How to Build a Cryptocurrency Exchange Platform
Table of content
So we have currency exchange offices offline, right? They get some fee for every exchange made, and it’s their bread. We have online currency exchange offices for fiat currencies that work on the same basis. There are special DeFi lending/borrowing platforms that revolutionize the world today, and there are cryptocurrency exchange platforms that we will discuss today.
The most successful cryptocurrency exchange called Coinbase has raised its net income growth by 5,000% in the past year. Impressive, right? The truth is the extreme speed of currency exchange, significantly lower fees, and the possibility to exchange a USD for a token, or a BTC for a painting, make exchange platforms the top marketplaces in the world of currency as of 2021. We won’t talk much about how the cryptocurrency exchange platform works, as you have a general idea already. Instead, we’d like to focus on launching one and sharing our cryptocurrency exchange development tips from the top experts in the field.
Before you launch your own crypto exchange
Before you start your cryptocurrency exchange, it is essential to have an idea of what exactly you will be developing. So first things first, let’s review the top types of possible exchanges.
Types of cryptocurrency platforms
Types vary not only in terms of liquidity management or their storage features but also in accepted currencies. Ensure that you glance through these basics to begin building the platform you and the market need.
Centralized exchanges (CEX) have a central operator that is accountable for updates, security, and all exchange functionality. It is the most popular option as it gets traders fast assistance in currency exchange, yet, it is vulnerable to attacks due to the centralized nature and storage of users’ assets/money in company wallets.
- Bandwidth of 1 mln operations/second
- A multitude of tools for simpler exchange
- High market liquidity
- In case of attacks, the centralized system is responsible for refunds
- Weak security due to centralized control
- You need wallets for storing money for exchange
Examples: Binance, Coinbase, LocalBitcoins
Decentralized exchanges (DEX) act as guarantors of exchanges between the seller and the buyer. Owing to the extensive application of smart contracts, DEX is significantly safer than CEX and has a close-to-no commission. This version of exchanges is getting more popular, so we decided to describe it in more detail. Read more about decentralized exchanges in our overview.
- High security as the system is controlled by decentralized nodes
- No responsibility for users’ money – it is stored in their own wallets
- No need for additional anti-breach and user verification service
- No liquidity – the transaction doesn’t exist until there is a suitable offer
- Exchange admins take responsibility for fraudulent operations (if one of the parties request a chargeback)
- No control over exchange rates and low commission
Examples: dYdX1, Uniswap, io
Peer-to-peer exchanges (P2P) act as a pinboard where users leave their offers/requests for buying and selling currency. The exchange does not participate in the process but provides a place for meetings. The difference from DEX here is that P2P does not control the transactions as they may happen offline and outside of the exchange.
- No responsibility for any fraud and theft
- All kinds of assets and currencies can be exchanged
- Global coverage (even in countries with strict laws on the crypto world)
- Exchange does not collect a commission
- Low speed of transactions closing as users need to wait for the right offer to appear
- Low liquidity
Examples: Paxful, HODL HODL, Remitano
Instant exchangers act as brokers for exchanges and hence guarantee instant transaction completion. To ensure immediate service, they are connected to hundreds of other exchanges, banks, and other financial entities like neobanks.
- High transactional speed
- High commission for instant service
- Exchange of a multitude of assets is possible
- Centralized nature causes lower security levels
- Fraudulent offers get vetted and don’t participate
- No advanced trading options
Examples: ChangeNOW, Godex, Changelly
Besides these four types, you can also find hybrid exchanges that embrace the pros of several exchange types in one. And keep in mind that there are also online and offline exchanges. The above-mentioned types all operate online and require a connection to complete transactions. Offline exchanges are not very popular nowadays, but they allow submitting an exchange request online to withdraw the funds at some physical outlet later on.
Before you begin to build your own cryptocurrency exchange, there are things you need to think of and plan beforehand. A set of exchange features is one of those elements. We divided them into three categories. Quality features impact the level of service you will provide to the users. The must-have features are mostly related to the functionality and comfort of use you will be delivering. The nice-to-haves are the features that can differentiate you in the market and help gain greater trust and interest.
