The cryptocurrency market is booming and more and more people are trying to find a suitable place to buy bitcoin and other coins. This has increased the interest among investors not only in cryptocurrencies but also in the crypto business, in crypto exchanges particularly.
However, establishing such a business requires time, understanding the industry, a great team, and a lot of preparations. Here are some basic things you need to consider before launching a crypto exchange.
Determine the Exchange Type
Crypto exchanges can be centralized (CEX), decentralized (DEX), and P2P. Centralized exchanges have significant liquidity and in most cases support both crypto-to-crypto and crypto-to-fiat currency pairs to trade. DEXs are decentralized applications on the blockchain that support only crypto-to-crypto exchange. P2P exchanges allow buyers and sellers to find each other in the list of market participants with their own prices.
Before selecting the type of exchange, it is important to understand the pros and cons of each model and assess the risk/benefit ratio. Centralized exchanges are more common in the crypto industry, so the next steps will be more applicable for CEXs.
Choose the country to do your business and check legal requirements
Whether you want to launch a local or global exchange, you will usually be required to get an appropriate license and approvals from regulators for your company. Laws and conditions differ from country to country, so consult with a law expert regarding a situation in a particular country or create your own legal department.
In most countries, entities that work with financial operations have to adhere to AML/KYC procedures and norms. The main point in this is to prevent money laundering. Therefore, it is worth considering in advance how the verification process on the exchange will take place in order to meet the requirements of the regulator and not be complicated for users. If an exchange is regulated, then users will have more confidence in it and it will be considered more reliable.
Partner with bank and payment providers to add fiat payments
Most major crypto exchanges offer the possibility to deposit and withdraw fiat currencies. Having only crypto-to-crypto pairs on your CEX may be not enough since DEXs’ influence is constantly increasing. So if you decide to add fiat payments, you need to partner with payment providers that process such transactions. Payment gateways can make or break fiat operations and can affect crypto exchange services, so choosing the right provider is vital.
Besides, it is important to choose a trustworthy bank with fast clearance and settlements. It will help provide convenience to your customers thanks to rapid transaction processing.
Build a Platform Architecture
Talking about the tech side of launching a crypto exchange, there are two main ways — creating platform architecture from scratch or using white label solutions. The first option will be longer and most likely more expensive but you will be able to set everything up as you wish. The second option may be good for a startup with limited resources but customization and exchange functionality will be also limited. Regardless of the method, some elements must be polished.
First of all, it’s a trade engine that can be called a core of crypto exchange. It matches buy/sell orders, executes transactions, and calculates balances. Crypto exchange cannot function without a trade engine. And if something is wrong with the trade engine or correctness of the operations, then it will greatly affect the crypto exchange and its functions.
The second component is the wallet. Without a wallet, there will be no deposits and withdrawals in cryptocurrency. Most crypto exchanges use a combination of hot and cold wallets for storing users’ funds and exchange operations. Such a hybrid system provides a perfect balance between convenience and security. Hot wallets should always have a positive balance for providing withdrawals for users. But most users’ funds should be stored in cold storage for better security.
Also, you should take care of the user interface (UI) since it plays a significant role in platform usability and shows how traders see your exchange. If UI is not intuitive and user-friendly, it may scare away potential customers. The basic crypto exchange functions like deposit/withdrawal, trading, registration, verification, and main services have to be easy to access and visible for users.
Another important element is the admin panel that allows the operator to manage the exchange, set up new options, and change conditions in existing ones. The admin panel should be divided into sections to give different departments access to specified functions that help assign responsibilities.
Create Liquidity on the Platform
It is one of the main issues that new exchanges face. If there is an empty order book, then it will be difficult to attract new customers. If there are no active traders, then new orders will not appear. Sounds like a vicious circle, right?
There are several options on how to resolve this problem. Some of them are:
- Implementing API that connects your exchange with others.
- Finding liquidity providers and market makers that can create liquidity directly to your exchange.
Each solution has its specifics and can be useful depending on exchange features. For example, market makers may come to your exchange if you support some rare markets, fiat currencies, or features like offering a place where Canadians can buy bitcoin with credit card. Some exchanges even provide unique market conditions for liquidity providers and market makers.
Take care of security and offering Customer Support service
Even if you already have high liquidity and a lot of cool features on your exchange, security issues may significantly damage the reputation and reliability of crypto exchange. History of the crypto industry remembers when even top exchange for its time was forced to go offline after the security breach. To keep users’ funds and identity safe, exchanges should use top-notch security tools and encrypt customers’ data that are used for verification and transactions.
Last but not least is customer support and staff that will maintain the crypto exchange operations. Client service staff is needed for general guidance, answering user complaints, and checking AML/KYC requests. You also need finance specialists for processing fiat transactions and accounting. Marketing will help attract new customers/partners and improve the engagement of the current audience. Thus, if you want to succeed in the crypto exchanging business, you need to have a great team that can implement the necessary ideas and features.