutions such as social recovery and multi-signature wallets. Social recovery, used by Argent, allows users to designate trusted contacts to help regain access if their wallet is lost. Meanwhile, Gnosis Safe employs multi-signature security, requiring multiple approvals for transactions, adding an extra layer of protection for users managing larger sums of assets.

For enhanced security, hardware wallets store private keys offline, reducing the risk of hacks. Ledger and Trezor are popular choices, providing secure storage for crypto assets while integrating with various platforms for easy management. Casa takes security further by combining hardware wallets with multi-signature support, distributing keys across multiple devices to prevent a single point of failure. These wallets are ideal for users seeking maximum protection, especially for long-term holdings.

💡 What is missing? There’s a clear need for better guidance to help users choose the right wallet and services based on their specific needs. Additionally, we believe an independent certification framework, similar to SOC but tailored for non-custodial wallets, could ensure transparency and security in how private keys are managed across providers.

User experience (UX)

The user experience in non-custodial wallets has historically been a hurdle, particularly because of the complexities involved in setting up wallets, managing seed phrases, and conducting transactions. These challenges often deter less tech-savvy users. To improve accessibility, wallet providers are enhancing UX by simplifying processes. Innovations like smart wallets now eliminate the need for seed phrases by using passkeys or biometric authentication, making onboarding smoother. For example, Coinbase Smart Wallet removes the hassle of seed phrases by allowing users to manage assets securely with biometrics or passkeys. Similarly, ZenGo utilizes threshold cryptography to eliminate seed phrases, enabling passwordless login and biometric security to provide a more user-friendly and secure experience.

In a Twitter thread, Jesse Pollak outlined his vision for a "dream wallet" that would far surpass current Web2 and on-chain solutions by solving key challenges. He believes that within 6-12 months, on-chain experiences could become 100x better than online alternatives. Pollak’s ideas focus on improving user experience and security while hinting at even greater long-term advancements in wallet functionality and on-chain interaction.

We like the approach of just-in-time tutorials during crypto onboarding. For example, when I needed to split a bill with my friend in USDC, it was convenient that he could quickly download Coinbase Wallet without being forced to immediately back up his seed. Only after receiving the payment did the app prompt him to secure his wallet, making the experience smoother and less overwhelming for new users.

💡 What is missing? We think there is a need for go-to best practices when building non-custodial wallets, which overlaps with the idea of an independent certification framework.

Security vulnerabilities

Although non-custodial wallets are inherently safer from centralized attacks, they remain vulnerable to phishing, malware, and other security threats. Users may accidentally expose their private keys or fall victim to scams.

Transaction fees and speed

High transaction fees and slow processing times, particularly on congested blockchains, can make non-custodial wallets costly and inefficient. To address these challenges, many wallets are adopting Layer 2 solutions like Optimism, Arbitrum, and Coinbase's Base, which reduce fees and improve transaction speeds. Base, built on Optimism’s stack, offers an Ethereum Layer 2 network designed to bring faster, cheaper transactions for decentralized apps. Additionally, features like gasless transactions through paymasters, as seen in some smart wallets, help further alleviate cost and efficiency concerns, making crypto more accessible to mainstream users.

USDC on Base is growing rapidly reaching $7 million daily transfer volumes.

Stablecoins is a major driver for onchain adoption. As pointed out by Peter Schroeder stablecoins on L2s now represent 7% of the total stablecoin market. With an average transaction cost of $0.01, it’s easy to see why L2 stablecoin usage is rapidly increasing.

💡 What is missing? Stripe announced their support for USDC online checkout, but what is missing is a smooth experience to make point of sale payments without needing a card. Cards add extra cost where direct on-chain payments could have saved the merchant anything between 1% - 3% in fees.

Regulatory compliance

Non-custodial wallets exist in a regulatory grey area, creating uncertainty for both users and providers. Unlike custodial services, non-custodial wallets give users full control over their assets, which complicates their classification under existing financial regulations. While they may not be subject to the same stringent requirements as custodial services, evolving regulations around anti-money laundering (AML) and know-your-customer (KYC) practices are starting to impact non-custodial providers. This uncertainty forces wallet providers to constantly monitor and adapt to regulatory changes, adding overhead to stay compliant with potential new rules. The lack of clear guidance poses challenges for long-term planning, making it difficult to anticipate how these wallets will be governed in the future.

In a recent push for crypto regulation, Senator Schumer announced that he intends to pass legislation on cryptocurrency by the end of this year. This coincides with U.S. Presidential candidates beginning to outline their positions and policies on digital currencies, signaling that crypto is becoming a central issue in the political landscape. Circle's CEO Jeremy Allaire made a video on the importance of policy guidance and points out why it is important for the US.

💡 What is missing? The obvious answer is clear regulatory guidance on what is required from non-custodial providers.

Interoperability

Non-custodial wallets often face challenges with interoperability, making it difficult for users to manage assets across multiple blockchains seamlessly. To address this issue, wallet developers are focusing on the development of cross-chain bridges and multi-chain wallet support. These innovations enable users to interact with various blockchains from a single interface, thus simplifying the process of managing digital assets across different networks.

Not only is interoperability a technical overhead, but it significantly complicates the user experience.

Zero Dev recently launched a compelling demo that simplifies the problem of having multiple chains. Socket Protocol makes it easy t o unify balance across chains, and instantly spend on any chain with no bridging and no need for native gas tokens. See the demo below.

💡 What is missing? It’s often unclear which blockchain is best suited for specific use cases, and most leading wallets don't take a clear stance on this either, which can confuse new users. A more opinionated approach that guides users towards a default chain based on their use case could reduce confusion and make onboarding smoother.

Spending with cards

Another architecture challenge for non-custodial wallets is the limited integration with traditional financial systems, particularly for spending crypto directly with cards. While non-custodial wallets are excellent for holding and managing digital assets, using these assets for everyday purchases remains a hurdle.

Gnosis Pay, claims to be the first provider that offers a Visa-certified card linked to self-custodial wallets. However, it does require that you top up your card for spending. Mastercard and MetaMask also recently announced the rollout of their MetaMask Card - it is unclear whether it will work with a preloaded balance as well.

💡 What is missing? We believe this development is a game-changer and could serve as a significant catalyst for mainstream crypto adoption.

In conclusion, while non-custodial wallets offer significant advantages in terms of user control and security, there are still several hurdles that need to be addressed for mainstream adoption. User education improved UX, and better security measures such as private key management and interoperability will play key roles in making these wallets more accessible. As the industry evolves, continued innovation and collaboration between crypto businesses, foundations, and regulators will be essential to close the gaps and build a more trustworthy and user-friendly ecosystem.

Follow along and let us know if you have any further questions. Check out our non-custodial deep dive here.