Crypto Academy / Season 3 / Week 1 - Homework Post for @allbert
1. Explain differences between wallets and exchanges as well as mention which operations should be performed in an Exchange and which operations should be performed in a wallet (in terms of fees).
A crypto wallet is simply a digital safeBox which stores your coins and tokens (assets). They possess private keys which help proof the ownership of a certain amount of asset; they are like identifier tied to the contents of the safeBox. When a third-party gain control of a person's private key, they automatically gain access to the assets in the wallet and can transfer them to their own person wallet, and secure it with their own private key. Examples of crypto wallets include Trust Wallet, Electrum, Trezor, Exodus and Jaxx.
Exchanges are websites and services which help people to trade their assets. They simplifies and replace the stress of having to find someone with the token or fiat currency we want to exchange to, agreeing on a certain exchange rate paying them and having them send your acquired assets. Exchanges create a wallet for the user to use within the exchange but their major function centers on converting coins, token or fiat currency to another. The exchange doesn't provide you full control to these integrated wallet like a conventional crypto wallet. The exchange possess and control the wallets private key. It is simpler to say an exchange stores your asset in their own wallet, control the private keys and only gives you access to the assets via an account you create with them. Examples of popular exchanges include Binance, Kraken, Polinoex, Huobi Global, Coinbase (pro) and KuCoin.
| Parameter | Wallet | Exchange |
|---|---|---|
| Security | High Security | Prone to being hacked |
| Private key | Secured by owner | Secured by Exchange |
| Primary Purpose | Long term storage of asset | Trading of Asset |
In terms of fee, exchanges offer a relatively low fee for transfers within the exchange and more outside the exchange while wallets have fixed fees. The exchange fee on wallets is relatively small and negligible. However, exchange rates on exchanges are fairer compared to using DApps like uniswap or justswap on wallets. These DApps often consume some amount of coins or token because of the smart contract transactions they perform.
2. In your own words, Why You think people should have more than one exchange account?. Do you have an exchange account? and Why that specifically?
It is a good practice to use more than one exchange accounts. This falls back to many reasons of which the most important is security concerns. An integrated wallet in an exchange is prone to attack from hackers so it is a good practice not to keep all eggs in a basket.
Another reason to have more than one exchange account is to harvest arbitrage profit. These are profits resulting from temporary difference in value of coins or token across different exchanges. Volatility is the driver of cryptocurrency trading, and these volatility is not uniform across exchanges, even in a day, there can be sudden surge in an exchange which will not occur in any other exchange. Having multiple account proves useful in this circumstance.
Different exchanges have their terms and conditions, different governing rules which affect the users' experience. KYC requirements differ across exchanges and so does the pairs available for trading. Some exchanges are good for converting cryptocurrencies into Fiat while some are not intended for such purposes.
Trading fees differ across exchanges for the same pair. This is where the luxury of having different exchanges come to play.
Hence, the advantages of having multiple exchange account can be summarized into:
- Security Reasons
- Arbitrage profit harvestingDifference in mode of operation and system
- Strengths and weakness associated with an exchange
Currently, I own two exchange accounts: they include Binance and PoloniEx. I use binace exchange for most of my trading activities because of its high trading volume and numerous pairs I can trade with. But Poloniex offers me the STEEM/TRX pair which is not available on Binance. There was a time when Binance was observing a maintenance break and it affected depositing STEEM into Binance wallet, hence trading was on hold. Having the another exchange help me avoid being stucked.
3. What are better? Wallets or exchanges?
The direct answer to this question is there is no better choice between the Wallets and Exchanges. This is because wallets and exchanges were set up to perform different functions. So choosing between the two is a result of what one intend to do. If you intend to safe up your tokens or coin for a long period of time, it is advisable to make use of wallets as it is safer and more designed for this function. If you are a day trader, using the Exchange will help you move your assets easily. Exchange rate are fairer on Exchanges than using DApps on wallets.
4. Create an account in a wallet and in an exchange of your choice and show screenshots of the process.
Creating an account in a wallet: Trust Wallet
- I decided to open an account on Trust wallet. The wallet is not limited to managing one token but many more. Using my android phone, I searched for the app on play store. Then I clicked on the install button. When the app as completely installed, I clicked on the open button to launch the wallet application.
- Once the application was launched, I clicked on create new wallet, then an interface opened where I ticked a check box to accept the terms of service and privacy policy, then I clicked continue. A new interface opened prompting me to save my wallet seed phrase. I clicked on continue to reveal my 12-word seed phrase.
- I couldn't screenshot the next process because the app stops the function. I wrote down my seed phrase and confirmed it. Now my wallet is fully set up and I can receive and send tokens and coins.
Creating an account on an Exchange: KuCoin
- li>I used my PC for this task. Using my browser, I visited the KuCoin home page on https://kucoin.com. Then I clicked on the sign up button to create a new account.
- A new page opened and I inputted the necessary data to create my new KuCoin Exchange Account. I chose the e-mail option and had a confirmation code sent to my mail. I inputted the confirmation code sent by Kucoin to my mail in the sign up page. I inputted a password of my choice, ticked the 'I have read the terms and conditions' check box and then proceeded to click on the sign up button.
- Now I have a Kucoin account and I can start trading.
Conclusion
In conclusion, both wallets and exchanges have functions they perform. It is however possible for a person to have a wallet and not a trading account on any exchange because not everyone uses exchanges. They can simple transact through peer to peer method which is the very thing exchanges try to simplify.