People generally think one of the best ways to make money with cryptocurrency is by exchanging or trading them. The fact that the value of the Bitcoin has risen by 10000% since its inception is quite a lucrative proposition for any person seeking to make money.
The cryptocurrency business is mostly about trading exchanges, and they account for about 80 to 90% of the total business volume. The rapid growth in 2017 and the volatility in 2018 allowed many investors to earn massive amounts of money.
It might be an exaggeration to say that cryptocurrency is slowly creeping into the world of mainstream transactions. Countries like Australia have allowed the payment of bills using Bitcoin and Malta has grown up to be one of the best places for doing business in the cryptocurrency industry.
Given this evolution of cryptocurrencies, a great business proposition for an enthusiast would be to Create a Cryptocurrency Exchange.
What is a Cryptocurrency Exchange?
As the name implies, it is a platform where users can trade cryptocurrencies for other cryptocurrencies or fiat currency at a predetermined value that is decided by market dynamics.
Types of Cryptocurrency Exchanges
Not all exchanges are created the same! There are different types of cryptocurrency exchanges available in the market.
Administrator-User Cryptocurrency Exchange:
This type of exchange suits users who do not have much experience in buying or selling cryptocurrencies. It has a simple interface and an easy navigation feature. The exchanges are made instantly between the user and the administrator.
The profit lies in the exchange margins. If the current rate of the Bitcoin is $10,000, you can sell it for $10500 to one user when you have bought it for $9500 from another user. The thousand dollar difference is your profit. Generally, the spread varies between three to five percent of the current market rate.
This type of exchange is quite similar to an administrator-user exchange, but it works directly and completely with the blockchain. The difference is that there is no regulatory body. The transaction occurs directly between the users, and it directly connects buyers and sellers. The profit lies in the exchange fees that are collected for every transaction. Binance and Polonix are good examples of this type of exchange.
Decentralized Cryptocurrency Exchange
Decentralized cryptocurrency exchanges operate entirely within the blockchain. As the name implies, it does not have a centralized authority to govern exchange-activities. There are different types of decentralized exchanges, including on-chain, off-chain, and cross-chain.
Exchanges can either be fully or partially decentralized. It has some functionality implemented on the blockchain. The wallet module and the registration module are generally decentralized. Decentralization gives a higher degree of security because funds are not stored in the system. However, the functionalities offered by the exchange are quite limited.
Currency Exchange With Margin Trading and Leverage
It is a new trend that has been gaining popularity and attraction among some users. Cryptocurrency exchange with margin trading helps you create contracts in monetary terms. This increases profits in proportion to the risk. There are not many players in this field, and the target audience is also small.
There are a few pointers to be taken into consideration before you choose a cryptocurrency exchange.
The Legal Requirements
Incorporating a cryptocurrency exchange is not mandatory, but it does offer an advantage over other companies. It would be a good practice for any exchange to follow the KYC (Know Your Customer) and AML (Anti-Money Laundering) norms. The legal requirements might vary from country to country. Some of the best countries that you can choose to incorporate your cryptocurrency exchange are:
The Manpower Requirements
Gone are the days when the revenue and turnover of the company were proportional to the number of employees. It is not uncommon for companies that have more than a million-dollar turnover to have 10 to a hundred employees. However, when it comes to a cryptocurrency exchange, there are a few key skills that are required. It is to be noted that these skills do not essentially mean manpower.
1) A managing director to oversee all the work and to ensure that the duties of the employees are performed optimally.
2) A marketing manager to ensure that the marketing and PR activities occur in a smooth fashion. It is the marketing that distinguishes a successful project from failure.
3) A director of partnerships who will be entrusted with finding partners and contractors.
4) A support manager who will check the incoming tickets and answer support questions. The initial support of the support manager is something that will help ground your cryptocurrency exchange’s supremacy in being responsive to customers.
5) The technical work can be outsourced to trusted companies to build your cryptocurrency exchange.
It is quite evident that you will not need more than three people to start a successful cryptocurrency exchange.
The Cryptocurrency Exchange Architecture
Functionally, a cryptocurrency exchange is expected to do nothing more than connecting buyers and sellers. The process can be executed using different architectures.
