Where to store cryptocurrencies, and why are centralized crypto exchanges unsuitable?
Now the crypto business is actively developing, and virtual currency investors want to store their crypto assets on reliable platforms that ensure the complete safety of their virtual funds and carry out transactions with high reliability, ensuring the security of transfers. Currently, there are two systems for storing cryptocurrency — centralized and decentralized. Let’s figure out where to store your funds most securely.
A few words about crypto exchanges
The centralized system is much older than the decentralized one but has a large user audience. The decentralized approach is younger, has fundamental differences in the principle of its work, and is considered more suitable for storing virtual currency.
CEX are crypto exchanges that match a customer with a merchant through a list of orders. Such work is similar to accounts through an intermediary (broker). That is, they are managed by one firm, which is a two-way broker. All transfers are made in the database, and the client does not have a code to the wallet where the cryptocurrency is stored. Thus, the client needs the opportunity to access virtual currency, since the exchange broker, on the client’s behalf, is the wallet’s custodian.
DEXs are autonomous crypto exchanges that operate using smart contracts between clients. This method allows you to transfer virtual currency of one type to another. Transactions form a chain of blocks, which is created by distributed ledger technology. The main difference between such systems is the absence of a broker company (as in CEX), the client can store virtual funds, and the blockchain system records all transactions. That is, the user has complete control over the assets stored in the wallet, which means that the reliability of decentralized crypto exchanges is much better.
Detailed comparison of CEX and DEX
Storage, buying, and selling transactions carry a particular risk associated with breaking codes, leaking information, and stealing funds from crypto storage. But each exchange system has its degree of reliability and security.
They are a traditional exchange market where virtual currency is traded, not securities. The main features of CEX are as follows:
- There is a significant threat to such exchanges from hackers breaking into storage hosted on the server. Recently, many exchanges with a centralized system have been hacked, which led to their bankruptcy and cessation of activity.
- CEX regulates conditions subject to sudden transformations that create considerable risk for crypto assets held in vaults. There are many reasons why regulators have the right to freeze your virtual funds temporarily and, in more severe cases, seize them.
- CEX generally requires verification of the client’s identity. And if information leaks suddenly occur, then all the client’s data can be used by attackers for their purposes. In this case, the client is a potential target for hackers.
Summing up, such a system allows you to conduct cryptocurrency transactions processed on the server, engage in trading, crypto contracts, etc. But in such a system, personal identification is required, and there is no control over one’s crypto assets because the storage is under the power of the brokerage firm.
In such systems, no servers processing information or centralized management exist. Consider the main characteristics of the DEX marketplace:
- Only the client can control their assets through a distributed ledger, and intermediation is eliminated. Therefore, the transaction is made only between two clients or firms. Locking the client asset vault is not possible as in the CEX system.
- Such systems use smart contracts and blockchain technology to ensure the anonymity of transactions. Interacting or canceling such a transaction and gaining access to the financial vault is almost impossible.
- User identification is not required, so the client can remain anonymous.
Based on the above, decentralized platforms for storing virtual currency are much more reliable and safer than centralized ones. There are two ways to store assets — cold and hot.
So where do you store your virtual funds?
The collapse of FTX showed that keeping money on centralized exchanges is not worth it. Elon Musk said that the future lies with custodial wallets. We recommend storing assets in hot or cold storage wallets and crypto DEX.
Storage for virtual currency is a specific code of two digital arrays that provides access to control of their virtual assets. This type of encryption is called a key. One of the keys is open, and the other is closed; analogies are the login and password for email. The first key is shared with the recipients, while the different key is kept secret and used only to manage their storage. This technology is similar to remote access to your bank account.
Cold storage places your funds in a vault — the keys and necessary information on devices disconnected from the Internet. Connection to the Internet occurs only for the time required for various operations. The client’s storage is automatically disconnected from the Internet as soon as the transaction is completed.
The primary cold storage type is hardware because it has physical characteristics. Outwardly, it resembles a USB drive or a credit card, and in size, it is smaller than the palm of your hand.
Hot storage type
Hot storage of financial assets is a storage facility permanently connected to the Internet. Such vaults are very easy to manage, providing a fast way to conduct transactions (acquisition of virtual currency). Such storages have several variations, namely:
- desktop storage — installed on a client’s laptop or computer;
- mobile storage — installed on the client’s mobile device (smartphone, etc.);
- browser storage is not installed on any user’s electronic devices but is available directly through the Internet browser.
The constant connection of hot storage to the network enables operational actions: purchases, sales, exchanges, and so on. The keys of such vaults are always on the Internet.
Is it worth keeping money on the DEX? The answer suggests itself: on decentralized platforms with the reliability of transactions thanks to blockchain technology, ensuring user privacy, direct management of their storage without an intermediary company, and smart contracts make all transactions with virtual currency transparent. These are very significant and undeniable advantages over centralized platforms, which are the most vulnerable to hacker attacks, the possibility of leaking personal user data, and unreliable storage of their cryptocurrencies.
planetex.io is a reliable decentralized platform that uses modern technology, such as Web 3.0. This platform is used by many clients for whom confidentiality and reliability play an essential role. The ecosystem allows transactions with virtual currency and trades NFTs. This platform includes a wide range of services, including cryptocurrency-related ones. At the moment, Planetex is under development, but it is already showing awe-inspiring results.