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Understanding The Inner Workings of a Cryptocurrency Exchange

Cryptocurrency exchanges have presented themselves as viable alternatives for making a profit from the crypto space. The success of cryptocurrency exchanges as a business can be attributed to two significant factors.

The first one is that cryptocurrency is exceptionally volatile. Let us take even the most prominent crypto coin, the bitcoin, for example. It was valued at close to $20,000 in December 2017, and it dropped down to $3000 in December 2018. With these extreme levels of value fluctuation, it might not be easy to use cryptocurrency as a replacement for cash, at least for now. Therefore, the only way to turn this disadvantage to advantage is to introduce cryptocurrency exchanges. Expert traders who understand these patterns of variation can make a profit by buying a crypto asset at a time when its price is about to increase and by selling it at a later date and at a better rate.

The other is that, needless to say, the complexity of the mathematical problem that needs to be solved for mining cryptocurrency has increased considerably. This means that there is a high demand for computational and electrical power. Therefore, mining has been confined to a few high-end systems that might not be available with ordinary people.

 

The basics of a crypto exchange

 As the name implies, a cryptocurrency exchange software is a platform where people can trade cryptocurrency with each other at predetermined market rates defined by dynamics like demand, supply, and acceptance. In most cases, it is a web application, and in some rare cases, it is a mobile app.

A cryptocurrency exchange is extremely dependable and profitable as a business because, just like casinos, a cryptocurrency exchange makes a profit irrespective of the trade or making a profit or loss. It is not a thing of wonder that a lot of crypto entrepreneurs want to start the cryptocurrency exchange business.

There are a lot of ways to go about it. These entrepreneurs can either choose to develop the exchange from scratch by hiring their own team or partnering with a cryptocurrency exchange software development company. Alternatively, they can also consider customizing a white label cryptocurrency exchange. It is bound to save them a lot of time and money.

Irrespective of them going for either solution, it is important to understand a few basics of a cryptocurrency exchange, which we have outlined in the paragraphs below.

 

The basic features

A cryptocurrency exchange should have a few essential components; some of them are tangible and abstract. Some of those features are:

  • The exchange should be uncompromising on performance when it comes to trading.
  • The traders should be able to use any device that is compatible with web access, including but not limited to, desktops, mobile devices, and tablets.
  • The cryptocurrency exchange should be safer and more secure in comparison with other processes of currency or asset trading.
  • The exchange should support multiple languages.
  • The exchange should be lightning fast in supporting up to 1.4 million orders per second.
  • The exchange should be able to support multiple kinds of cryptocurrencies.

At the end of the day, a cryptocurrency exchange is an app, and some of the crucial features of any of the applications need to be in place.

 

The features of the interface

Needless to say, a cryptocurrency exchange should support a flawless, intuitive, and interactive user interface. It should be remembered that people who use cryptocurrency exchanges are not technology experts but simple people with a penchant for understanding trade fluctuations.

The cryptocurrency exchange should feature an easy sign-up and sign-in process. Just because it should be easy doesn’t mean that it should compromise on security. High security ensures that unauthorized logins, hacks, and other manipulations and tamperings are effectively prevented. Most cryptocurrency exchange platforms provide two-factor authentication. Some of them have gone ahead even to put in a 3-D authentication where the login is verified by both mobile OTP and email.

From the exchange’s perspective, some security measures like storing and hosting different components in different servers and facilitating a proper channel of communication between them ensure better security. Even if one of the silos is compromised, the others still keep up the functioning and protect the information that they have.

In the interest of security, most exchanges have introduced a KYC process. This ensures that all the customers’ details are known to the exchange, including but not limited to the identity and the financial background. This ensures that no malicious people join the exchange, leading to the prevention of scams. Parallel to this, the anti-money laundering process, commonly abbreviated AML, is also done. AML ensures transparency of traits and helps prevent money laundering. Commonly, but KYC and AML are performed parallel to each other.

One of the most essential features of a cryptocurrency exchange is a cryptocurrency wallet to be used for deposits and withdrawals. A wallet is a daemon that serves to store crypto assets. There are hot wallets that are attached to the network and cold wallets that stay outside the network. The withdrawal and deposit limit is determined by the AML validation.

Every trader is provided with a transaction dashboard. The transaction dashboard stores the history of all the transactions performed by the user, and it speaks about the accountability of records of the cryptocurrency exchange. To assist in trading, most cryptocurrency exchanges provide users with a trade analytics engine. It shows the charts of all the trades that have been done and the profit margins. It is only using this graph that most traders extrapolate the earnings of the future.

Overseeing all the functions of a cryptocurrency exchange is assigned to an administrator. The administrator is provided with a specialized panel that helps monitor the vital parameters of the exchange. In most cases, the administrator is the CEO or the director of operations. The administrator not only gets the right to view all the transactions of all the traders but also to enable or disable users either on the basis of suspicion or because of malicious behavior.

One of the core aspects of a cryptocurrency exchange is the trading engine. The trading engine is the heart and soul of the crypto exchange and is responsible for matching the buying and selling orders. The quality of a cryptocurrency exchange is directly proportional to the quality of the training engine.

Another important feature of any cryptocurrency exchange is liquidity. Liquidity is defined as the ease with which you can convert an exit into cash. In the context of a crypto exchange, it is the volume of transactions. For a new exchange, it might be difficult to showcase liquidity. The exchanges can either simulate internal trading with bot accounts or connect their exchange to another exchange with high liquidity to factor their values into the new exchange.

In addition to these factors, there are legal aspects to take care of. Countries and jurisdictions have displayed a wide variety of emotions and responses towards cryptocurrency and cryptocurrency exchanges. The regulations governing the cryptocurrency, much like its values, are quite volatile. Therefore, it is important for you to understand the legal dimension before you step into the business of a crypto exchange.

It is also to be remembered that cryptocurrency exchanges are capital intensive. It is highly recommended that you ensure the availability of funds before you embark on building the crypto exchange business. Yes, it is bound to get profit, but it needs some time before it can acquire its volume of users. There have been a lot of instances of cryptocurrency exchanges ceasing operations because of the unavailability of funds.

 

Conclusion

Cryptocurrency exchanges are, without question, one of the most profitable business models brought about by cryptocurrency and blockchain technology. As we have discussed earlier, there are always a lot of ways to create your exchange, but white label solutions are the best for the sake of practicality. It saves you a lot in terms of both time and money, enabling you to kickstart your business in the shortest possible time.

All you need to do is get in touch with a white label exchange solutions provider. They will take care to understand your business requirement and also create and customize your exchange according to your needs.

About AnnaLisbeth

I’m a blockchain analyst and also an avid learner of blockchain technology and its advancements. I assist budding blockchain entrepreneurs with solutions that fit their business models and provide them with strategies to enhance their blockchain business!

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