It is the year 2009.
You are Satoshi Nakamoto (or a part of Satoshi Nakamoto, we’ll never know for sure).
You have just published the whitepaper for something called Bitcoin, a currency that works in ways no other currency does.
You call it the world’s first cryptocurrency, which seems like a great term because of how cryptography links in with all the workings.
You talk about something called the blockchain, which is a decentralized network upon which your currency operates.
Would you, back in 2009, ever have thought that blockchain, cryptocurrencies, and Bitcoin would take off in the manner it did?
Fast forward to 2020.
Everyone is talking about blockchain. The applications of this fantastic decentralized ledger network have gone beyond fintech, and are being talked about in areas such as healthcare and supply chain management.
Paul, a business owner, wants to harness the power of blockchain and cryptocurrency to take his business to the next level.
He’s a traditional businessman, however, and wants to keep the application of blockchain to its tried-and-tested fintech solutions only. He comes across something called a cryptocurrency exchange while exploring potential blockchain applications in fintech. He is intrigued. He wants to know how to make a cryptocurrency exchange for his own business. He even thinks about having a meeting with developers from a cryptocurrency exchange development company.
Before answering how to make a cryptocurrency exchange, however, he decides to read up more on what exactly exchanges do.
What exactly is a Cryptocurrency Exchange?
Paul, instinctively, thinks about fiat currency exchanges- where you go with a certain amount of currency A, and exchange it for currency B, according to set rates. The problem with cryptocurrency coming into the mix, however, is that it is not widely accepted as a mode of standardized payment, as fiat currencies are.
So if Paul possesses BTC that he wants to spend on some commodity, chances are that he will need to exchange it for fiat currency first (unless the dealer accepts BTC, which is a rare occurrence even these days).
Paul, being a businessman, is more interested in the revenue side of things when it comes to how to make a cryptocurrency exchange.
Earning money through trading cryptocurrency isn’t all that different from fiat currency trading in principle, but the very nature of cryptocurrencies make it something to be studied in depth before diving in headfirst (another reason why exchange development is best left to the experts at a cryptocurrency exchange development company).
Another fact he needs to keep in mind while planning on how to make a cryptocurrency exchange- the development cost of making a cryptocurrency exchange.
Cryptocurrency exchanges can be of two types- centralized and decentralized. We discuss what they are, and why should a business delve in one, in the next section.
CEX, DEX, and why your business should look into them
Centralized cryptocurrency exchanges, or CEXs, have been on top of the crypto exchange world for some time now. They are owned and operated by a central entity, which can be a single organization, a government, or even a group of individuals. They are easy to use, provide features like margin trading, and are generally a preferred bet for individuals looking to trade cryptocurrency.
Decentralized exchanges, however, solve a major problem that exists with CEXs- that of security. Hacks on centralized exchanges like Bitfinex and Mt. Gox has led to users losing millions of dollars, and this seems to be a recurring problem with centralized exchanges, owing to their very nature.
With a major characteristic of the blockchain being its decentralized nature, it makes total sense from both a security and logistics point of view that the exchange on which cryptocurrency is traded embodies the principles of the network itself. Privacy, anonymity, and hacking resistance are what differentiate DEXs from CEXs. The question of “how to make a cryptocurrency exchange” is generally going to refer to DEXs, in the near future (at least hopefully!).
Now, coming to the burning question- why would your business benefit from diving into the world of cryptocurrency exchanges and discovering the answers to the question “how to make a cryptocurrency exchange?”
– Exchanges like these can act as direct trade platforms between users, where the pre-established market price that is a common feature of fiat exchanges is absent. If both users agree on the exchange price, the deal goes ahead, and exchanges net a commission for being the middleman.
– Cryptocurrency exchanges also fund platforms which are investment pools for management of the business to buy and hold virtual assets. With the world moving towards digitization every second of each day, holding virtual assets can do wonders for your business as a whole.
A splendid business opportunity is being offered up. Why would Paul, or any other sensible businessman choose to let it pass?
Creating a cryptocurrency exchange- the features
A cryptocurrency exchange embodies some salient features which are a must-have for any platform dealing with cryptocurrency in such a large volume. These include having a sound trading engine, UI/UX considerations, wallet functionality, security considerations, and liquidity handling. If you’re looking over information on how to make a cryptocurrency exchange, consider the following features a must-have.
