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How to Create a DeFi Exchange?

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Yuri Musienko
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We’ll tell you briefly and in lay terms about what DeFi exchanges are, why users like them, how to launch your DeFi exchange, and how much it costs.

DeFi exchange are another rapidly growing trend in the cryptocurrency world, which gained momentum in 2020. Specifically, on only one platform — 1inch — daily transaction volume has grown from averaging $1 million in daily volume in July 2020, to over $40 million a day, in January 2021. Other DeFi aggregators such as Matcha, Zapper.fi, and Zerion.io improved their performance significantly as well. It points to a great interest in such projects, which you can use to launch your own DeFi exchange. Later, we’ll tell you how to do it and how much the development of such software costs.

What is a DeFi exchange?

Decentralized finance or DeFi is financial instruments in the form of services and apps, which are managed not by centralized companies, banks, or regulators, but by decentralized blockchain protocols. In 2020, these projects became the main growth driver of the cryptocurrency market because, unlike traditional financial instruments and services, DeFi has no problem with accessibility, transparency, and data confidentiality assurance.

However, decentralized finance has serious problems with UX / UI: most DeFi services have a complex user interface and many specific terms, which complicates working with them and pushes beginners away. Besides, at this stage, the DeFi applications are fragmented and it is quite difficult for users to keep an eye on the market.

DeFi exchanges are intended to resolve both problems. These services gather information from various DeFi protocols and integrate them into a single interface, which is simple and intuitive. This allows users to monitor the condition of many markets and make smarter decisions due to only one tool.

Besides, exchanges perform other functions such as connecting liquidity pools, reducing transaction costs, earnings on staking, participation in lotteries, buying and selling NFT, the launch of IDO/IFO, and many more.

Here are some examples of DeFi exchanges on the market:

  • 1inch and DEX.ag. They collect data about the cryptocurrency rates from DEXs and AMMs and enable users to exchange crypto assets at the most favorable rate.
  • InstaDApp. It collects information about loan conditions on DAI platforms and allows users to receive loans without leaving the service.
  • PlasmaFinance. Collects data from trading platforms, credit markets, and liquidity pools.
Benefits of DeFi exchanges

Before you start creating DeFi exchanges, you should find out what users and decentralized service providers need them for. So you can understand what features you better implement in your project.

Why do the end-users of DeFi need exchanges?

  • More opportunities. People want to buy and sell cryptocurrency in the most effective way possible. This includes the speed of work, rate, fees, various bonuses, passive income, etc. But they are reluctant to monitor the situation on all DeFi services themselves — it's expensive, hard, and inconvenient. Plus, it’s difficult to monitor the emergence of new projects. Exchanges undertake the monitoring of all markets.
  • Improved user experience. We have already written that the majority of DeFi protocols have a quite complex user interface, inside of which there are many cryptocurrency terms. Exchanges make DeFi protocols accessible for everyone like Robinhood did for stock markets.
  • A wider range of DeFi projects. How many exchanges an ordinary trader can monitor on his own? Five? Twenty? An aggregator makes it possible to monitor several hundred and even thousands of markets in a convenient way. At the same time, the process of search for the best option is usually automated: an exchange monitors all markets and shows the most profitable option to the user.
  • More useful information. It refers to both the market (DeFi aggregators provide a much more complete picture of the current market condition than a separate protocol), and providers (aggregators collect information about the protocols they work with and if they see scam or fraudsters, they remove them from the listing and warn the clients).
  • Elimination of slippage. It’s when orders are executed at a price that is less favorable than expected. This happens due to small liquidity in liquidity pools, which is the case for DEX. DeFi exchanges help solve this issue as they combine the liquidity from different exchanges in one platform. For instance, 1inch aggregates liquidity from different DEXs and Orion Protocol aggregates liquidity not only on DEX but also on CEX.
  • More protection. To some extent, exchanges may be responsible for the settlement of controversial issues between users and supplying companies, acting as an arbitrage. This is a critical moment in the world of decentralized finances, where there are almost no regulations.

Why do decentralized finance providers need exchanges?

