How To Build A Crypto Exchange From Scratch?
A cryptocurrency exchange is a platform that allows users to buy/sell a variety of tokens. It's like a stock exchange, but instead of stocks, you buy or sell cryptocurrencies. In this article, we will show you how to build such a cryptocurrency exchange from scratch.
The first step in starting your own cryptocurrency exchange is choosing the type of trading platform you plan to build. This is important, since the mechanism for exchanging cryptocurrencies, the way they are stored, liquidity management, the ability to trade fiat and other functions depend on the choice of the platform.
Centralized exchanges (CEX). The most common type of trading platforms, the main feature of which is the presence of a centralized operator responsible for the security, updates and functionality of the exchange. The main advantages of centralized platforms are the speed of crypto transactions and the absence of liquidity problems. The main weak point is security, since centralized exchanges store user funds in their wallets, which, as practice shows, are often hacked.
Decentralized exchanges (DEX). Such platforms bring sellers and buyers of cryptocurrency together, giving them the ability to automatically exchange assets without the participation of intermediaries to validate the transaction. The role of the guarantor of the transaction is assumed by the platform's smart contracts, which operate on the basis of open source software. This mechanism allows you to save on commissions (no need to pay intermediaries) and increase the level of security (the exchange does not have access to money and private keys of users). However, you should keep in mind that on such exchanges, the lack of third-party moderation shifts all responsibility for errors to the users themselves.
Peer-to-peer exchanges (P2P). These are essentially online message boards for buying / selling cryptocurrency. Users enter the platform, look for a counterparty with a supply offer (denomination, amount, rate, transfer method) and contact him to agree on an exchange. You can buy a crypt in this way using fiat, gold or ordinary goods - as the parties agree. In this case, the transaction can be carried out both online and in person.
Instant exchangers. Platforms that act as a regular exchange point are very easy to use. All the user needs to do is open a trade order and it will be instantly executed. This is possible because such sites act as a broker that provides access to the liquidity of many exchanges. Fee foe speed is an increase in the number of intermediaries, which leads to higher commissions and a decrease in the level of security.
Also on the market, you can find hybrid platforms that combine the properties of centralized and decentralized exchanges. For example, a service can be operated by third-party operators and give traders more control over their funds. Orders and transactions on such crypto exchanges are encrypted, fixed in time, and stored on the blockchain, and order approval is performed outside the blockchain on a third-party node.
In the next step, you need to decide what functionality should be implemented in your crypto exchange. It is usually divided into such modules:
Authorization and verification. The path of an ordinary user to trading on the exchange begins with registration via email or accounts on social networks and Google. But the registration itself is usually not enough to start trading. This requires personal identification - verification. This verification is necessary to ensure transparency of transactions and minimize the possibility of fraud, and also because it is required by regulators.
Platform trading engine. It is responsible for the basic functionality of the trading platform. For example, a trading engine checks the balance in a user's wallet to make sure that they have enough funds to make a transaction. It also compares trade orders and rates in real-time, carries out transactions, processes information about prices and commissions, creates charts, etc.
Exchange admin panel. Includes a panel for tracking the current state of the exchange (traffic, trading volume, number of transactions, income from commissions), traders, wallets, transactions and content. In addition, tools should be implemented to verify users, change and remove content, ban and remove users, change commissions, manage marketing and affiliate programs.
It will also be convenient if you have a system for automatically checking users for "strange" actions, like on Binance: if a trader does something compromising (strange, unusual, clearly unauthorized), the system will notify the administrator and may even temporarily freeze operations on the compromised account and / or undo the last action.
Cryptocurrency wallet. If you are developing a centralized platform, then you need the functionality of an internal wallet. It is needed for faster access to money, which speeds up the process and makes it easier, as well as to ensure the liquidity of the exchange. In the case of decentralized and peer-to-peer cryptocurrency exchanges, there is usually no need to create an internal wallet.
Think about how users will be able to replenish their wallets and withdraw funds from them to a card or their cryptocurrency account. For example, Coinbase allows traders to connect their bank account and transfer dollars to or from a wallet easily. This possibility can be realized both with the help of manual withdrawal of funds, and through automated algorithms / smart contracts.
Analytical tools for traders. This functionality will help attract experienced traders to the platform. Analytical tools allow you to receive additional information about the current state of the market, predict its movement, analyze trends, create and test trading strategies. When starting a crypto exchange, you have to decide what indicators you want to see on your platform. The most popular (required) options are:
Security features. One of the main problems of the cryptocurrency market is the low security of cryptocurrency exchanges. Not a year goes by without news of another hack of any exchange. The loudest are: Mt. Gox - $ 450 million, Bitfinex - $ 65 million, Bithumb - $ 58 million, Binance - $ 40.5 million.
Therefore, when creating your own trading platform, you need to do everything to protect the data and money of your users, especially if you want to create a centralized cryptocurrency exchange. Here's what will help:
A cryptocurrency exchange should be launched only through custom development, since only in this way can you ensure the proper quality and security of the software. There are ready-made solutions (scripts), but they, as a rule, are created by amateurs and / or carry risks that there will be many security holes in the code, created on purpose or through oversight. Considering the situation with such frequent hacks of cryptocurrency exchanges, it is not worth the risk.
How to find and choose a technical partner to create a cryptocurrency exchange from scratch is described in the article: «How to Choose a Blockchain Development Company».
After you choose a developer company, the process of creating a cryptocurrency trading platform will be as follows: