Wallet Strategy Part 3: The Three-Wallet Problem

The Last Straw for Alice & Bob, the Tide That Never Rises

Previously in the Wallet Strategy Series:

Series Preface: For context around the topics and terminology discussed in this series, as well as a bit about me and why I write about them. 

Wallet Strategy Part 2: Unusual Dynamics & the Role of Wallets

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Will your product and organization realize the full business value of decentralized identity technologies, or will the emerging Three-Wallet Problem undermine your investments and efforts? 

Navigating the Rising Tide in Uncharted Waters

In this pivotal installment of the Wallet Strategy Series, let’s build on the foundation previously set and confront the problem head-on. The Three-Wallet Problem is a barrier which, left unchecked, will impede your product’s user acquisition, stifle your potential to benefit from massive network effects, and radically lower the ceiling for growth of all decentralized-IDtech products.

Your role as a product leader or executive is to steer your organization toward success in a market on the brink of a rising tide — one which lifts all boats, including yours. Your long-term potential for growth hinges on the rising tide of decentralized IDtech:

Once our community finds and follows the right path, Metcalfe's Law will quickly create a tipping point, where joining the network is so obviously valuable for each individual and organization that adoption will drive itself. [...] This is the path to wild success for your product or organization, as well as for other pioneers in this space. 

— Wallet Strategy Part 2

As we’ve established earlier in this series, decentralized identity wallets are unlike any digital product of the last two decades because of the unusual strategic dynamics of decentralized networks, and they are the keys to unlocking the vast potential business value in this emerging space. But when misaligned with user expectations, wallets become a closed valve to hold back the rising tide.

Mitigating the Three-Wallet Problem is now critical, as decentralized IDtech finds itself on the cusp of transformative tailwinds for everyone investing in these technologies.  This series will not only make the problem plain but also set the stage for its solution.  As you guide your company through these uncharted waters, understanding and overcoming the Three-Wallet Problem is key to crafting a winning wallet strategy and realizing the full potential of your investments in decentralized IDtech.

The Three-Wallet Problem

As made clear already in this series, applying your great product-strategy instincts in the realm of wallets will backfire for your product and organization. And that’s because the Three-Wallet Problem is unlike any challenge we’ve faced in digital-product strategy during the 21st century. Its implications pose a profound threat, but it’s very simple to understand, if we truly take the full perspective of a user.

The Three-Wallet Problem is this: 

Any given user will develop a strong resistance to decentralized-IDtech products and platforms, by the time she is forced to adopt a third wallet in the course of using such solutions. 

To illustrate this problem, let’s visualize how it manifests for our old pals, Alice and Bob, and then examine the factors that underpin it.

The Last Straw for Alice & Bob

You may recognize these names from diagrams or example scenarios where W3C DIDs and VCs are useful — showing how they can work well to serve users and organizations. But in this simplified illustration, Alice and Bob learn that decentralized-IDtech solutions are actually worse than the forgotten passwords, privacy violations, data breaches, and potential for identity theft they’ve come to expect from legacy digital-identity solutions: 

The Three-Wallet Problem diagram above illustrates Alice’s experience (and Bob’s) engaging with an ecosystem of “decentralized” IDtech solutions, each of which require users to adopt its own bespoke wallet in order to use the given product or platform.  My use of scare quotes around “decentralized” is quite intentional here, to denote that while these products technically use decentralized standards, they are actually de facto-centralized solutions, practically speaking.  

Decentralization is not a function of the technology being used but rather of the network dynamics.  To demonstrate the distinction, the red, dashed, vertical lines in the diagram illustrate the implicit silo created by the tight coupling of each vendor’s product to their own first-party wallet, isolating each product’s silo from those of its peers. 

In this diagram, Alice adopts her first wallet to interact with customer-service departments at certain merchants she patronizes, and she finds it to be an interesting experience. But eventually, she’s surprised to find that her credit union requires her to adopt a different wallet, in order to use the same technologies in their context.  Finally, her university wants her to adopt yet another wallet, in order to receive and manage her education credentials. 

By the time Alice has adopted her third wallet, she feels fed up — and decides she misses the way things used to work. She’s feeling overwhelmed with remembering which wallet to use where and keeping track of how each specific wallet works.  And Bob’s experience with a different set of wallets and products is quite similar. 

