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I was a little bit shocked to learn that many (if not all) hosted e-Wallet providers combine their customers money in the hosts account, instead of just providing a service for easy access and storing of the users wallet data. This carries over many of the well known and less well known problems with the traditional banking structures onto bitcoins, and defies the aim to avoid central services. So, what are the actual advantages of this, for both the user and the e-Wallet service?

For the e-Wallet it would allow fractional reserve banking in order to charge interest for loans. That makes the system susceptible to crashes like we are experiencing outside and supports an interest based economy, which has its own troubles. (See also this question.) And it makes it easier for the bank to run away with the users money, since the users give the actual ownership of their money away. Are there other points? What is the advantage for the users?

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  1. As Chris mentioned, this is the default behavior of bitcoind which the eWallet uses - disassociating addresses from accounts.

  2. Users expect the funds to be immediately available. If everyone has their own address, it means all the deposited funds must be in a hot wallet, which is dangerous since it can be hacked and stolen. A prudent eWallet will keep most of the deposits in a cold wallet, and only move funds out of it as necessary to allow smooth transactions. For this it will need to move bitcoins to an address other than the original deposit address.

  3. Some eWallets provide green address functionality - a sending address known to belong to the eWallet and assumed trusted. For this the eWallet will need to move funds to its green address in advance.

So the question really is why not to combine the funds. If it's to prove that it's not fractional reserve, that can be done in other ways.

eWallet such as blockchain.info's MyWallet provide the benefits of an eWallet without giving the provider control over the coins, and in the future there will be eWallets with more advanced features using multi-signature transactions.

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One attribute of a shared wallet is that it lessens traceability. In order to track bitcoin spending, records from the EWallet provider would be required.

Some exchanges and EWallet providers have stated that they would only provide this information to authorities if required to do so after being subpoenaed. Others don't even retain logs (or at least, not for very long) that would provide the ability to track deposits versus withdrawals.

Also, there are some online EWallets that are not shared. Blockchain.info/wallet, for instance, treats each account with the service as its own wallet. This is because they don't have the private keys necessary to spend the funds, but there's no reason other EWallet couldn't segregate addresses per-account just the same.

So it is likely for convenience and for privacy enhancing reasons that all hosted EWallets employ shared wallets.

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The wallet services are probably just running a single bitcoind server. bitcoind currently only supports a single wallet, and so by far the easiest way to arrange things is to keep all the user funds together in a single large wallet (regularly taking the majority off to an offline wallet for security purposes).

Anything else would require custom code to keep the funds separate.

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