Crypto Is A Multi-Trillion Industry, How Is Exchange Building Evolving?

Bitcoin, Ethereum, DeFi, NFTs, and gaming are dominating crypto and blockchain discourses. On the one hand, the explosion of Bitcoin and Ethereum adoption has ushered in a new wave of acceptance and adoption. 

Gone are the days when Bitcoin and Ethereum were intertwined with doubts and fear. Instead, less than 15 years after the first cryptocurrency, Bitcoin, launched, the sphere has been associated with stellar return on investment, outperforming any traditional market.

Cryptocurrency Exchanges in Driving Adoption

Amid the influx, traders and investors have to choose: Which best cryptocurrency exchange do they funnel their hard-earned capital to? 

Cryptocurrency exchanges remain the only convenient choice, the most practical conveyor belt into the burgeoning world of cryptocurrency and blockchain possibility. To better understand crypto trading and investment, it is best to define what a cryptocurrency exchange is.

With this, we also have to understand how a market functions. Typically, a market is made up of participants—buyers and sellers. 

Price discovery is a factor of demand and supply determined by the level of interaction of buyers and sellers. 

In the early days of Bitcoin and cryptocurrency, swapping was peer-to-peer. Buyers and sellers used to manually estimate the worth of each coin relative to USD. Then, the crypto market was informal and, as expected, hadn't grown in sophistication operating as it is presently. It took years before the first cryptocurrency exchange grew, allowing the free flow of capital into the sphere.

Cryptocurrency exchanges have since evolved to mirror the level of progress in the sphere. They are now at the center of the crypto development, allowing funds to flow into the expanding ecosystem freely. 

Cryptocurrency exchanges can be described as gatekeepers, allowing users to participate and, similarly investors, cash out. Depending on the type, these ramps are suitable for both retailers and institutional grade investors and traders.

Types of Cryptocurrency Exchanges

There are two types of cryptocurrency exchanges. Decentralized exchanges or DEXes, as the name suggests, are non-custodial, allowing the swapping of tokens via a non-custodial wallet like MetaMask or Formatic, for example. DEXes are part of DeFi and operate on a peer-to-peer model without a centralized entity. These exchanges also employ a different algorithm for price discovery, primarily using pools and Automated Market Makers (AMMs)--and their variants. In this arrangement, holders within a given community supply funds and are rewarded with the DEX's token.

On the one hand, there are centralized exchanges, or CEXes, allowing the swapping of crypto-to-crypto or crypto-to-fiat, including stablecoins. As a centralized entity, traders forfeit the control of their assets to the exchanges via their custodial wallets. However, centralized exchanges continue to play a critical role in cryptocurrency and blockchain circles, allowing the seamless flow of funds from the traditional to the crypto world. Besides, centralized exchanges have also proven to be more secure over time as more stringent control measures, including the need for regulation, have been implemented, averting hacks and other reputation-damaging exploits. 

Despite the increasing popularity of DeFi, CEXes are preferred by institutional and retail traders because of the ease of funding, the safety of funds--as most are regulated and comply with existing jurisdictional laws. Also, the performance of CEXes isn't tied to the throughput of the base layer, as is the case with some exchanges. As such, they tend to have higher throughput with instant trade execution.

For the critical role of centralized exchanges in driving adoption and allowing the safe trading of digital assets, traders usually take their time researching the best cryptocurrency exchanges. According to CMC, there are over 400 exchanges—DEXes and CEXes—to choose from. Depending on the needs of the trader, each type exists to meet a specific demand. 

Aware that a trader's choice evolves with the increasing sophistication and adoption of cryptocurrency and blockchain, developers are taking time to develop exemplary exchanges using some of the industry's best practices.

Focus on Liquidity and the Trading Engine

At the heart of any cryptocurrency exchange are liquidity and the underpinning technology, trading engine. In layman's terms, liquidity is the ease of buying and selling an asset without adversely affecting its price. At any point in time, an active exchange executes thousands of trades. 

During this time, market participants expect execution to be instant without prices being negatively impacted. An exchange should incentivize market-making, allowing liquidity to grow, which in turn positively impacts the user experience of market participants. 

The work of the trading engine is to ensure that buy and sell orders are efficiently matched and executed regardless of load, without compromising security, and uniformly without order discrimination or prioritization. Additionally, the trading engine should be shielded from manipulation malpractices such as wash trading or insider trading. 

Instead of building an exchange from scratch, HollaEx a white-label crypto exchange where creators, developers, and traders can participate in an open and accessible digital asset marketplace. According to the platform's creators, their solution allows for coin listing and building of new markets, has a baked-in automated trade matching engine and an open-source HollaEx Kit. A user can choose to build and host a cryptocurrency exchange from their own computer or opt into a paid cloud service. Operators can then manage and maintain the exchange on the back end with the Operator Control Panel.

Users can also opt for Binance Cloud by Binance—a leading cryptocurrency exchange. The Binance Cloud white-label B2B2C solution provides an option for partners to launch their cryptocurrency exchanges that mirror the core functionalities of the Binance's exchange. The difference with other options is that the platform prioritizes security, liquidity, and scalability, tapping on Binance's rails. With the core parts needed to operate an exchange handled, the builder can focus on business development, marketing, and client onboarding.

Besides, there is AlphaPoint, a company focusing on providing blockchain technology and infrastructure to institutional players. The platform offers a customizable and scalable cryptocurrency exchange white-label solution comprising exchange technology: an order management system and a matching engine--custody—wallet and risk management--and yield. According to the developing team, their solution can process up to one million transactions every second. The result, therefore, means high throughput, low fees, and ideally, better liquidity. Additionally, AlphaPoint also has a liquidity solution using automated market makers and managed liquidity options.

Conclusion

Experts expect cryptocurrencies to command trillions in market cap in months to come. As of early October 2021, Bitcoin alone commands a market cap of over $1 trillion with predictions that altcoin projects, especially Ethereum, would grow as emerging technology finds adoption. Combined with assets outperforming the rest, more players rush to launch ramps to channel funds from the traditional markets. 

As of early October 2021, there are 421 cryptocurrency exchanges representing a 23 percent rise from June 2020. With rising crypto adoption and the demand for safe trading solutions, the role of white label trading platform providers will continue expanding. While they may not provide customized options, their solutions meet the baseline of what defines a secure, liquid, functional, and cost-effective trading platform giving the owner a competitive advantage while saving time.