Why Three: The Psychological Threshold

But wait, how do we know the number is three?  Couldn’t a user be fed up after the second wallet, or even be willing to adopt five wallets before frustration heightens?  Sure, maybe the number isn’t three. But will a user happily adopt 30 wallets, to facilitate interactions across all industries and use cases?  

Obviously not!  So, to illustrate the principle, we’ll assume the typical user gets fed up after the third wallet. 

Users Are Already Overwhelmed

Application downloads, onboarding, and authentication for centralized products are already fatiguing users: 

• 62% of installed mobile apps are used less frequently than once per month, and 25% of apps are used only once after installation and then abandoned entirely, according to BuildFire’s statistics.

• 39% of Americans reported experiencing a high level of password fatigue, according to a 2022 study by Beyond Identity.

As cloud and mobile computing have become pervasive, home-screen real estate and mindshare are clearly in short supply among consumers.  User acquisition for any consumer product is already much more challenging than it was a decade ago, and that’s without the added demands that wallets impose on users. 

Wallets Are Worse

Adopting a decentralized identity wallet, one which puts the user in possession of her verifiable data and private keys, is likely to be an even greater burden than the typical app installation and user onboarding.  These wallets require key management, backup, and recovery to be accomplished by the user — in one form or another.  No matter the method used (e.g. social recovery, cloud syncing with traditional authentication patterns, etc.), adopting any such wallet places heightened demands on the user during onboarding, as well as at the time of recovery. And the high stakes of managing keys, whether locally or in the cloud, will heighten the perceived burden undertaken by the user.

Given our statistical understanding of the current state of app fatigue and the new demands that wallets place on users, it should be obvious that each additional wallet which a user is asked to adopt will feel like an even heavier burden than the last. So, it’s now clear that the Three-Wallet Problem will harm users of decentralized IDtech, and stifling widespread adoption will limit the potential for these technologies to benefit society at large.  

Next though, let’s shift our focus to a more central question: How will it impact you and your product? 

Implications for Your Product & Market

To appreciate the gravity of the Three-Wallet Problem for your product and organization, let’s first accept the premise that your product’s growth trajectory will eventually depend on acquiring users who have already adopted other decentralized-IDtech products prior to encountering yours. 

To put the micro-implications of the problem in perspective, consider this: 

What portion of your total addressable market (TAM) do you think you can capture, before you start to run out of first-time wallet adopters?  That is, how long before you’ll encounter users who have already adopted a wallet for some other use case? From then on, the Three-Wallet Problem will create headwinds which make user acquisition progressively more difficult for your product over time — ultimately lowering the ceiling on your potential for growth. 

And for the macro-implications of the problem, we need to contrast expansive networks (interoperable; truly decentralized or federated) vs. restrictive networks (silos; sometimes called “walled gardens”). And we must understand why restrictive networks hold back the tide. 

Let’s start with the macro-implications on the entire space, and then zoom in to unpack the micro-implications for your product specifically.

Macro: Restrictive Networks Prevent the Rising Tide

Play out in your mind the scenario Alice and Bob face in the Three-Wallet Problem diagram, across a global population and countless more products — including those from many other industry verticals and use cases. It’s easy to see that network effects of an expansive network never develop in decentralized IDtech.  Metcalfe's Law never creates a tipping point; and as a result, your investments in decentralized IDtech underperform in the long run.  

This is because the siloed products will onboard their users to a restrictive network.  The size of the network in which your users participate is naturally bounded by your siloed product, and constraining network size will constrain the network’s value.  Metcalfe’s Law still applies, but only to your restrictive network.  The tipping point will never be reached, and the tide will never rise. 

Learning from Email’s Rising Tide

The history of email offers us a clear example, where the prevalence of restrictive networks held back the tide, until an expansive network finally caused the tide to rise. The earliest restrictive networks for email began to form in the 1970s. Many such restrictive networks were formed during the ‘70s and ‘80s, including proprietary commercial email systems like IBM’s PROFS (for PRofessional OFfice System), which was introduced in 1981. The following year, Hewlett-Packard launched HPMAIL, which became the world’s largest selling email system at the time. 