Quality: security, liquidity, compliance
You need to protect your own money, your users’ money, and your exchange system from hackers and DDOS attacks coming from all fronts. In the cons of exchange types, you might have spotted that security is one of the most vulnerable spots here. So to keep everything in order, here is what you need:
- Protection against DoS, DDoS, SSRF, CSFR.
- Sign-up protection via users verification.
- Two-factor HTTPS authentication for the sign-in step.
- Data encryption to ensure that even stolen data cannot be used.
- Protection against malicious SQL injections.
Note: Generally, tip #2 is advisable even if you build a P2P exchange. However, given that cryptocurrency is proud to work on anonymous blockchains, you might consider leaving this step out.
Liquidity stands for the number of buy/sell orders you can provide to the users at a reasonable price. In order to make your own crypto exchange that is successful and profitable, your liquidity needs to be high. To get and keep it high, you can involve third-party liquidity providers (to use their services for your exchange) or contact the operator directly, avoiding the intermediary chain. For DEX communities, you can also apply rules (every user needs to deposit X to use the service, or for keeping Y on the exchange, a user gets a reward). Such liquidity mining is an option but might take time to earn.
Regulations in the crypto world are still weak, yet they are evolving fast around the globe. If you are working with cryptocurrencies, then, for the time being, you can sleep peacefully and forget about legal regulations. But if you plan to cooperate with physical banks or local physical currencies, then learn the laws well to get your exchange legal from day one.
Some European countries, for instance, will require specific rules to be present on an exchange to combat terrorist financing and money laundering. This means that you will need to comply with:
- Know Your Customer rules (each user has to go through personal identification)
- Know Your Transaction (exchange has to check the source of each transaction and block suspicious ones)
- Anti-Money Laundering rules (according to US law, exchanges have to develop Suspicious Activity Reports and send them to the authorities).
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We touched upon this point in the ‘security’ section above. Users might be reluctant to share their ID data with an online exchange, yet, this might be the only way to prevent unauthorized access and data theft from your exchange. Make sure to set up two-factor authentication and anti-bot verification at sign-up and log-in procedures. And keep in mind that you have to clearly state where users’ data will be stored and for which purposes it is collected; it will increase users’ trust.
This is the heart of every exchange platform. The trading engine is responsible for the speed of transitions and provision of real-time trading data, so you understand that it is crucial to develop a good one. Engine creation is one of the most challenging parts when you develop a cryptocurrency exchange. So unless you are an expert in blockchain development, we strongly advise using blockchain consulting services to discuss the details and plan your engine efficiently.
When you start your cryptocurrency exchange, you need to understand that not all traders are experts in cryptocurrency and the world of blockchain. Many of them will be completely green participants trying to earn a couple of extra dollars. This is why intuitive and efficient UI design is a must-have feature for every exchange. The more user-friendly platform you develop, the greater loyalty you can achieve.
A wallet is needed to store users’ funds and exchange funds (for DEX). Wallets are frequently one of the targets for hacker attacks; this is why we strongly advise going with the two-wallet exchange. The first one is ‘hot wallet’ – the one your users are utilizing to make exchanges; it works while online. The second one is ‘cold wallet’ – it runs offline and keeps users’ money intact even in case of an attack.
It needs to be a dashboard with easy access to the statistics in graphs and tables, trading history, orders book, balances, etc. Admin panel needs to facilitate orders creation and cancellation, market monitoring, funds withdrawals, and contact to support. It could have been a part of the UI point above, yet Admin is a separate essential role that deserves an emphasis.
Many would put the features like order book or trading history into the ‘must-haves’ category, so we’d like to elaborate a bit more here. Both features definitely help traders monitor and manage their activity on the exchange. However, we stress the ‘nice-to-haveness’ here because k users will still be able to use your exchange without transaction history or order book. It will be less intuitive and friendly, but it will work. So if you start your exchange as a DeFi development to advance your business with a minimal budget, then you can avoid these features at the MVP stage and add them after platform vetting.