1) Monolith - An all-in-one architecture, housing the wallets, payments, accounts, and administration on the same server. Not suitable for handling high volumes of users.
2) Modular - Containing easily manageable modules for each function, typically hosted on separate servers.
3) Distributed - Has independent modules consisting of different submodules. The database can be housed in multiple servers. The magnitude of performance is proportional to the quality and maintenance efforts.
It is to be noted that any cryptocurrency exchange should be scalable. This can be achieved by increasing server capacity, optimizing scripts, or recoding modules.
The Key Features of a Cryptocurrency Exchange:
Any cryptocurrency exchange needs to have the following features -
A graphic user interface
Private administrative system
There are different advantages and disadvantages to each architecture, and it is important to define your goal before you embark on creating your cryptocurrency exchange. Models typically communicate internally with each other. The most effective API communication with data transfer in today's context is in JSON format.
The back end of the cryptocurrency exchange is one of the most important features. This is the heart of the entire system where the operations and calculations are passed through central scripts. While the other aspects of the exchange can take a backseat, utmost importance has to be given to this feature during the design of the project architecture.
The Graphic User Interface
It has to be admitted that the end-user does not care much about the intricacies of coding that go into creating the core. What matters to them is a breezy and intuitive front end. This user interface is the first thing that meets the eye of the users. The increasing number of smartphone users mandates that the website needs to be compatible with mobile screens. It might not be mandatory to make an application in the beginning but as time goes, it would be a good idea to make applications available for the two major mobile ecosystems - iOS, and Android.
The wallet consists of two parts, the cryptocurrency wallet, and the fiat wallet. It allows blockchain to be connected with deposit and withdrawal functionalities of the currencies that are being traded.
There are different ways to integrate your wallet with the mainstream banking system. There can be direct bank transfers in manual mode, or Visa or MasterCard services can be used in automatic mode. The money gets deposited directly in your bank account.
Liquidity is one of the most important aspects of any exchange, including traditional stock exchanges. The order book is the representative of how popular your stock exchange is. Similarly, the cryptocurrency exchange also needs to exhibit something like an order book to establish liquidity.
You can either choose to go with a liquidity provider or simulate trading activity within the exchange by using bots. Using the first option would increase the fees for your business and might not go well with the customers.
The trade engine forms the core of your exchange. It connects buyers and sellers. The speed and performance of the exchange directly depend on the trade engine. Most of the p2p cryptocurrency platforms use limit and market orders to ensure that the performance does not suffer. Some systems allow you to place stop-limit and stop-loss orders. They are preferred by experienced traders.
Private Administration System
The private administration system is the control center of the exchange. As an owner or an administrator, the person in command should be able to look at all the vital details and perform key activities including user management, transactions, wallet management, and the auxiliary activities like KYC and AML. If need be and based on the user-size of your exchange, you can even delegate roles to other users with limited powers.
Securing Your Cryptocurrency Exchange
For any system that deals with huge volumes of money, security is of paramount importance. Most of the hackers try to incorporate multiple methods to breach the security of the ecosystem. Some of them are:
1) Hacking the administrator panel - the attacker gets full access to the system. However, this can be prevented by using multi-factor authentication. Another method to secure the funds is to incorporate a mix of both cold storage and hot storage wallets.
2) Hacking a specific user - this might not open the exchange as much as it does in hacking an administrator user, but it is a vulnerability nevertheless. Similar to the administrator panel, it would be good for the users to have multi-factor authentication. This is an increasing cause of concern because hackers have been known to target users who have, in some way or the other, shown that they have a lot of money in their crypto wallet.
3) Social engineering - this is one of the simplest and yet the most unavoidable methods to encounter. The system cannot help much if you have, either knowingly or unknowingly, disclose the access credentials of your wallet. The best way to stay safe from these attacks is to understand that even the minutest of information could open the back door to your wallet.
4) Hacking the server - for a hacker, this is one of the most lucrative methods to gain access to huge amounts of money. The best way to avoid instances of such attacks is to invest in a good provider. Providers like Amazon Web Services or Microsoft Azure are known to ensure security by protecting your data against denial-of-service attacks.