What are Web3 Wallets and How Do They Work on Bitcoin?

General Wallet Use

15 min

Bitcoin wallets have come a long way, from simple payment applications to multi-functional platforms like Leather. In many ways, Leather represents a key component of the crypto ecosystem that is growing quickly: Web3 wallets.

The Bitcoin blockchain is no longer just for peer-to-peer digital asset transactions. It now serves as the base layer for decentralized applications that are expanding its use cases every day. The emergence of Bitcoin Web3 has given today’s Bitcoin users the chance to engage with everything from Bitcoin DeFi protocols to NFT marketplaces built on the world’s oldest blockchain.

Consequently, it is more important than ever for Bitcoin wallets to also serve as Web3 wallets.

The Growth of Web3 and Bitcoin’s Challenges

While Bitcoin was created to facilitate trustless peer-to-peer transactions, the Bitcoin blockchain – and blockchain technology in general, for that matter – has evolved to include entire ecosystems of decentralized applications. DeFi protocols have surged, NFT marketplaces have seen exponential growth and infrastructure upgrades increasingly allowed for additional use cases to be built on top of blockchains.

However, as Bitcoin and newer blockchains like Ethereum attracted new users over time, network congestion and higher fees emphasized the need for scalability. If developers were to continue building and growing dApps on blockchain networks, they needed scaling solutions that would help bring out the full potential of their projects and account for users.

Bitcoin was no exception. In fact, you could argue that Bitcoin needed scaling solutions more than most – if not all – blockchains. Users who are familiar with the crypto often learn about the “Blockchain Trilemma.” The term specifically refers to the barriers developers face in balancing security, decentralization and scalability when working with blockchain technology. Generally, blockchains end up sacrificing one of those pillars in favor of the other two, resulting in unique challenges for each network.

When Satoshi Nakamoto created Bitcoin, it was primarily meant to be a peer-to-peer transaction protocol using digital assets. This meant that Bitcoin was, by design, highly secure and decentralized. But that came at the cost of its scalability. As a result, Bitcoin required scaling solutions to support the throughput and advanced functionality needed to run Web3 applications.

But this created opportunities for layer-2 solutions, in particular, to emerge on Bitcoin.

The Impact of Scaling Solutions on Bitcoin Web3

From Lightning payment channels to sidechains like Liquid and RSK, the Bitcoin layer ecosystem is growing.

Lightning enables instant, high-volume micropayments that are ideal for Web3 applications while sidechains allow features like smart contracts while benefiting from the underlying Bitcoin L1 security. Stacks, another Bitcoin layer, also boasts its own smart contract language, Clarity, and a unique network consensus mechanism that has enabled users to participate in Bitcoin DeFi protocols that settle on the Bitcoin main chain.

In 2022, the Bitcoin L2 ecosystem exceeded $2 billion in market cap. While this still lags behind the Ethereum L2 network, it is indicative of the growing impact – and importance – of Bitcoin layers in Web3.

These solutions aim to unlock Bitcoin’s possibilities as the trustless, decentralized base layer for an internet of value. Bitcoin’s blockchain provides the foundation while layers power innovation at the edge.

The Transition Towards Web3 Wallets

As you can imagine, the overall expansion of Web3 has led crypto wallets to adapt to the emerging Web3 landscape. The first crypto wallet in history (which was, of course, the original Bitcoin wallet created by Satoshi Nakamoto) was a single-asset wallet.

Over time, multi-asset wallets began to make an appearance as well. Wallets began integrating support for additional blockchains and crypto assets, allowing users to tap into a growing variety of coins and assets from a single interface. Many wallets also removed network siloing, opening the door for users to explore multiple blockchain networks.

How do web3 wallets work?

Web3 wallets, at their core, work very much the same way that crypto wallets always have. When you go to create a Web3 wallet a public-private key pair is generated that will serve as your way of transacting with and maintaining ownership over your funds. There are also various types of Web3 wallets also come in the form of hardware wallets and hot wallets.

However, because the main goal is to connect users to Web3 applications, Web3 wallets do need to be connected to the internet. This is many of the best Web3 wallets also come as browser extensions or mobile wallets rather than cold wallet options (although again, a number of hardware wallets do allow their users to connect to Web3 apps, too). These wallets are ideal for helping users access and interact with multiple Web3 use cases.

Additionally, self-custodied and non-custodial wallets became more prominent. Web3 refers to applications and services built on decentralized blockchain networks rather than centralized traditional internet platforms. True to the ethos of decentralization and self-sovereignty, more wallets emerged that turned the responsibility of storing and securing private keys and assets to users themselves. Rather than rely on a third party, users now had increasing access to wallets where they had full control of their own assets.

At their core, Web3 wallets allow you to generate public-private key pairs to manage cryptocurrencies and various assets from blockchains. This includes not only native coins like Bitcoin, but also tokens and collectibles representing DeFi assets, NFTs, governance rights and more. Web3 wallets offer unified interfaces that bridge networks to simplify access to dApps from a single portal.

What About Bitcoin Web3 Wallets?

As Bitcoin builds momentum as the base layer for Web3 development, Bitcoin wallets are becoming increasingly pivotal as user gateways to the decentralized BTC landscape. Modern Bitcoin wallets now go far beyond just holding keys and displaying balances. Bitcoin Web3 wallets are evolving into multi-functional platforms enabling seamless access to dApps and more.

What distinguishes Bitcoin Web3 wallets from Web3 wallets more generally is their focus on Bitcoin-secured assets and dApps built on Bitcoin. They’re also developed, of course, with Bitcoin as the base settlement layer.

While other Web3 wallets like MetaMask, Trust Wallet and Coinbase Wallet have integrated support for Bitcoin Web3 networks, Bitcoin Web3 wallets are focused on protocols that retain Bitcoin as the main settlement layer underpinning their activity. They frequently integrate scaling solutions on Bitcoin like Stacks, for example, bringing additional functionality to Bitcoin itself.

The emergence of these wallets has, in turn, spurred the development of Bitcoin’s Web3 landscape. Wallets have always been the primary touchpoint for users keen on accessing the Web3 ecosystem. Bitcoin wallets like Leather, in turn, are users’ gateways into Bitcoin Web3 where they can interact with the growing number of projects appearing on Bitcoin. In doing so, they can also find additional ways to make their Bitcoin-backed assets productive and contribute to the Bitcoin Web3 space as a result.

The Transformative Future of Bitcoin Web3 Wallets

As Web3 aims to reshape how we interact with data, our identities, economies and more, having an intuitive and secure portal for individual participation is essential.

Bitcoin wallets like Leather are evolving to serve this purpose – enabling simplified access to the growing opportunities powered by digital assets and the Bitcoin blockchain. Especially with the advent of new technologies like Ordinals, developers are increasingly excited about the prospect of Bitcoin serving as the bedrock of Web3 applications.

This is why Bitcoin wallet applications like Leather focus heavily on ensuring that their users can go beyond basic transactions. The key to participating in Web3 is enabling users to find different ways to put their BTC and Bitcoin-backed assets to work. That’s why Leather is working to offer a wide range of features from Ordinals and BRC-20 support to integrations with DeFi and crypto swap protocols.

The Bitcoin Web3 landscape may be in its early stages, but more and more users are believing in its potential every day.

Connect to web3 applications built on Bitcoin with the Leather browser extension. Install Leather – the only wallet you need to tap into the multilayered Bitcoin economy – today.

This article was updated on 3/13/24

This article was updated on 3/13/24