How to build a Decentralized Cryptocurrency Exchange (DEX)
How to build a Decentralized Cryptocurrency Exchange (DEX)
Earlier we wrote a lot about the development of centralized cryptocurrency exchanges, which included all the main components like the trading engine, wallets, UI wrapper, and admin system. In this article, we will make a detailed overview of how to make a decentralized crypto exchange and what is needed for this.
All of you had already heard the story of blockchain evolving, and that its predecessor is associated with the launch of bitcoin in 2008, which is fundamentally a lie. Nevertheless, this is a topic of another educational topic and probably we cover it later. Let us start with the main thing - how to make decentralized cryptocurrency exchange and what is needed to do it.
I have been involved in the cryptocurrency industry for a while. Living and feeling the crypto community, as a community of close friends, we often share success and setback of each other. When someone loses money on one exchange, or notice that some ICO is a scam - he hurries to tell it to the other member. This is how the trust is born and relationships created.
Cryptocurrency exchanges boom occurred in the past year. Especially when major players gained worldwide fame and popularity, such as the Korean Coinrail. The more daily trading, the higher you rise and yummier you become for hackers and other intruders of social engineering. Contrary to their ignorance, or negligence, bad people can access and this will affect your finances. Even worse, if there is a radically different situation - the exchange on which you trade hacked and stole coins.
Intel story of vulnerabilities, it becomes clear if there are no holes in the software, hackers look for them in the server part, and further in the hardware, even at the processor level. What then to do and is there a solution?
Decentralized exchanges solve the main and only security issue. The main task is not to store users' funds on the exchange account, and not have access from owners’ side to funds. This means that once the access to funds and coins are only from users, then it does not make sense to hack the system. After all, what is going to be changed eventually, if the exchange is just a bridge between two users - buyers and sellers well known in exchange industry as takers and makers?
Decentralized exchange development means that the system works with blockchain technology. Whether it's Ethereum, Bitshares, 0x protocol or others. At the moment there is a limited list of blockchains frameworks who support decentralized exchange.
Decentralized exchange can be completely decentralized or semi-decentralized. By definition, the information recorded on the blockchain cannot be changed or modified once it's recorded. This means that the blockchain technology, in turn, provides a very simple, from the user perspective, possibilities: recording and reading. Modification or removal is impossible; this is the reason that the system is transparent and trust-less.
As you know, any exchange consists of the following components.
1. Graphical user interface (GUI);
2. Trading and matching engine, the core of any system;
3. Cryptocurrency wallets;
5. Admin system.
Technically, each of these components can be implemented decentralized, but in practice, this does not always make sense. Based on our experience in the decentralized cryptocurrency development, we dare to assert this. And I’m going to explain it further.
Graphical user interface. From an architectural point of view, this shell that envelops the entire system. It can be a web client, mobile client, desktop application, etc. even up to smart TVs, and applications for gadgets.
Trading engine. Half composed of the order book and the second part is the trading bot engine. Technically, the all features of blockchain technology can be implemented and sued here. But in practice it is unnecessary. Here is why. We all know that on the P2P exchange, there are at least 2 types of orders - at the specified and market price (limit and market orders). Recording them in the blockchain is possible, but there is no modification option.
Now imagine an exchange on which you cannot delete your previous order or cancel it. Seeing that the exchange rate is changing, at the same time being paralyzed by an inability to do something. Is it worth having such a function? The answer is ambiguous. Some existing exchanges have it, others do not. Considering UX, this is an unreasonable decision to use it. Apparently, this is the cornerstone of why decentralized exchanges lose many times their centralized competitors.
Cryptocurrency wallets. If they are centralized, they still lucrative to hackers. Definitely, the component worth being decentralized to protect the environment.
Liquidity. Due to the peculiarities of decentralized cryptocurrency wallets, it is not possible to use a third-party service or a liquidity pool. Solutions like market makers or the sharing liquidity with others does not work here anymore. There are no funds to b transferred of used as they adhered to users’ accounts and only users in charge of them. Is there any liquidity solution or is this an unsolvable problem?
Unfortunately, in the decentralized exchange systems concept, liquidity is the weakest point, and it can not be solved in a simple way. However, after stepping further and rethinking the architecture of the common system, we can correct this by creating a hybrid cryptocurrency exchange. The separate component is responsible for liquidity.
Admin system. In a broad concept, it is an urgent need and preferable to have. The list of registered users, history of trades and transactions, the financial system given the turnover of the token is always necessary for owners who expect a decent return on investment.
2017 and 2018 were turning and had a very serious impact on the cryptocurrency market. Many Governments both gave green light to cryptocurrencies and taxed them (Australia, USA) or completely banned them (China's example). The crypto industry and Bitcoin were launched as an alternative to the current bureaucratized world where all the power is in bankers’ hands.
Decentralized exchanges offer anonymity. There is no need to introduce or repel users using KYC, and owners can forget for AML and any other reporting. Absolute anonymity from users’ side, and even from owners. You do not have to disclose your identity. Trust, but the transparency of the system. If Government of rest countries took radical pathways, DEX is most likely the only opportunity for trading and exchange.
Ease of scalability is one of the hidden advantages of decentralized systems. You rely on the blockchain for your transactions. Bandwidth depends on what price you set on GAS (in case of Ethereum) so miners execute your request faster. Eventually, if the system is down, it does not mean that all the money is lost and everything stopped. Quite the contrary though.
Adding new tokens becomes as simple as possible. If you plan to launch a decentralized exchange on Ethereum, it means that all ERC tokens will be automatically available even new ones. The same goes for other blockchains. All coins and tokens built using blockchains will be available on your system almost instantaneously.
There are several different options for access to coins. Importing or generating private keys or seed (mnemonic) phrases, Metamask integration using web3.js, an imported binary file or even through the access of your favorite Ledger.
Nowadays, the most popular are Ethereum, and usage of 0x protocol upon Ethereum and Bitshares. By the way, the latter was built using the Graphene framework.
What is remarkable about each of these options? Let us start with the very last one - Bitshares. One of the most multifunctional and least studied systems. It is based not on 1 and not 10 internal coins. They support the possibility of so-called pegged tokens. The cost of which is pegged to the dollar, or the yuan, or bitcoin, and so on. Each of their nodes participates and creates a completely interconnected ecosystem. Not only supporting native tokens but also external ones with pegging feature.
Ethereum. The second by the capitalization of the cryptocurrency. However, all its potential is revealed not in a coin, but in the functionality of a smart contract that allows you to remove intermediaries and automate processes. They built the whole system of DEX platforms.
In the current cryptocurrency market situation when a Big Brother watches us, decentralized anonymous cryptocurrency exchange help to avoid this. Launching and creating your own decentralized exchange from scratch and without experience might seem like an endless torture, especially if you do not have experience in decentralized applications before. Want to learn more about creating a decentralized exchange, or know about development price and time frames? Contact our managers and we are going to provide you a demo and a proposal.
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