Despite all these efforts and non-trivial adoption across various siloed email platforms, the tide did not rise for email during this era, because restrictive networks hold back the tide. 

However, the expansive network for email began to grow with the adoption of Simple Mail Transfer Protocol (SMTP) for transmitting messages among a diverse set of mail servers, along with other email-related standards (e.g. POP and IMAP, for interoperable client-server connectivity).  These standards allowed any user to adopt her chosen email host, get an email address, and exchange messages with any other user on the expansive network, via her chosen email-client application.  No matter which vendors a given user may have chosen for email hosting and client software — nor which industry or use case inspired her to exchange email messages — she could benefit from the growing value of the expansive network of email users. Many products, many vendors, many applications. But one expansive network. 

Just as Metcalfe’s Law would suggest, a tipping point was reached during the 1990s, as the expansive network grew. By this time, the expansive network for email became large enough — so obviously valuable to its participants — that email adoption began to drive itself.

Thus, the tide began to rise for email. Not because of the standards adopted, but rather thanks to the expansive network their adoption enabled in practice.  And as astonishing as it may seem, the tide is still rising for email’s expansive network, with the number of global email users expected to grow to 4.73B people by 2026, according to Statista.  That’s more than one billion more people using email than in 2017. The tide is still driving massive email adoption in its fourth decade of rising. 

Implications for Decentralized IDtech

The history of email’s rising tide of users is instructive for us now, because it was unleashed by a transition from a myriad of restrictive networks, to a single expansive network. 

The macro-effect of the Three-Wallet Problem is this: When decentralized IDtech vendors build siloed products which require their own bespoke wallet, they each build their own restrictive network (no matter which technical standards they’re using).  And a prevalence of restrictive networks will prevent the rising tide.  

Email took more than two decades to construct an expansive network and see the tide start to rise.  How long can your product and organization afford to wait for the tide to rise in decentralized IDtech? 

Micro: User-Acquisition Headwinds of “Decentralized” Silos

But even without a “rising tide”, you can still build an exceptionally successful product, right?  In many situations, that’s certainly the case — though obviously more challenging. However, the micro-implications of the Three-Wallet problem will make this even more difficult than usual, for decentralized IDtech products. 

Unfortunately, siloed products in decentralized IDtech will not only miss out on the massive network effects of a rising tide.  They’ll also eventually face user-adoption headwinds that we can think of as “silo effects”. The silo effects of the Three-Wallet Problem will cause the TAM for your product to effectively shrink over time, while products like yours face a swell of negative word-of-mouth and bad press. 

Silo Effect: TAM Erosion

In the miniature model presented in the Three-Wallet Problem diagram, we can see that Alice is frustrated and fed up with decentralized IDtech solutions after the third wallet she adopts. She’s then not only uninterested in considering offerings from other firms; she’s actively opposed to them!  Rather than being a user who could be “shared” — easily acquired by the 4th–Nth product or platform — she’s been burned (in more than one sense) and is no longer part of the potential market for other decentralized-IDtech products. 

Many markets are zero-sum: I only need one dishwashing machine, for example. If I buy a General Electric dishwasher, then I won’t buy another from a competing appliance brand.  But with silo effects at play for wallets, the market might be described as “negative-sum”. 

In the Three-Wallet Problem, you’re not just competing with your natural competitors — those products serving your industry or use case, offering an alternative to yours. You’re also competing with every other decentralized IDtech product which requires a user to adopt its own bespoke wallet. It’s a perversely hyper-competitive market dynamic, like if my purchase of a General Electric dishwasher made me unwilling to consider purchasing a Sony television. The two products serve different purposes and should not be competitive in the marketplace, yet thanks to the Three-Wallet Problem, they become so.

In the parlance of Blue Ocean Strategy, this is even more competitive than a red ocean, where the market is well defined and companies try to outperform their rivals to grab market share (i.e. cutthroat competition turns the ocean “bloody red”). We could say that the Three-Wallet Problem creates an “infrared ocean” — where companies must compete across markets and industry boundaries to outperform both their rivals and non-rivals alike in marketing to acquire new users. 

