How to Create a Digital Asset Exchange? – Ultimate Guide
There is no doubt that crypto exchanges are becoming a more and more important part of the digital landscape. With the rise in popularity of digital assets, such as NFTs, coins, and tokens, the need for an efficient way to exchange these assets is also increasing. Therefore, it’s not surprising that many businesses want to grab their share of the market.
Building a digital asset exchange is not an easy task. There are many things to consider, from the security of your platform to the features you offer your users. In this article, we will walk you through the process of creating a digital asset exchange from start to finish so that you can make an informed decision about whether or not this is the right path for you.
What is a Digital Asset Exchange? How Does It Work?
A digital asset exchange, or cryptocurrency exchange, is a platform where users can buy, sell, or trade tokens and coins. These platforms work similarly to traditional stock exchanges, with buyers and sellers placing orders and waiting for someone to match them. Most exchanges also offer a variety of features, such as wallets, margin trading, and over-the-counter (OTC) trading.
What is the underlying technology behind crypto exchanges?
Crypto exchanges are built on a variety of different technologies, but the primary one is the blockchain.
Blockchain is a distributed database that allows for secure, transparent, and tamper-proof transactions. The blockchain is created by a network of computers that all have a copy of the blockchain database. When a new transaction is made, it is verified by all of the computers in the network before it is added to the blockchain. In this way, the information is accurate and cannot be manipulated.
What types of exchanges are there?
Centralized and decentralized exchanges are two of the most common types of crypto exchanges.
Centralized exchanges (CEXs) are those that are operated by a single company or individual. This type of exchange is more centralized, meaning that it has a higher risk of failure. If the company behind the exchange goes bankrupt or is hacked, users may lose their funds, as has happened with the recent FTX debacle. The two most popular examples of CEXs are Binance and Coinbase.
Decentralized exchanges (DEXs), on the other hand, are operated by a network of users. If one user or node goes offline, the exchange will still be able to function. The most common examples are Uniswap and PancakeSwap.
Choosing the right crypto exchange is crucial; it will allow you to make intelligent decisions later on about software, storing cryptocurrencies, licensing issues, liquidity management, and whether or not to offer support for fiat currencies.
Building an Exchange from Scratch: What to Pay Attention to
When it comes to creating a digital asset exchange, there are two different methods — you can start from scratch or use ready-made technology.
So, which option is right for you? That depends on your needs and budget. If you want a completely custom exchange that meets all your specific requirements, starting from scratch is the way to go. But if you’re looking for a faster and cheaper solution, using ready-made technology may be a better option.
Let’s look at the first option first.
It all starts with understanding your user base and determining who you want to cater to. This part is important as it will help guide what sort of back-end and front-end features you pursue. Are you looking to focus on firms conducting internal or B2B transfers across national borders, experienced traders using cutting-edge algorithmic strategies, or customers just trying to fill up loyalty points or buy their first Bitcoin?
You also need to make sure you are compliant with all the regulatory requirements of the jurisdiction where you plan to base your business. Additionally, the tax environment in the country you choose will impact how much you need to pay in taxes on your cryptocurrency transactions. Also, consider the infrastructure and support services available in different jurisdictions before making your decision.
Some countries don’t have any laws regulating online exchanges, so you can operate without documentation and stay within the law. However, if you make your business legal from the beginning, you’ll reduce future risks associated with registering your digital asset exchange in locations that aren’t very friendly to businesses.
Having dependable technology for your exchange is a must. This is what the architecture of the exchange should look like:
Front-end — The software interface that traders use to place orders and manage their accounts.
Any exchange relies heavily on its user interface, as it allows users to register, view orders and transactions, obtain statistics and balances, and perform other functions. Whether it’s simple or complex — with indicators, trading tools, signals, etc. — what matters is that it’s comfortable and adaptable to any device. So when you’re designing your exchange service, make sure to put much thought into the UI/UX design.
Back-end — Includes all operation-related components, such as:
- Matching engine — for matching orders on an exchange;
- Crypto wallet — for keeping users’ funds;
- Risk management system — for preventing risk limits from being breached at both account and system levels;
- Admin panel — for tracking your exchange’s current state (trade volumes, withdrawals, commissions), traders, wallets, and transactions;
- Integrations — for integrating with payment gateways, wallets, and third-party services.
The payment processor will let users deposit, withdraw, and trade their cryptocurrency funds. It is important to research different payment processors before selecting one to use. Consider factors such as performance, transaction speed, security, and availability when making your decision. You should also investigate how many businesses are currently using the processor and check out market prices and feedback before signing up.
You need to make sure that your back-end systems are secure. This includes implementing strong authentication measures, such as two-factor authentication (2FA), and using firewalls and intrusion detection systems to protect your digital asset exchange from attack.
You also need to make sure that your customers’ funds are safe. This can be done by implementing a cold storage solution, which stores cryptocurrencies offline, away from potential hackers.
You also need to make sure that your exchange is compliant with Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations. This means implementing systems and processes to verify the identities of your customers and track their transactions.
Ensure that your website is a safe space for all the money-related transactions and ICOs you will be hosting. In recent years, privacy has become increasingly important, so you must apply a high level of security to your client’s personal information.
It is important to find a liquidity provider in order to ensure that your digital asset exchange has competitive liquidity. A liquidity provider is a company that provides the necessary order flow to keep your exchange’s order book healthy. This means that when someone wants to buy or sell an asset on your exchange, they will be able to find a counterparty almost immediately.
Before selecting a liquidity provider, be sure to do your research. Make sure to ask about their order flow and their commissions. Additionally, it is important to make sure that the provider is reputable and compliant with all regulations in order to avoid any potential issues down the line.
Operating an online trading platform is a lot of work, and you’re going to want to hire more employees for your team to provide customer support. It’s important that these support services are easily accessible to users, meaning the employees should be quick in their responses and helpful with any questions or concerns.
Your exchange needs marketing in order to succeed. Marketing is the process of creating awareness for your exchange and driving traffic to your website.
There are some ways to get your exchange noticed:
1. Create a website and social media accounts
2. Develop a marketing strategy
3. Market your exchange on online forums and websites
4. Advertise your exchange on TV and radio
5. Use paid advertising to promote your exchange
6. Sponsor events related to cryptocurrencies or the blockchain industry
7. Get involved with the crypto community
It is important to continuously update your marketing strategy as your exchange grows and changes. This will ensure that you are reaching the right audience and attracting new users.
Building an Exchange with a Ready-Made Solution
If you want to launch an exchange but don’t want to go through the hassle of building it from scratch, you can use a white label solution.
A white label platform is an existing technology infrastructure that you can rebrand with your own identity. By customizing the user interface and features to match your specific needs, you can enjoy reduced upfront costs and nominal ongoing maintenance fees. Moreover, a white label platform allows you to enter the market faster than if you were to build your own technological solution from scratch. However, there may be some limitations on how much you can customize the platform, and you may need to adhere to the development roadmap of the white label provider.
When choosing a white label provider, it is important to do your research. Make sure to ask about their platform and how much customization is possible. Additionally, be sure to check that the provider is compliant with all regulations.
The cryptocurrency market is constantly changing, with new spot exchanges being created all the time. As of November 2022, there are 524 spot exchanges in the market, according to CoinMarketCap data. In order to succeed in this competitive field, it is important to have a well-thought-out business plan and to choose the right technology solution for your exchange. Take the time to develop a strong foundation for your business before launching it.