From paper to paperless, the emergence of cryptocurrencies has completely transformed the way people look at money, and transact them in this technologically advancing era. As more people recognize, the craze for cryptocurrencies is growing further with each day. As the craze increases, thousands of cryptocurrencies are being introduced in the market chronically. What is the purpose of these thousands of cryptocurrencies popping up if you can’t trade them? This is what drives potential investors towards cryptocurrency exchange development. The cryptocurrency exchange market volume is drastically expanding with each day and there is always a need for more exchanges.
In this highly competitive scenario, if you want to create your own exchange, and make it sustainable and distinguishable, it is essential that you know all about crypto exchanges and its functioning. This blog is for helping you easily understand the key basics of a crypto exchange. Let’s begin from the concept of what a cryptocurrency exchange is, and what it does.
What is a cryptocurrency exchange?
A cryptocurrency exchange is a medium or an online platform that allows investors to exchange their cryptocurrencies for other cryptocurrencies, digital assets, or fiat money. Cryptocurrency exchanges work similarly to a traditional exchange. But the difference is that in a traditional exchange the trades are carried out only between securities. It doesn’t interfere with the broker or dealer’s role and doesn’t touch custody. But in a cryptocurrency exchange, transactions are carried on a distributed blockchain network, without involving a central authority, and the user funds are stored in the crypto wallet. However, this depends upon the type of crypto exchange. Another difference is that the crypto exchange regulations are considered undefined in some parts of the world yet compared to traditional exchanges.
When you talk about the type of cryptocurrency exchanges, there are two major forms i.e Centralized and Decentralized exchanges. Let’s take a brief look at them for your understanding.
Centralized exchanges
Centralized exchanges are the most popular and commonly used cryptocurrency exchange among investors. This model is the most similar one to the above mentioned traditional model. A centralized exchange facilitates transactions only after approval from a central authority. The activities of the exchange and the user funds are controlled by a central authority, and the exchange sets a limit for the transfer of funds.
Decentralized exchanges
A decentralized exchange works contrarily to a centralized exchange, without involving any central authority. Decentralized exchanges work depending on a smart contract-based escrow system, and facilitates direct peer-to-peer transactions between the involved parties. The success/ failure of a transaction is entirely on the users in this exchange platform. Though centralized exchanges are the most commonly used exchanges, decentralized exchanges are offering many benefits for users such as easier access, sole ownership, more efficient, speedy transactions, etc which is simulating an increase in decentralized exchange software development in the market.
Although centralized and decentralized exchanges have their own characteristics, the functioning of these exchanges, and how a transaction is facilitated is similar. Let’s find out how it works.
How does a crypto exchange work, and how a transaction takes place?
- Firstly, the users have to create an account and register with the exchange.
- The exchange verifies their KYC details and confirms the registration.
- Once the registration is approved, the users have to generate funds for their account, in order to process transactions.
- Then, the users have to place an order request mentioning the order type( buy/sell), price, and other essential information regarding the transaction.
- The order book collects and saves all the requests, then matches the buyers and sellers according to their set prices.
- Once the order is matched, the buyer has to make the payment.
- The central authority or the smart contracts based escrow holds the order until the seller confirms payment.
- Once the seller confirms receiving the payment, the order is released and transferred to the buyer’s crypto wallet.
This is how a transaction takes place in a cryptocurrency exchange. Crypto exchanges are underpinned by the blockchain that records, secures, and verifies every transaction happening on the exchange and the user data, and the transactions are encrypted with strong cryptography.
Key components of a cryptocurrency exchange that you need to reckon before getting into development
Before commencing your cryptocurrency exchange development, there are several factors that you need to give keen importance to, for enabling high-performance and hassle-free operations for your exchange. Let’s take a look at the primary ones.
- Proper registration of the exchange and licensing according to the geographical jurisdiction
- Complying with other legal frameworks and Adhering to KYC( Know Your Customer /AML ( Anti-Money Laundering) norms.
- Integrating graphical, user-friendly interface for enhanced user experience
- Powerful Matching Engine with a capacity to handle multiple transactions at a time, with zero latency.
- Secure hot and cold crypto wallets enabled with multi-signatures
- Advanced blockchain technology and smart contracts
- Robust admin panel
- Deep Liquidity integration
- Multi-layer security protection
- Extended support for web, mobile applications, and any other operating systems.
Future Potential for cryptocurrency exchanges
Cryptocurrencies and cryptocurrency exchange platforms are not far off from global mainstream adoption. As discussed earlier, the volume of cryptocurrencies and crypto exchanges are growing with each day, and many countries have started revising their regulations and are accepting crypto and crypto exchange businesses. There are boundless possibilities in this sector to multiply your profit chances, and the future is bright and promising.
To become a part of this revolutionary sector, and earn million-dollar profits revenues, choose an experienced, well-acclaimed company and obtain mission-driven cryptocurrency exchange development services.
