Cryptocurrency exchanges have presented themselves as an alternative business opportunity for common investors. They might not have the technical prowess and the computational power to invest in cryptocurrency mining. It also goes in line with the fact that the volatility of cryptocurrencies makes them unfit for transactions.
Cryptocurrency exchanges present lucrative business opportunities for the exchange owner who provides the platform. However, cryptocurrency exchange software development is just the tip of the iceberg. There are a lot of aspects that need to be put in place for the crypto exchange ecosystem to function properly and gain profitability.
There are different types of crypto exchanges. The most common of them is the centralized cryptocurrency exchange, and major exchanges like Bittrex and Binance fall into this category. There are also decentralized exchanges that, as the name implies, do not fall under any single authority, and are decentralized in every sense.
In the oncoming paragraphs, we will read about the general requirements of any crypto exchange, and focus on decentralized exchanges.
The different components & properties of a crypto exchange
For a cryptocurrency exchange to function properly, there are a lot of components that need to be put in place. In addition, a successful crypto exchange has a few properties that define its business relevance and profit.
Every cryptocurrency exchange needs to have an interactive and intuitive user interface that makes it extremely easy for even a novice investor to adapt to the functionalities. The investors should be able to easily execute the desired tasks in as minimal steps as possible. Your exchange needs to be hosted on a reliable server that assures uncompromising uptime.
Users should also be able to add money to their exchange wallets quickly. The exchange wallets are, in essence, hot wallets, and they can be used in transactions to buy or sell cryptocurrencies on the exchange. The wallet should be easy to load and should accept all major crypto, and fiat currencies.
The trading engine forms the core of your crypto exchange. The trading engine should be robust and swift, and it should also make sure that it matches buying orders with relevant selling orders. The cryptocurrency exchange’s trading engine is what makes or breaks the exchange.
In addition to the features mentioned above, the cryptocurrency exchange needs to ensure top-notch liquidity and security. Liquidity ensures that the trades keep happening, and it is considered to be one of the parameters that will qualify the success of a crypto exchange. It is to be remembered that exchange, because of its centralization, is considered to be a ripe target for hackers. Therefore, it is important to ensure top-notch security by incorporating security measures like SSL encryption and two-factor authentication.
Steps to create a cryptocurrency exchange
As seen earlier, the cryptocurrency exchange launching process involves a lot of activities.
- You will need to figure out the properties of the exchange that you will be creating. The exchange could be either a centralized or decentralized exchange.
- You will need to get in place, all the legal and regulatory aspects. Not every jurisdiction has been welcoming towards the world of cryptocurrency and blockchain. There are laws that differ, not just by country but even by state. Therefore, it is important for you to figure out the nitty-gritties and nuances that govern your exchange.
- Cryptocurrency exchanges are capital intensive. Therefore, you will need to ensure that funds are available for the entire development, launching, and marketing process. This is one of the territories in which a lot of cryptocurrency startups fail. They think they might have enough funds, but they end up losing midway earning the distrust of investors.
- Ensure that you have partnered with the right technology solution provider. You can consider developing your exchange right from scratch, and you can also consider using open-source codes for crypto exchanges that are available on platforms like GitHub. Another lucrative alternative that you can consider is the use of white label cryptocurrency exchange scripts. A white label cryptocurrency exchange software is extremely easy to customize, and it will also ensure that there are no lapses when it comes to the quality of coding, and the basic functionalities of any crypto exchange. Due to its nascent nature, a white label decentralized exchange can present an amazing business opportunity awaiting and unprecedented boom.
- In the endeavour to enhance your liquidity, you can either simulate transactions within your exchange by using simulated accounts. You can also consider connecting your exchange to an already existing exchange so you can capitalize on the magnitude of liquidity that the other exchange has.
- Your exchange is bound to attract users proportional to the number of payment options it offers. Therefore, you will need to partner with a versatile payment processor who will not only give you a competitive rate but will also accept multiple modes of payment. It is to be ensured that they are compliant with regulatory requirements like the PCI DSS to ensure cybersecurity.
- After assuring security, your cryptocurrency exchange is now ready for beta testing and marketing. Once you have figured out all these aspects, it is important to garnish your exchange with the availability of customer support across multiple channels. Considering how rapidly blockchain laws are changing, you will need to maintain ongoing legal compliance by employing a team that takes care you do not suffer any fall back because of non-compliance.
Decentralization makes the difference
Blockchain was considered a revolution in data and process management because it brought together top-notch security and transparency through decentralization. The fact that there is no centralized authority and gaining access to a single entry point doesn’t mean the compromise of the entire system is what makes blockchain an amazing option for supply chain and data management.
When it comes to crypto exchanges, centralized exchanges like Binance defeat the very purpose of blockchain by bringing control of the entire exchange to a single authority. The fact that your Crypto coins are not stored in a wallet that you own started to raise questions about the ownership of coins that were added to the exchange wallet. It is also possible that the entire exchange could shut down overnight and not hold themselves responsible for the funds. However, in a decentralized exchange, the possibilities of these happening are completely eliminated.
How do they work?
Decentralized exchanges are, in essence, a marketplace for crypto traders. A person who wants a Crypto token places their order to trade their token with another Crypto asset available in the exchange. They also set the price of the token and also a time limit until which bidding for the asset or the token can take place. Once the selling order is set, users can submit their bids signaling a buying order.
Once the time limit set by the seller expires, the bits are reviewed and executed by both parties. Unlike a centralized exchange where the exchange itself holds the responsibility for the transfer of funds, the decentralized exchange executes it using a smart contract. The funds are placed in an escrow governed by a smart contract, and only upon successful completion of the transaction, the funds are released for either party. This makes the entire process trustworthy. It completely eliminates the need for a third party to ensure mutual trust in the transaction. This translates into direct attenuation in the cost of the transaction.
You can use your wallet address to sign into the decentralized exchange. Once the transaction has been executed and the asset has been transferred, you can immediately disconnect your wallet, keeping them out of any other possible access.
Decentralized exchanges present a bouquet of advantages that make them a preferred choice for people who value anonymity and non-involvement of third parties in their transactions. Decentralized exchanges give investors complete control over their crypto funds.
- Decentralized exchanges mean lesser fees because they do not charge for or a percentage of the fee in every transaction but only a charge for trade. All you need to do is pay for the gas as you will have to get your trade confirmed through the blockchain, and it usually does not exceed $1.
- Decentralized exchanges assure top-notch anonymity because there are no Central authorities involved. You do not have to submit any documents for your KYC/AML processes, making your identity nothing more than your wallet address!
- In a decentralized exchange, you are, without any digression from the truest sense, the complete owner of your assets. Decentralized exchanges also mean enhanced liquidity.
Decentralized exchanges might not have started first. Binance, in spite of its established presence in the centralized crypto space, has gone to establish a decentralized exchange under its brand. This is a resounding testimony to the growing demand in the future for decentralized cryptocurrency exchanges.
It might not be an exaggeration to say that the market for decentralized cryptocurrency exchanges is void and open. The availability of white label decentralized exchange, the process of getting into this business only gets easier and faster. All you need to do is get in touch with a cryptocurrency exchange development company that specializes in creating cryptocurrency exchanges. They will take care not only to develop the exchange but also customize it according to your requirements.
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