This silo effect means that the addressable market for your product effectively erodes over time, as products in other industries and use cases acquire users. But unfortunately, it gets worse — because the headwinds extend beyond just active wallet users like Alice and Bob.

Silo Effect: Negative Word-of-Mouth & Bad Press

Zooming out a bit, we’ll find that the impact of Alice’s frustration doesn’t stop with her. By her third wallet, Alice has come to resent decentralized identity wallets as a concept.  She’s become a word-of-mouth defender of centralized identity solutions. She’s doing anti-marketing for wallets as a product category and telling her friends and family that your core product was not as good as it first seemed.  

As Alice, Bob, and many more users like them develop and propagate this negative sentiment toward wallets and decentralized IDtech in general, the press will smell headlines and clicks. Discussions on forums and social media will become source material for the tech press to craft stories announcing that decentralized identity is DOA, because DIDs, VCs, and the myriad wallets required to use them are a nightmare for users.

A Problem for Users Is a Problem for You

Does the emergence of the Three-Wallet Problem sound like fertile ground for growing your product?  By the time the problem is manifesting at scale, it will be too late to unwind. 

As experienced product leaders, we’ve likely internalized the wisdom of making customer and user problems our problems. But we typically do this within the scope of our own product. Decentralized identity wallets present a case where we must take a broader view of the emerging landscape and appreciate the problem that users will face across the ecosystem of decentralized IDtech. 

Once you find and adopt a strategy to solve the Three-Wallet Problem for users, you’ll also solve the problem for your product and organization.  The tide can rise, and you can ride it to exceptional growth over the decades to come. 

Solving the Problem & Riding the Tide

Insights from industry pioneers, as highlighted in the IWIB Wallets Report, suggest a future where ecosystems collaborate and interoperate, laying the groundwork for a united front against the Three-Wallet Problem: 

But as some of the ecosystems grow to a critical mass and validate their value creation model, they will start to open up their ecosystems to others, further expanding value creation through cross-ecosystem collaboration, wallet interoperability and customer choice and reach.

In turn, as the value of the cross-ecosystem expansive network increases, the incentive for new participants to join the network will also increase.  And so begins the rising tide.

Your Wallet Strategy

Now is the opportune moment to reflect: Does your current wallet strategy inadvertently amplify the Three-Wallet Problem? If so, you’re certainly not alone, and it’s only natural for expert product strategists like yourself to initially miss the unusual dynamics at play in the wallets space.

Stay tuned as we unravel strategies that not only mitigate these issues but also harness the full potential of decentralized IDtech’s expansive network. Rest assured, this series will reveal your greatest point of leverage, to turn the tide in your favor. Part 5 will unveil the counterintuitive solution to the Three-Wallet Problem, setting the stage for you to craft a winning wallet strategy in Part 7 — a strategy that unleashes the expansive network's potential for growth. 

Can you envision a scenario where Alice and Bob avoid the Three-Wallet Problem?  If so, you may already be on the path to solving it. 

The tide can rise, and you can ride it to exceptional growth for your product and organization.  The rest of this series will explain how. 

Up Next in Part 4

Having now faced the brutal facts of the Three-Wallet Problem, we need to prepare for its solution — with an unwavering belief that we will prevail in the end.  To set the stage for our solution, we’ll recontextualize the role of wallets in Part 4, to understand why the unconventional strategy needed won’t be entirely unprecedented:

• The Complementary Nature of Wallets: Learn what wallets have in common with tires and guitar strings and understand how your wallet strategy can leverage this dynamic.

• Navigating Wallet Wars: We’ll dissect the impending “wallet wars” and chart a course for the community to avoid mutual destruction for all players in decentralized IDtech.

• Strategic Shift for Success: Let’s set the stage for the solution to the Three-Wallet Problem by understanding the conditions required for the tide to rise, so you can craft your own winning wallet strategy.

Join me in Part 4, as we prepare to unveil the solution to the biggest problem in decentralized IDtech — allowing you to craft a wallet strategy to ride the rising tide, instead of being sunk by it.  Subscribe, reach out with feedback, and share the series to invite more community members to the discussion!

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Next in the Wallet Strategy Series:

“Wallet Strategy Part 4: Rethinking the Role of Wallets” [COMING SOON]

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