Exchange deposits and withdrawals

Owned by Eric Butz
Aug 26, 2022
2 min read

Links

https://www.gemini.com/cryptopedia/crypto-wallets-crypto-exchanges

Wallets

There are a few key components that are relevant in the behavior of centralized crypto exchanges:

  • Hot Wallets: Hot wallets are typically the main interaction point between external parties and an exchange. Exchanges use this type of wallets to make an asset available to trade.

  • Cold Wallets: Exchanges use cold wallets as a secured storage of crypto-assets. This type of wallets typically hold larger amounts of assets that are not intended to be traded frequently.

  • Deposit Addresses: Deposit addresses are, often temporary, on-chain addresses used to transfer funds into an exchange. The focus of this type of address is to facilitate user to exchange money flows.

  • Withdrawal Addresses: Withdrawal addresses are, often temporary, on-chain addresses that are used to transfer funds out of the main exchange wallet. Sometimes withdrawal addresses can play a dual role as deposit addresses.

User Wallets

On an exchange, the cryptocurrency a user acquires is automatically stored in an exchange-hosted wallet, which is typically custodial, meaning the exchange has control of the private keys. In addition to being a custodial wallet, a user’s crypto exchange wallet is almost certainly a “hot” wallet. 

Exchange deposits and withdrawals

Exchanges typically have a split storage setup. They have hot wallets and cold wallets. The hot wallet holds private keys on an online server that can quickly send and receive tokens for when users deposit and withdraw. The hot wallet usually contains a small amount of the token, whatever the exchange operator things will be necessary in typical usage.

The majority of an exchange's coins will be held in a cold wallet. The cold wallet is a machine that is not connected to the Internet and holds the cold wallet private keys. Typically exchanges will send funds from the hot wallet to the cold wallet when the hot wallet has too many coins and send from the cold wallet to the hot wallet when the hot wallet does not have enough coins.

There are a variety of strategies used by exchanges to handle deposits and withdrawals. These strategies involve different combinations of hot and cold wallets to manage funds.

For example: https://www.linkedin.com/pulse/10-patterns-centralized-crypto-exchanges-explained-using-rodriguez