In today's fast-paced digital world, the way we handle payments is undergoing a significant transformation. At the heart of this change is the evolution from Web2 to Web3 wallets. Web2 digital wallets reached a valuation of $318.5 billion in 2022, with wallets such as PayPal, Apple Wallet and WeChat Pay becoming increasingly popular. However, most of these wallets are centralized systems controlled by companies, requiring users to trust these entities with their data and transactions.

On the other hand, Web3 wallets represent the next step in digital wallet technology. These wallets are decentralized, giving users control over their own data and transactions. This shift from centralization to decentralization is not just a technological upgrade but a fundamental change in how we interact with digital payments.

Why the Transition is Essential

The transition to Web3 wallets is essential for several reasons. Firstly, Web3 wallets offer enhanced security and privacy by making data sharing and verification faster and more reliable. It does this by removing the need for direct connections between parties and instead relies on verifiable credentials issued by trusted parties. If you trust the issuer of a credential, you can trust the information and connect it to your systems through an API. This means that each intermediary can rely on the verification credential issued by the first party in the payment process instead of performing their own verifications.

For instance, when a user makes an online purchase using a Web3 wallet, they can share a verifiable credential issued by a trusted party, such as a bank, with the merchant through an API. The merchant, trusting the issuer, can verify the information without performing their own checks, eliminating the need for direct connections and repeated documentation submissions. This process not only reduces the time and costs associated with the payment process but also enhances security and privacy by ensuring that personal information is not shared with multiple parties, ultimately improving the overall payment experience for the user.

Secondly, Web3 wallets enable new functionalities such as smart contracts and decentralized finance (DeFi), which can streamline and automate complex financial transactions. Smart contracts are self-executing contracts with the terms of the agreement directly written into code. These contracts automatically enforce and execute transactions when predefined conditions are met, eliminating the need for manual intervention. This automation reduces the time and costs associated with processing payments, as it removes the need for intermediaries to verify and approve each transaction.

For example, a customer can use a Web3 wallet to take out a loan, streamlining the process with smart contracts and DeFi technologies. The customer shares verifiable credentials issued by their bank, confirming their identity and creditworthiness. A smart contract, with the loan terms written into code, automatically enforces and executes the loan disbursement once the bank approves and verifies the credentials. This eliminates repeated manual interventions and reduces processing time and costs. The bank still plays a crucial role in verifying credentials and ensuring regulatory compliance. By leveraging these technologies, banks can offer more efficient and reliable loan processing solutions, enhancing the customer experience and opening new opportunities for financial innovation and inclusion.

Challenges in Transitioning to Web3 Wallets

Despite the promising benefits, the transition to Web3 wallets presents several challenges that need to be addressed. One of the most critical hurdles is achieving interoperability between identity, money, and objects across Web2 and Web3 platforms. Currently, most wallet technology solutions in the market are specialized point solutions focused on specific areas such as payments, cryptocurrencies, and NFTs. These fragmented approaches do not address the broader need for a unified infrastructure that can securely integrate identity, money, and objects. Without such an infrastructure, the full potential of Web3 wallets cannot be realized.

A significant challenge in transitioning to Web3 technologies is building a comprehensive ecosystem. For instance, consider the KYC onboarding process with verifiable credentials. This process requires various authorities to issue credentials for verifying residential addresses, salary information, corporate details, and signatories, all of which come from different parties. Coordinating and getting every employer and relevant authority on board is a time-consuming and complex task. Establishing this ecosystem involves ensuring that all parties adopt and integrate these technologies, which can be a slow process. Overcoming these hurdles is essential to fully realise the benefits of Web3 wallets in enhancing security, privacy, and efficiency in financial transactions.

Leveraging Universal Wallet Infrastructure by NTT and Accenture

Universal Wallet Infrastructure (UWI) offers a promising starting point in addressing the challenges of transitioning to Web3 wallets. It seeks to achieve interoperability across identity, money, and objects using Secure Communication Protocols, Data Standardization, and custom Application Programming Interfaces (APIs) and Software Development Kits (SDKs). For example, UWI aims to integrate existing standards in the digital identity space, such as Mobile Driver's License (MDL), W3C Verifiable Credentials (VCs) and ICAO Digital Travel Credential (DTC) to ensure consistent and reliable data standardization. This unified approach aims to eliminate the fragmentation seen in current point solutions focused on specific areas such as payments, cryptocurrencies, and NFTs, thereby unlocking the full potential of Web3 wallets.

Given the importance of a comprehensive ecosystem to fully realize the value of Web3 wallets, the UWI is being developed to thrive in a collaborative, multi-stakeholder environment. In this ecosystem, every participant—whether a strategic partner, industry leader, or service provider—plays a crucial role in advancing the evolution of Web3 technologies. UWI has already established a robust network of partners, thought leaders, and innovators across key industries and standards organizations. This collaborative model fosters continuous innovation and value creation, driving the ecosystem forward and ensuring that the benefits of Web3 wallets are maximized.

Conclusion

The future of payments hinges on the seamless integration of Web2 and Web3 wallets. While solutions like UWI are still in development, they represent a crucial step towards bridging these technologies. By fostering interoperability and enhancing security, UWI paves the way for a more secure, efficient, and user-centric digital payment ecosystem. As we continue to innovate and refine these solutions, we move closer to realizing the full potential of digital payments.