Private and Exchange Wallets: Only Choose Based on Your Needs
Today I want to compare the differences and similarities between private wallets and exchange wallets. Before we make the comparisons, let’s have a look at what a cryptocurrency wallet is.
A cryptocurrency wallet is the software, hardware, program or application used to store cryptocurrencies and crypto-tokens safely. Even though the definition of a crypto wallet refers to a storage tool, It is more of a ‘communication tool’ used to access or interact with your crypto assets or funds on the blockchain. In other words, we can liken a cryptocurrency wallet application or device to a traditional banking application.
Banking applications demonstrate the results of communication with banks, hence, it does not store real money on the app. Likewise crypto wallet applications, they only demonstrate the results of the unending communications happening on the blockchain. A crypto wallet does not store real coins or tokens on the app, it only helps to execute and relay the outcome of several transactions on the blockchain. Having stated the obvious, let’s look at the categories of cryptocurrency wallets.
Categories of Cryptocurrency Wallets
There are two categories of crypto wallets, Private Wallet and Exchange Wallet.
Private wallets are usually available on devices via mobile, web, and hardware. Since the users have the right to their private key and passphrase, the private wallet is relatively safer than the exchange wallet, when users keep their private keys safely. On the other hand, Exchange wallets are made by exchanges like Binance; Bithumb; Coinone; Okex, and Upbit, etc for trading purposes within the exchanges. Hence, users can store their coins in these exchanges but remain at the mercy of these exchanges in terms of safekeeping of the coins.
Unlike private wallets, the exchanges have a right to users’ private keys, as they the ones who created the wallets for users. Then, where do these wallet categories relate and differs between themselves? First of all, the common feature is that the basic wallet functions of receiving, storing and sending cryptocurrencies are the same for both private and exchange wallets. Both of them connect to blockchains to show the current amount of coins a user have per time, also they are available to transfer to others’ wallets.
What are the differences in both? The purposes of each wallet category are fundamentally different in design, structure and use cases. The private wallet is focused on the storage of cryptocurrencies more safely and for the long-term.
But the Exchange wallet is focused on the convenience of trading between users within one exchange. For instance, in the case of ETH and ERC20 Tokens, exchanges manage their wallets for the simplicity of trading via Etherscan (the website that shows the state of trading and other forms of transactions between Ethereum and ERC 20 tokens).
It gets clearer with this example. If Joe sends 0.4ETH from Methamask to Upbit — [Private wallet -> Exchange deposit wallet]
What one needs to know here is the incoming address on your Upbit account.
When you get the incoming address, you can send 0.4ETH from Methamask to Upbit. The incoming address is your private wallet address that holds your ETH on the Ethereum blockchain, while your public address is where the 0.4ETH is displayed from, which is also used to publicly send your 0.4ETH to the Upbit wallet’s deposit address.
Once your transaction is successfully done, your 0.4 ETH should be in your Upbit deposit wallet address. However, when you check your personal Upbit’s deposit wallet after 20 mins, you will notice that 0.4ETH is transferred from your Upbit deposit address to another address which reads 0x5e0322….
Did you notice that this new transaction wasn’t made by you? [Well, I noticed :)] And when you check the owner of the new receiving address — 0x5e0322…, it belongs to Upbit’s ledger wallet.
When many users send Ethereum to their incoming address on their Upbit accounts, what happens is that all the ETH they sent is transferred to Upbit’s ledger wallet after a certain amount of time. this is a similar situation with other exchange wallets. Users do not control the private keys hence they also do not control how the funds are sent or spent. Transacting with exchange wallets is usually based on trust only. However, just as earlier noted exchange wallets are efficient for trading services as it helps the exchange team to control and act swiftly at all times when users trade amongst themselves in an exchange platform like Upbit. For instance, when a Seller (A) trades 1 ETH at $150 to a Buyer (B), it does not mean 1 ETH is moved from A’s wallet to B’s wallet. Rather, it is the record of transactions on the exchanges’ database that helps to conclude the trade instantly. This is because all outgoing and incoming transactions are managed by the exchange’s team and their ledger wallet, hence, making the speed of transactions guaranteed.
Just like the logic Yin and Yang, if there are advantages, then there must be some disadvantages too, just like moral hazards, or fabrication in a computational system. In the case of Exchange wallets, beyond funds misuse and embezzlement by the exchange team, exchange wallets are mainly prone to hack due to the concentration of funds in a single wallet device or application. According to Cointelegraph, in 2019 alone, over $292M worth of cryptocurrencies have been stolen from exchange wallets through hacks and other malicious tricks. This is why we encourage crypto users to store the majority of their funds on a private wallet where no one other themselves have control over their funds and how they execute transactions.
Another reason to consider making a private wallet your primary wallet is the fact that it’s already possible to enjoy the same seamless services offered by centralized exchanges via Decentralized Exchange (DEX) and the DeFi ecosystem.
If you would love to avoid those risks associated with exchange wallets, make sure to always manage your crypto assets using private wallets such as Trust wallet and the about-to-launch Lead wallet.
Lead Wallet is the world’s simplest and decentralized cryptocurrency wallet that allows users to store, spend, swap, stake, receive and exchange cryptocurrencies while they control their private keys.