– Trading engine
The trading logic is the backbone of any currency exchange, and this is one of the most important features to get right. There are certain requirements that are needed to get the trading engine up and running, including but not limited to order lists (list of transactions made by the players), live update charts that display prices of cryptocurrencies and volatility index, and any analytical tools that you may desire.
For decentralized exchanges, smart contract logics are one of the most popular trading logic choices, and those familiar with how Ethereum works will already know about smart contracts. Basically, they represent an agreement between two customers looking to trade on the exchange, with the conditions being coded directly into the blockchain.
Once the conditions of the contract are fulfilled, it will execute automatically. What you need to keep in mind is that if you commission a smart contract logic for your exchange, there is also a need to build a verifying protocol to validate the integrity of the trades taking place. Depending on the number of participants you are looking to support with a single trade, the verification mechanism can be developed.
– Liquidity and fund control
Fund control considerations begin with creating user account systems for your exchange. Whether it be centralized (where you control the funds) or decentralized (where people are in charge of their own money), a user account system is imperial for any cryptocurrency exchange.
All funds and currency that move across the exchange will either be controlled by your business, or the people. This makes it crucial to get the right fund control mechanism in place for your exchange, which leans into security considerations as well.
Arranging liquidity is another fundamental feature to have in a cryptocurrency exchange. For your crypto exchange to get started, you need to have something that people can trade with, right? Getting an aggregator here makes sense, especially if you are running a CEX.
Users can create their coins or tokens using currency, and post it on the list of assets in your exchange, creating liquidity. The ability of an aggregator to process a large amount of information every second is what makes it so crucial for generation of liquidity, especially in the early stages.
Here comes one feature that is specific to cryptocurrency exchanges- wallets. A wallet is where you store your money, right? Cryptocurrency is far off from physical currency, but you still need somewhere secure to store it. Virtual wallets are what help people store cryptocurrency, and then use it to trade on the exchange.
A good idea is to provide easy integration with other hardware wallets as well, when creating your own version of a cryptocurrency wallet for your exchange. This will help users transfer funds to and from the exchange easily, allowing them to trade good volume in shorter amounts of time.
It is important to take security considerations seriously, since access to wallets means access to money. If hackers get a hold of the private keys of user wallets, the money will disappear in a split second. Safe and secure wallet integration is the key here! Wallet integration can sure drive up the development cost of making a cryptocurrency exchange, so keep that little tidbit in mind.
– A killer user interface
Admittedly, user interface and user experience can be one of the less important considerations when one wonders how to make a cryptocurrency exchange. However, this is a rookie mistake, and should be avoided at all costs.
Who is going to use your exchange if they cannot figure out how to list assets for the life of them? Even if you incorporate cutting-edge features, a cryptocurrency exchange is not going to be popular among the masses if you need an industry grade manual to figure out how to create a user account.
Your cryptocurrency exchange platform should have a user friendly, and intuitive interface. Simple, flowing menus, easy to follow directions, and adaptable on multiple platforms- these are the bare necessities that you should be going for, tech-wise.
As far as the user experience is considered, it will no doubt be enhanced by quick registration and account creation processes, 24/7 customer support, instant deposition and withdrawal of funds, booking and transaction history, and other features necessary. Adding easy integration with existing wallets, as talked about in the previous section, will also provide an additional aspect to enhancing the user experience for those already seasoned with handling cryptocurrency.
Security and Regulations- The Kingpin
When you’re dealing with people’s money, one thing needs to be top notch, no excuses- security. Money is something that people literally kill over (no, this isn’t an invitation to do the same!).
Cryptocurrency exchanges store and transfer currency, which has monetary value, therefore, it needs to be kept safe and secure. There. We said it. Even a 5 year old can understand the importance of security for a cryptocurrency exchange now!
Taking this opportunity to talk a little bit more about decentralized exchanges. As compared to CEXs, DEXs are many orders of magnitude more secure. This is because of their decentralized nature- an attacker looking to steal funds or compromise the system must take control of more than half the nodes on the network, since there is no single point of entry for a decentralized exchange.