The same rule applies to the analytical tools for traders, such as Relative Strength Index (RSI) to monitor trend strength or Moving Average (MA) to control average price data over a selected period. Push notifications and alerts can also do a whale of good to traders to stay up-to-date with every minor market change or promotion/special offer beginning.
The most important idea that you need to remember from this cryptocurrency exchange development guide is that exchange platforms should be developed and launched only through custom code. Ready-made code ages fast and hence makes your platform even more vulnerable to attacks. We strongly recommend lowering the risk of oversight by working with expert developers (learn more about hiring an expert blockchain developer here).
How to create a cryptocurrency exchange platform
So once you have a team on board, these are the steps to make your own crypto exchange.
1. Research and plan. First, you research the market, then decide on the exchange platform. Know your market and know your users’ demand before you even get into exchange development. The more you learn at this first step, the easier planning and development would go in general.
2. Create a draft. Draw wireframes and platform logic, consider the upcoming platform functionality and work with designers to plan the draft style.
3. Build a prototype. Based on the draft and paper-based ideas, develop the minimum essential features of your platform. At this stage, you can even run tests with potential clients to collect feedback and improve the core functionalities:
a. Back-end development. Build crypto exchange architecture and implement draft logic. Remember to develop a platform with scaling in mind.
b. UX/UI design. Develop efficient and user-friendly interface design based on the initial draft and updated feedback.
c. Front-end development. After designers planned your platform UI, it is time to build it in reality.
d. Developing security. Once the platform is ready from the front and the back, it’s time to secure it with authentication and user-verification features. And don’t forget to encrypt your DB at this stage.
4. Test and improve. Now your basic version of the exchange is ready for testing. Do the internal as well as limited end-user testing to see what needs improvement and where. After the collected feedback, correct the reported issues and list the currency. You already know what currencies you will be working with, so get your dev team a list, and they will add the necessary coins to the platform.
5. Launch the exchange. Now just deploy your exchange platform and let end-users interact with it. Ensure to stay on top of any issues they might experience and try to make frequent platform releases (every couple of weeks) in the first several months after the launch. It will help you get users happy, collect more feedback, and grow your participation list.
Business considerations of cryptocurrency exchange development
You will have plenty of decisions to make before the launch of your own crypto exchange. But we’d like to give you a couple of tips to facilitate at least some of them.
- At the planning stage, you need to get yourself a reliable bank partner in the country of operation. Choose a brand with a solid online presence, one that sees the world through your paradigm and is ready to offer good partner fees for currency exchange. Such cooperation can also increase your value in the investors’ eyes if needed.
- While legislation for cryptocurrency is still in its infancy, it grows rapidly. To keep up with the new laws, regulations, and trends, you need to constantly read dozens of documents besides thinking of how cryptocurrency exchange works and how to make it better. So our tip is to hire a lawyer or a consultant who would take the legal load off your shoulders.
- Last but not least, from the very beginning, think about the mobile presence for your exchange. The tendency below shows a steady growth of mobile users, and the increasing power of mobile devices also promotes users’ preference for phones and tablets. We recommend getting a mobile app for your platform from the beginning.
Don`t forget that for exchange-based wallets, you will initially need some money to open the exchange. As a rule, it is $20,000-$30,000 in the beginning.
Tip: You can lower the cost of some stages significantly by using outsourced teams and white-label solutions (learn more about ‘white-label solutions’ in our article on white-label for neobanks).
The final word
Today is the early rise of crypto exchanges, just like it is the rise of cryptocurrency. Markets and countries switch and implement crypto payments on a state level, so the demand for cryptocurrency exchange platforms is expected to rise in 2022.
Whichever type of exchange you select, we believe that the tips and tricks in this article have answered the question ‘how to create a cryptocurrency exchange platform’ and how to make it an efficient enterprise. But if you have any doubts/questions or you are looking for a reliable partner to build your own cryptocurrency exchange, give us a sign: ask our expert below.