Exchange wallets – an opportunity or a risk for the user?

Stock exchange wallets – an opportunity or a risk for the user?

Every novice user faces the dilemma of choosing a wallet for their cryptocurrencies: which wallet is safe? Which one is easy to use? Often one issue excludes the other, so it is worth allocating time for analysis and a well-thought-out decision – after all, it is all about our money!

How does a cryptocurrency wallet work?

The task of the cryptocurrency wallet is to store funds and access the blockchain on which all network transactions are recorded. By setting up such a wallet, we get access through a private key, which is used to transfer funds. Remember – do not share your private keys with third parties, because according to the rule: “Not your keys, not your coins” you will lose access to your cryptocurrencies!

Along with creating a wallet, you are also assigned a public key that is used to accept payments. You use this key securely, because it does not give you access to your wallet in any way.

Types of cryptocurrency wallets

We can distinguish several basic types of wallets: paper, hardware, software, stock.

Paper wallets

From a security point of view, paper wallets or brain wallets are perceived best. In simple terms, they consist in creating a wallet with the help of a program by generating a private key, to be printed or saved as special keywords. Such a wallet can be created using the GitHub repository, where you can download a script that generates the wallet. Examples may also be Electrum, ArmoryMycelium. In addition to security, the advantages of such wallets are the trouble-free acceptance of payments and the fact that fees are subject to the network (i.e. they depend on its load, not on the exchange). However, what can cause frustration are difficulties in sending funds and handling the wallet itself. In addition, you cannot recover funds in the event of loss of your private key and there is no option to change the transmission network.

Hardware wallets

Another, much more convenient type of wallets are hardware wallets. The most popular in this category are Ledger and Trezor, which outdo each other in making it easier for users to operate. It is also worth noting that the private key remains in the hands of the owner. Such a wallet is stored on a device resembling a larger USB flash drive and is most often connected to a computer via USB. Equipped with a special chip, it allows access to the blockchain network and protects against access to the private key. You connect it to your computer only while the transaction is confirmed, so your funds are not available to hackers. A stolen or lost wallet is recoverable thanks to keywords that can be written on sheets of paper stored in different places around the home, or remembered. In addition to security and the ability to recover the wallet after loss, the advantages of such wallets are: easier handling and the fact that fees are subject to the network. However, there are also weaknesses – you need to have your wallet with you to approve the transaction and you cannot recover funds after losing your device and keywords. In addition, with such a wallet, you partially entrust the security of your cryptocurrencies to its creators and you also cannot change the transmission network.

Software wallets

The wallets described above are the so-called “cold wallet”, i.e. wallets that store user funds in an offline form. Their opposite are “hot wallets”, i.e. those that have access to the network, such as MetamaskMyEtherWalletExodus. Private keys are secured by the device on which the wallet is installed (e.g. laptop, smartphone), so there is a greater risk of hackers accessing your cryptocurrencies. Nevertheless, the ease of using this type of wallet is much greater than the previous ones. In addition, you can secure funds using hardware wallets (those in the form of the so-called pendrive) – e.g. integrate Ledger z MetaMask. This will make it easier for you to use and view the wallet, and only when sending funds you will have to confirm the transaction on the hardware wallet. An additional advantage of software wallets, as in the previous ones, is the fact that the fees are subject to the network. However, it is also worth paying attention to the risks, incl. security which depends on you as a user, if the device and keywords are lost, you will not recover your wallet, it is not possible to change the transmission network.

Stock exchange wallets

There is notoriety around stock exchange wallets and they are considered the least secure. It is ironic that until now all banking institutions are such central points in managing the wallets of fiat currencies of citizens, and yet we entrust them with our money. Of course, this is a question of regulation and trust. Nevertheless, from the point of view of a centralized solution, it does not differ much. In addition to centralization, reluctance to exchange wallets may also result from historical events – hacker attacks, bankruptcy of exchanges, frauds, thefts, and unlawful management of users’ capital. In addition, fees are against this, which are usually higher on the exchange than in the case of transmission between wallets (this is due to the mechanism of charging fees via the network – the exchange has to pay an average of three transactions in the network for one user transaction).

In addition to the many risks associated with keeping funds on the stock exchange, there are also many benefits. The stock exchange wallet is generated by creating an account on the stock exchange, so you can quickly and seamlessly deposit and withdraw funds between your accounts. Such a wallet is easy to use thanks to its friendly interface. You don’t need to have any device with you to deposit and withdraw cryptocurrencies. You can take care of the security of your funds by setting a complicated account password and additionally enable two-factor authentication.

Unfortunately, the private keys will not be yours, which means that the funds deposited on such a wallet do not belong to you. From a technical point of view, this has its advantages – someone more experienced (we assume) is responsible for the security of our private keys, we have the option of recovering our account after losing the password, and some exchanges (including Kanga Exchange) allow internal transfers for free or with micropayments. An additional benefit is the transfer of cryptocurrencies between networks. What does it mean? Ethereum sent over the ERC20 network is not the same Ethereum sent over the BSC network. Having ETH on the hardware wallet in the ERC20 network, we will not transfer it to the BSC network. However, it is possible from the position of the stock exchange (if the stock exchange supports the network data).

The biggest advantage of storing cryptocurrencies on exchanges is the ability to multiply your capital. For example, the Kanga Exchange, thanks to the Proof of Stake mechanism, offers a profit of 11-18% per year! The KNG, COP, oPLN or SD1 tokens are subject to this mechanism and each of them represents a different type of capital multiplication. For the sake of simplicity, we will look at the oPLN stablecoin (omega PLN). In order to earn on Polish zlotys, which lose their purchasing power while on bank accounts or deposits, they must be transferred to the stock exchange and deposited into a special “PoS liquidity PLN” account. Currently, profits are growing around 11% per annum, with the award being paid out daily. Where is it coming from? Kanga Exchange has the largest partner network of cryptocurrency exchange offices in Poland. To enable such a large network to smoothly trade in cash, it uses the funds of users who have deposited their zloty on PoS, in return for which it multiplies their capital. What about security? Kanga’s CEO, Sławek Zawadzki, declared that they do not use user funds – he considers it extremely immoral. He guarantees the inviolability of funds by the team thanks to appropriate internal procedures ensuring that there are no single entities that could decide about it. Hackers? Imagine the combination of the first of these wallets, which is a security feature in stock management. It is an effective security option against online hacking and access to deposited funds of users. It is also worth paying attention to the Kanga Exchange business model, which has been approved by the KNF. In view of the above, it can be safely concluded that in the case of some exchanges the security is at such a level that there is no reason to fear the loss of funds held on the exchange.

Choosing the type of wallet is not an easy task, especially for beginner cryptocurrency holders. On the one hand, we care about the security of cryptocurrency storage and the ease of use of the system, on the other – we would like not to think about passwords and private keys. We do not like the fact that a centralized body (cryptocurrency exchange) holds our funds, but at the same time we are happy to help us regain lost access to the account. How to find the golden mean? Analyze each type of portfolio and take advantage of several options thus diversifying your risks.

Roman Majewski on behalf of the Kanga Exchange

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