Even if hackers manage to take down a few nodes, the entire exchange keeps functioning as intended, because the network’s fault tolerance is built on decentralization.
Further, anonymity and privacy of users is also ensured on a decentralized exchange network. This means that users are not forced to provide personal details to the exchange or to other participants, whereas in CEXs, such information may be gathered by the governing body for administrative purposes.
Moving on to the next major aspect of anything that deals with cryptocurrency- compliance with regulations.
As stated before, cryptocurrencies are not yet accepted as global modes of payment, therefore governments and central bodies do not have control over them as they do over fiat currencies. This is something that governments do not tend to accept.
Thus, when you look up on how to make a cryptocurrency exchange, make sure to research all regulations that apply to your business depending on sector and geographical location.
However, in an effort to encourage development in this sector, and maintain a foothold over the currency and economic factors related to crypto, governments often have regulations that businesses must comply with in order to work with cryptocurrencies. Similar to the Payment Card Industry Data Security Standard, or PCI DSS for credit or debit cards, cryptocurrencies have their own set of standards and rules, called the CCSS, or cryptocurrency security standards.
The main purpose of CCSS is to ensure secure storage and management of cryptocurrency. It is applicable to all businesses and applications that have a wallet functionality to store funds of the user. Therefore, it is imperative that you as a cryptocurrency exchange owner remain compliant with CCSS as far as your wallet integrations and capabilities are concerned.
Great- you now know how to make a cryptocurrency exchange. Where to start?
Starting out with any blockchain application, including a cryptocurrency exchange, is all about choosing the right platform and protocol to suit your business needs.
You could go all in and create your very own permissioned blockchain setup, or if you want to save yourself some time and effort, but want the decentralized side of things to remain as your focus, then you may build cryptocurrency exchange solutions based on protocols like 0x or Bitshares.
As of now, solutions based on these protocols are ready for implementation, therefore, they make the most sense from a business point of view if you are looking to get things up and running as soon as possible.
Tokenization of assets is made as easy as 123 with Bitshares. If you are looking to provide customers with a smart contract platform that makes digital asset transfer simple and streamlined, then Bitshares is the protocol to use. They offer an easy to use API with which businesses can build their own exchange solutions based in and around Bitshares, creating tokens and listing them on the Bitshares market itself for trade purposes.
Perhaps the most popular platform to build a DEX upon, 0x works on the Ethereum smart contract logic with a number of relays already up and running based on 0x. Providing almost the perfect platform to build a decentralized cryptocurrency exchange, 0x allows all trades to happen through the smart contract logic, which makes sure that users are in possession of their tokens at all times.
All operations on the exchange are done in the form of transactions, including managing funds, placing orders, or cancelling them.
Going the centralized route
For Paul, and other businesspeople, centralized exchanges might make more sense, due to the level of authority that they lend to the owners. Sure, stringent security and compliances are required, but it is for sure an easier and more comfortable ride (at least it seems that way).
Many cryptocurrency exchange development companies offer full-fledged white label cryptocurrency exchange solutions for one time fees ranging from USD 21000-37000, with the feature sets dictating most of the development cost of making a cryptocurrency exchange.
When you sit down with developers from cryptocurrency exchange development companies, and discuss what a typical cryptocurrency exchange should feature, make sure to talk about everything that you have read up until this point- including security, regulations, wallet creation, and UI/UX.
Sure, the cost may go up as more and more features are added, but building a robust and secure cryptocurrency exchange requires a significant amount of investment. Don’t be scared, the scope for profits is insane!
Just look at the prices of BTC and ETH, and you’ll realize the potential that exchanges can make you and your customers!
Cryptocurrency has already been talked about by all techies great and small. Businesses have finally sat up and taken notice of the potential that they hold, and “how to make a cryptocurrency exchange” is suddenly being Googled more and more.
What are you waiting for? Get researching, have some thoughts, and if you feel like building your own exchange is too much, come to us! Better than any other cryptocurrency exchange development company around, we will make sure that your requirements are met, while keeping the development costs of making a cryptocurrency exchange under control. This does not mean that we’ll be skimping on quality- rest assured that your cryptocurrency exchange will be safe, secure, and a joy to use.