  • Liquidity. Even the most popular and competitive project is going to suffer from a liquidity shortage at the early stages of development. Exchanges help to avoid it by providing these projects with access to other projects’ liquidity. Due to that, any start-up can raise the necessary capital and provide the clients with a fully functioning service.
  • Access to credit. Not all crypto start-ups manage to raise funds with the help of ICO, STO, IEO, IDO, or other forms of a crowdsale. But if you demonstrate the potential of your project to exchanges, it’s possible to obtain a loan under certain conditions. Almost like in a traditional financial sector.
  • Competition growing. It’s in exchanges’ interest to maintain healthy competition among the DeFi providers because it enables them to provide their clients with the most profitable options. Besides, healthy competition helps a sector to develop and makes it more effective.
  • Promotion. Promotion on your own is difficult, long, and expensive. It’s far easier and more effective to run ads in the place, where your target audience gathers. DeFi exchanges are this place exactly.

DeFi exchange functionality

Must-have features. At the next stage of the development of your own DeFi exchange, you need to choose what features to implement primarily and what features can be added along the way of the platform development. Here is a list of features, which you should think about above all:
  • Sign up / log in. To get started with an exchange, users usually need to connect their crypto wallets as DeFi projects are usually non-custodial apps. It requires integration with popular Web3 wallets such as MetaMask, TrustWallet, MathWallet, TokenPocket, WalletConnect, Binance Chain Wallet, SafePal Wallet, and Coin98.
  • Dashboard. The main task of any exchange is to connect different DeFi protocols in a single user interface. A dashboard is the first screen and the most important part of this interface, which makes it one of the main features of your app. Zapper DeFi exchange is a good example of such a dashboard. It categorizes assets into various categories such as wallet, income positions, liquidity provision, and borrowing. It structures information, which simplifies its analysis and improves the effectiveness of investment decisions. Think about how you want to present data to your users.
  • Exchange. This tab allows users to exchange one crypto asset for another quickly and with the greatest benefit. A good example of this feature is the 1inch app, which aggregates liquidity from integrated DeFi protocols and provides the user with the best options for exchange in real time.
  • Liquidity pools. These are smart contracts, which keep the liquidity providers' funds for commercial transaction servicing for any given currency pair. Liquidity providers are ordinary users, who provide a pool with their own funds in exchange for its tokens or other tokens. This process is essentially a cryptocurrency staking.
  • History and analytics. The effectiveness of trading operations largely depends on the quality of the data about the market condition and market analysis tools. These tools can be both trading indicators and tables, graphs, and dashboards, which help to structure data.
  • Yield Farming. This is a revenue model, which implies income generation from the placement of assets on various DeFi platforms for defi-lending. It gained popularity in 2020 after the launch of such projects as Yearn, Sushiswap, and Yam Finance that enable you to earn an income of up to 100% per annum (cryptocurrency deposits can earn you 4-10%).
  • Advanced features. In addition to the must-have features, many DeFi exchanges have additional functionality that improves the user experience. It helps an exchange to differentiate from competitors, foster users’ loyalty, and take an advantageous place in the market. In such a way, if you want your exchange to strengthen its chances for success, think about implementing similar features.
Here are several examples of the opportunities that existing platforms offer:
  • Zerion provides a wide range of tools to customize the user interface. So users can choose a language, theme, color, etc. In its turn, 1inch allows you to customize your defi token portfolio and wallet token lists, which makes it possible to personalize the exchange to your investment portfolio. Think about how you can give your users more freedom to interact with the interface of your DeFi exchange.
  • Zapper invites users to try a demo without having to connect a wallet. In such a way, potential users can evaluate the functionality and usability of the platform before starting to fully work with it, i.e. entrust it with their data and money.
  • Saver has a Recipe Creator feature that allows you to combine any number of actions from different DeFi protocols into one transaction. Besides, the platform also has many other automation features that optimize a user’s operations.
Aside from implementing these and other advanced features, consider the availability of your DeFi exchange on mobile devices. According to statistics, most users prefer to interact with applications using a smartphone, the younger the user is, the stronger this desire is. By implementing it, you increase the reach and engagement of users.

DeFi exchange development stages

DeFi is sophisticated software with the highest requirements for code quality and security because it’s created based on open source and uses not only its users’ data but also their money. So if you want to launch your own DeFi exchange , you should entrust this task to a technical partner with extensive experience in the development of similar apps such as Merehead development company.

