When exchanges get involved in the wallet battle: A preemptive competition for traffic

Written by: Deep Tide TechFlow

Recently, exchanges have been making frequent moves in the wallet sector, indicating a stronger emphasis on building during the bear market.

On August 10, the Web3 multi-chain wallet BitKeep completed a brand upgrade and was renamed Bitget Wallet. Previously, Bitget exchange invested an additional $30 million, becoming the majority shareholder;

Just a week earlier, OKX announced the launch of its AA smart contract wallet, taking the lead among many CEXs in implementing account abstraction.

Whether through investment acquisitions or independent development, the investment of CEXs in wallets is evident. Note that this is not a custodial wallet on traditional CEXs, but a wallet that users can fully control, branded with CEX's name.

Years ago, as an old investor, I did not perceive the popularity of non-custodial wallets. Charging money, buying coins, selling coins, withdrawing money… it seemed that CEXs were the traffic entrance to the entire crypto world, while wallets were more like an exit for withdrawing assets.

In today's environment, where decentralization is increasingly emphasized and on-chain hotspots are becoming more dispersed, "interaction" has redefined the possibility of wallets as traffic entrances; additionally, the emergence of account abstraction has made people more hopeful that tomorrow's wallets will adopt a friendlier posture to attract traffic from outside the circle.

As CEXs begin to delve into wallets, beneath the calm surface of bear market prices, undercurrents are surging:

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

In Web3, Infrastructure is the Traffic Entrance

In the internet we inhabit, a basic consensus is: applications control the traffic entrance.

For example, an article on a WeChat public account can become a viral hit with over 100,000 reads; in this process, you only need to worry about whether the content itself is attractive, without fearing a lack of audience. The potential audience is all WeChat users, and the application itself holds a massive traffic pool.

However, if we push the timeline back 10-20 years, things were not always so.

In the 2G or 3G era, the providers of infrastructure held the traffic keys, namely telecom operators. Operators worked hard to lay networks and establish communications, while also launching VAS (Value Added Services): ringtones, MMS, mini-games, and mobile news… all services flowed from the operator, paid for with phone bills.

These services may seem somewhat unfamiliar to the new generation, but at that time, everything appeared to be logical:

The infrastructure provider made a significant investment in building infrastructure, then gradually recouped costs through nearly zero marginal costs of phone bills + value-added services, considering the vast user base, it was essentially a stable profit business.

Does this remind you of CEXs?

A significant investment in building a trading system for exchanges, supplemented by continuous operation and iteration, then recouping costs through transaction fees (spot/contract). Once a solid foundation is established, they can expand into more services and areas.

Ten years ago, CEXs were undoubtedly the main traffic entrance in the crypto world, without exception.

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

Five years ago, CryptoKitties appeared; almost in the same year, Opensea was established, followed by the NFT hype wave, allowing users to access platforms through wallets to trade NFTs;

Three years ago, Compound first introduced liquidity mining, igniting the DeFi summer, allowing users to interact directly with DApps to earn token rewards…

Don't forget, due to Web3's traffic inherently carrying trading attributes, wherever there are profitable trades, there will be traffic.

And as the first infrastructure for any transaction, wallets have gradually elevated their status as traffic entrances amidst changing narratives and paradigm shifts. This also contributed to the success of Metamask, established in 2019.

In this process, CEXs appeared somewhat late to the game. The early traffic overlords of the crypto world, during the development of frequent on-chain hotspots and the rise of NFTs, began to see traffic being segmented, much like how telecom operators were divided by WeChat and Alipay.

Thus, CEXs also began to engage in IEOs, develop wallets, build NFT platforms, support BRC-20, and provide more convenient entrances for liquidity staking or mining… everything became logical.

Maintaining the basic business while keeping pace with the changes in on-chain hotspots to compete for traffic entrances, and leveraging the accumulated user base to direct traffic to their non-custodial wallets and other services.

According to data from Grand View Research, as of August 2022, the number of global crypto wallet users increased from 76.32 million in August 2021 to 84.02 million; the global crypto wallet market size was $8.42 billion in 2022, and it is expected to grow at a compound annual growth rate (CAGR) of 24.8% from 2023 to 2030.

Given this scale, even without precisely calculating the overlap between wallet users and CEX account users, just looking at market size and growth rate, it is a very reasonable choice for CEXs to enter wallet development.

Why not seize more traffic?

Looking at Tomorrow from the Day After

Twenty years ago, telecom operators were the main entrance for communication and value-added services. But we have all witnessed what happened later: after 3G, the rise of mobile internet, a plethora of upper-layer applications, and traffic being segmented by various vertical applications, the once-dominant infrastructure providers gradually became lower-tier pipelines—only building roads but not receiving more tolls from traffic.

History does not repeat itself simply, but it always carries the same rhythm.

In the crypto world, a day is like a year in the human world. In the context of the rise of DEXs, global regulatory pressures, and rapidly changing narratives, do CEXs also worry about traffic and falling behind?

The answer is undoubtedly yes. Currently, CEXs building wallets, connecting with their own public chains, empowering their platform tokens, and providing experiences and services similar to on-chain apps can at most achieve "not falling behind."

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

If the crypto market has a tomorrow, seeking large-scale user adoption is certainly an unavoidable topic; and how to better plan for large-scale adoption, from a technical perspective, trends like account abstraction, ERC-4337, and smart contract wallets are gradually emerging.

Some L2s, like Starknet, have already begun to support only AA accounts and not EOA.

Although from today's perspective, in most scenarios, it is not yet a situation where only smart contract wallets are necessary, not to mention the question of who pays the gas fees after using AA. Its programmable, batch operation, and non-mainchain gas advantages seem more like a preparation for the future:

This is what wallet and interaction experiences should look like after large-scale adoption.

Therefore, I believe that exchanges are strategically positioning themselves in advance by building wallets from a future perspective, which is a competitive trend and reflects a top-level intuition in the industry’s food chain.

For example, OKX released its smart contract wallet at this point in time, which does not seem favorable from the overall market environment. Moreover, if you carefully experience it, you will find that the entrance to OKX's smart contract wallet is relatively hidden and not directly exposed.

However, considering the future, launching it during a stable low market and then quickly iterating and conducting small-scale trials, when the market situation reverses, the product experience may be well refined, and when facing an influx of more traffic during a good market, they will naturally be more confident.

Exchanges have learned from the previous "having what others lack" mistakes and will inevitably strive for "having what others excel at" during this phase. Whether through acquisitions or self-development, they cannot afford to lose this traffic entrance of wallets, and there is potential for creative integration with their existing businesses.

Additionally, thinking from another angle, if there is indeed mass adoption, using this wallet or that wallet would be the same for users. For ordinary new users outside the circle, considerations like brand endorsement, incentive activities, and user experience far outweigh the CEX vs. DEX debate, and they will not fall into the dogma of "I won't use CEX because it's not decentralized." Therefore, under conditions of financial and scale advantages, CEXs may still seize the opportunity when the next wave arrives.

After all, why must their first wallet be Metamask?

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