Online cryptocurrency wallets and trading platforms

An online cryptocurrency wallet is very similar to a hardware wallet that you could manage on your own, except for information stored in the cloud and accessed using a web interface on your computer or using an application on your smartphone.

In 2021, some of the most used online cryptocurrency wallet services are those offered by trading platforms such as Binance.

From a security point of view, it is very important to remember that the site provides the code that runs on your browser or in the application and also stores your keys. In other words, the site or application has the ability to access your wallet keys at any time.

Ideally, the site will encrypt those keys under a password that only you know, so you should always opt for a trusted platform. Specifically, you must have full confidence in the platform you choose and the security measures it uses to prevent theft of your wallet's private keys or password.

An online wallet comes with a number of advantages and is very convenient in that you can use it directly from the browser, without having to install anything on your computer. If you use an application on your phone, all you have to do is install it to benefit from all the functionalities of the platform, including those related to managing and managing your cryptocurrency wallet.

On the other hand, using an online cryptocurrency wallet can come with a number of security issues. To give just one example, if the platform or the people who manage it prove to be malicious or compromised in any way, access to your funds could be in jeopardy or, in the worst case, your funds could be stolen. .

Normally, the site or platform is operated and managed by security professionals, who are better prepared and diligent than you in maintaining security at a high level. So, you might hope that they will do a better job and that your coins are actually safer than if you stored and managed them on your own.

To understand how cryptocurrency trading platforms (such as Binance) work, we will first talk about how banks or banking services work in the traditional economy.

When you deposit a certain amount of money in the bank - a deposit - the bank promises to give you back that money whenever you want it. Of course, as you probably guessed, the bank doesn't take your money and puts it in a box in the back room. All the bank does is promise that if you show up at the time with a withdrawal request, it will honor it immediately.

However, the bank will take your money and use it, that is, invest it. The bank will probably keep some money "in reserve" to ensure that it can pay the withdrawal request it will face on an ordinary day or maybe even on an unusual day. Many banks usually use something known as fractional reserve, where they keep a certain fraction of all demand deposits in reserve, just in case.

Crypto trading platforms are companies that operate similarly to banks, at least in terms of user interface. They accept cryptocurrency deposits (such as Bitcoin) and will promise, like a bank, to return them on demand later.

You can also transfer fiat currency (traditional currency, such as dollar, euro, etc.) to an exchange by making a transfer from your bank account. The trading platform (exchange) promises to repay on demand any or both types of currency.

At the same time, the platform allows you to make a series of types of transactions, including making and receiving payments in cryptocurrencies. It also allows you to exchange cryptocurrencies for fiat currency or vice versa. Platforms usually do this by identifying a customer who wants to buy cryptocurrencies in dollars and another customer who wants to sell cryptocurrencies for dollars, at a price that is acceptable to both parties. In other words, trading platforms try to find customers willing to take opposite positions in a transaction. If there is a mutually acceptable price, they will complete the transaction.

To illustrate, suppose I have $ 10,000 in my Binance account and three ETH cryptocurrencies. Using the services of the platform, we opened a buy order to buy 3 ETHs for $ 2,200 each, and the platform finds someone who is willing to sell the cryptocurrencies at this price. When the platform has identified a trading partner willing to sell 3 ETH for the amount of 2,200 USD each, the purchase order is executed automatically and I will have in the account of the platform 6 ETH and the amount of $ 3,400.

The most important thing to note here is that when the transaction takes place between me and another user of the Binance platform, there is actually no transaction in the Ethereum blockchain. The platform does not have to go in the blockchain to transfer ETH or dollars from one account to another. All that is happening in this transaction is that the platform now makes me a different promise. If before he said, "I will give you $ 10,000 and 3 ETH", now he will say that "I will give you $ 3,400 and 6 ETH". It is practically just a change in their promise, with no real movement of money in the dollar economy or through the blockchain.

There are always both advantages and disadvantages to using trading platforms. And one of the biggest advantages is that trading platforms help connect the crypto ecosystem and cryptocurrency flows with the fiat currency economy, so that it is as easy as possible to transfer value between the two. If I have dollars and ETH or any other cryptocurrency in my account, I can trade between these assets quite easily, and this is very useful.