Note: This answer applies to Bitcoin, not "crypto" generically.
On terminology
I think you may be conflating "wallets" and "addresses". Addresses are used to communicate the payment instructions from receiver to sender and identify a payment's context. A more suitable name instead of "addresses" would have been "invoice identifiers". A "wallet" is an abstract construct that tracks a user's funds and corresponding transactions. Wallets often also manage private key material, although that is sometimes split into a "watch-only wallet" and a personal hardware signing device (or "hardware wallet").
In this context, some people insist that the term wallet only refers to situations in which the user has full control of their own funds, and relations in which a service has taken custody of their funds should be referred to as user accounts.
Replicating user balances on-chain
Having separate addresses per customer is a business necessity, having separate wallets for each customer is a scalability nightmare.
E.g. Coinbase handled their (custodial!) wallets that way for a long time: they would try to map user balances on chain in addition to accounting for them on the books. They'd redirect funds from the separate wallets to their main wallet after deposits came in, and before sending withdrawals/payments first stage funds in a user's specific address "to have the correct 'sender address'". This added unnecessary transactions and was a horrible privacy leak due to the address reuse. Also users were confused about "funds moving from/to their addresses".
Omniwallets
It's much cleaner to explicitly take custody: Since exchanges (and many online-wallets) take custody of deposits, they give out distinct addresses for each user to learn whom they should credit when payments come in, but all of the user addresses are part of a single "omniwallet". This allows the service to benefit from their operation's scale: they can use all UTXOs from the omniwallet to efficiently build transactions, can consolidate the smaller UTXOs opportunistically when blockspace is abundant, and keep the majority of the funds in cold storage. In Bitcoin, a transaction can spend UTXOs received to many different addresses together (which is not true for some other cryptocurrencies which operate under an account model rather than a UTXO model).
You can get bonuses upto $100 FREE BONUS when you:
💰 Install these recommended apps:
💲 SocialGood - 100% Crypto Back on Everyday Shopping
💲 xPortal - The DeFi For The Next Billion
💲 CryptoTab Browser - Lightweight, fast, and ready to mine!
💰 Register on these recommended exchanges:
🟡 Binance🟡 Bitfinex🟡 Bitmart🟡 Bittrex🟡 Bitget
🟡 CoinEx🟡 Crypto.com🟡 Gate.io🟡 Huobi🟡 Kucoin.
Comments