Because of how cryptocurrency exchanges and cryptocurrency wallets operate and the way they are intertwined, many people often confuse these two concepts. While they function in sync, these blockchain products are not the same. To enable people to understand these two products, Tectum details the differences between a crypto exchange and a crypto wallet.
To properly understand their dissimilarities, let’s look at them individually.
A cryptocurrency exchange is a platform where people buy, sell, swap, and trade blockchain tokens. An exchange should not be mistaken for a crypto off-ramp.
Crypto exchanges typically attract traders and investors looking to invest in cryptocurrencies for long or short terms. These platforms offer various trading tools, trading pairs, and trading opportunities.
Trading platforms are typically classified into centralized and decentralized exchanges. On the other hand, a crypto off-ramp exists specifically for converting cryptocurrencies to fiat currencies and vice versa.
A cryptocurrency wallet is a medium for storing and transferring blockchain tokens. They are classified into custodial wallets (tied to centralized exchanges) and noncustodial wallets (standalone wallets).
This article will compare noncustodial wallets to cryptocurrency exchanges, as custodial wallets are typically linked to trading platforms. In this regard, it is difficult to separate custodial wallets
Here are some of the most popular cryptocurrency wallets:
To properly understand the differences, this article will use metrics that cut across both a cryptocurrency exchange and a cryptocurrency wallet.
Below is a table highlighting the differences between a cryptocurrency exchange and a cryptocurrency wallet:
| Feature | Wallets | Exchanges |
| Functions | Store and manage cryptocurrencies securely. | Buy, sell, and trade cryptocurrencies. |
| Fees | Minimal fees (e.g., network transaction fees). | Trading fees, withdrawal fees, and other service charges. |
| Security Vulnerabilities | Risks depend on how securely users store their private keys | Risks depend on the security architecture of the trading platform. |
| Ease of Use | Managing private keys can be complicated for beginners | Managing accounts is easier as users do not have to manage private keys |
| Account Recovery | Users can only recover their accounts by themselves through private keys | Users can contact customer care to recover their accounts and retrieve funds. |
| Examples | Trezor and Ledger (hardware wallets), SoftNote, and Metamask (software wallets). | Uniswap and Pancake Swap (Decentralized Exchanges), Binance and Kraken (Centralized Exchanges). |
There are two ways through which exchanges and wallets work together.
Below are illustrations of how this happens:
Centralized exchanges typically have a custodial wallet embedded into every user’s account. This enables individuals to easily manage their funds from one place. Many people do not even notice that they are using a wallet, as it is seamlessly integrated into the platform.
That said, you can use centralized exchange to send and receive cryptocurrencies from noncustodial wallets. People can send the tokens they trade or buy from centralized exchanges to their noncustodial wallets.
On the other hand, decentralized exchanges are trading platforms that require you to connect your noncustodial wallet. Depending on which option is compatible, you must manually connect Metamask (or other noncustodial wallets) to the trading pool.
To ensure security, you must confirm transactions from your wallet before they are effected on decentralized exchanges. Meanwhile, you cannot connect custodial wallets to a decentralized exchange as you do not have control of the private key.