Our team has been developing blockchain-, fintech- and DeFi projects since 2015 – from smart contracts to decentralized crypto exchanges. You can see our portfolio and find out cooperation conditions via sales@merehead.com, on this phone number +1-206-785-16-88, or via a feedback form.

Project discovery phase

At this step, you and the development company should determine the goals and requirements, which will allow creating a software product that meets the needs and expectations of end-users. To do so, you need to study your target audience, competitors, and market condition, thereafter you’ll need to develop the design requirements and technical specifications as well as develop a detailed plan for the creation of a DeFi exchange.

Development of the design requirements usually implies the creation of:

  • exchange's UX strategy.
  • Potential users’ stories.
  • Users for key groups of the target audience.
  • User flows for all user tasks.
  • Information/navigation architecture of the exchange.
  • Low-accuracy sketches.
When developing technical requirements for the exchange, your team has to strike a happy medium among your business needs, user needs, and technical capabilities of the modern technologies.

The result of all this has to be the following things:

  • Data-flow diagram.
  • Your DeFi exchange’s architecture.
  • Development process planning.
  • Quality assurance principles.

UX/UI design development

DeFi exchanges emerged with the motto of improving user experience by providing a crypto community with a single, simple, and convenient interface for working with different DeFi protocols. So when developing your own project, you need to create an interface that really makes it easier for users to interact with DeFi protocols. So there is no point to lay down functionality that in fact turns out to be complicated and confusing.

This is where you need an experienced UX/UI design team to help you implement features into a convenient and user-friendly interface that your potential users will love. Its development usually includes the following stages:

  • UX wireframing. It’s a greatly simplified schematic image (sketch) of the user interface, where the main screens and design elements are demonstrated, but without details (color scheme, images, buttons, animation, texts) — they’re replaced with conditional blocks, which imply that these details will be present, but don’t show what they will look like.
  • High-accuracy mock-ups. These are a static representation of the interface design in the form, which the end-users will see it in. They don’t contain conditional blocks. All buttons, icons, images, animation, text, and other things are consistent with the release version of the exchange.
  • Prototypes. These are basically interactive mock-ups where all buttons, transitions, and videos are working, but the app features aren’t. Such prototypes are very convenient if it’s necessary for investors or target audience to test the project, which is being developed, to provide feedback.

Smart contracts development

In all DeFi platforms, most of the back-end part is embedded in smart contracts. They’re the ones responsible for the implementation of the main features whether it be the token exchange or crypto-lending. To develop the smart contracts of your exchange, you’ll have to think about their logic and algorithms in advance.

For example, 1inch has a unique algorithm that allows users to exchange tokens at the most favorable rate. This is possible thanks to splitting orders and the selection of the best rates on different DEX platforms. Also, you should think about the monetization of your exchange. Usually, DeFi exchanges earn commissions from users and/or partners.

Front-end development of an exchange

Front-end is also a very important part of the DeFi exchange, as this is the part that users interact with directly. Therefore, whether the users will like your exchange or not depends on it. To create front-end, which they will definitely like, you need experienced developers and a correct tech stack, which will allow implementing all of their ideas.

Here is an example of a tech stack for the creation of a DeFi exchange:

How to Create a DeFi exchange

Product testing

Testing is crucial for the DeFi exchange development as it allows making sure that all features of the created product work as intended. Besides, testing helps to identify system vulnerabilities and remove them before hackers take advantage of them: according to Block Research, in 2020 there were 15 hacks of DeFi platforms amounting to $120 million funds being stolen, which became possible due to errors in smart contracts.

Testing and bug fixes reduce future risks of similar attacks significantly, especially if independent auditors such as CertiK and Slowmist conduct the testing. Besides, in the case of positive assessment, their reports help a DeFi protocol to be more credible.

Cost of the DeFi exchange development

How to Create a DeFi exchange

How to Create a DeFi Exchange? key takeaways:
  1. What is a DeFi exchange?
  2. Why do the end-users of DeFi need exchanges?
  3. Why do decentralized finance providers need exchanges?
  4. DeFi exchange functionality
  5. DeFi exchange development stages
  6. Project discovery phase
  7. UX/UI design development
  8. Smart contracts development
  9. Front-end development of an exchange
  10. Product testing
  11. Cost of the DeFi exchange development
Merehead does professional development of DeFi exchange. If you have questions, contact us for a free consultation.

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