Cryptocurrencies have reshaped the financial landscape of the world. It offers new avenues for investment, transactions, and financial autonomy. As digital currencies gain traction in the mainstream economy, so does adoption, which calls for the need for effective asset management.
Owning crypto assets is one thing, but knowing how to manage them is a totally different ball game. Both are crucial aspects to consider when entering the crypto market, and this is where crypto exchanges and crypto wallets, considered to be the two main instruments for this industry, come in.
Let us take a closer look at crypto exchanges and crypto wallets to understand their functionality and most importantly, the key differences between them.
Cryptocurrency Exchanges
Crypto exchanges function as a marketplace where you can purchase, sell, and trade cryptocurrencies. Their operation is pretty straightforward, where users place orders to buy or sell crypto tokens. They can also navigate through the platform’s interface to execute trades based on live market prices.
These platforms are essential to the industry because they make it easier for users to convert their fiat currencies into cryptocurrencies, provide liquidity, and allow price discovery. There are two main types of cryptocurrency exchanges: centralized and decentralized exchanges.
Centralized exchanges, such as Binance or Coinbase, are platforms that operate as intermediaries matching buyers and sellers while holding custody of users’ funds. Meanwhile, decentralized exchanges are platforms that utilize blockchain technology to enable crypto trading without the need for a central authority or intermediary handling transactions.
Cryptocurrency Wallets
Cryptocurrency wallets serve as digital repositories for storing, sending, and receiving crypto tokens. They also have a crucial role to play in the ecosystem, where they provide users with ways to control their holdings. Crypto wallets comes in different varieties, such as hardware, software, and paper wallets, each with their own perks and drawbacks.
The underlying mechanism of a crypto wallet revolves around private keys and public addresses. Private keys are passwords backed by cryptography that grant access to one’s cryptocurrency holdings. Meanwhile, public keys are addresses users can share with other individuals or exchanges to send or receive funds.
Hardware wallets, such as ones from Ledger or Trezor, are designed to protect the private keys protecting your cryptocurrencies from online attacks by storing them offline. Software wallets like MetaMask or Komodo provide convenience and accessibility by allowing users to manage their crypto assets via a web, mobile, or computer application. Paper wallets are a less common variant that provides a physical printout of public and private keys to users to access their funds.
Key Differences Between Crypto Wallets and Crypto Exchanges
Here are the key differences between crypto wallets and crypto exchanges:
1. Contrast in Functionality
The main difference between cryptocurrency exchanges and wallets is their features. While the primary purpose of the wallets is to store cryptocurrencies safely, they also keep track of the private keys that are required to access and use digital assets on the blockchain.
On the other hand, cryptocurrency exchanges serve as marketplaces where you can purchase, sell, and trade crypto assets. These platforms connect buyers and sellers to perform trades and allow them to convert fiat currencies into digital currency and vice versa.
2. Security Implications
Crypto wallets give users complete control over their private keys, which are required to access the cryptocurrencies stored in them, particularly in the case of non-custodial wallets. In this case, the users’ actions have a significant impact on the asset’s security. Hardware wallets protect users’ funds from exploits by storing the private keys offline.
Meanwhile, centralized exchanges store and handle their customers’ private keys. While this is convenient for many users, it attracts hackers. Since the inception of Bitcoin in 2009, there have been ample amounts of high-profile crypto exchange hacks that have resulted in large sums of cryptocurrencies being stolen. Using an exchange to store your crypto assets may seem more convenient to a crypto wallet, but it always carries the risk of suffering security breaches.
3. Control Over Crypto Assets
The amount of authority users have over their funds is a noticeable difference between crypto exchanges and crypto wallets. A person using a wallet to store their crypto has complete control over their funds, especially when using a non-custodial wallet.
They don’t need to wait for authorization from any third-party intermediary to send, receive, or store cryptocurrencies. This autonomy allows users to handle their funds any way they see fit and don’t have to worry about losing access to their accounts or having their funds frozen by an exchange.
On the other hand, users effectively trust centralized exchanges with their money, giving those platforms complete control over such assets. These platforms are in possession of the private keys to each user’s wallet within them.
A risk posed by this arrangement is that users won’t be able to access their funds in the event the platform suffers issues with operations, security breaches, or legal concerns. The exchange also has the authority to place limitations on transactions, like withdrawal caps.
Read More:
Top 9 Crypto Exchanges that Do Not Require KYC – How to Trade Anonymously?
