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INN4SCIENCE BLOG

INN4SCIENCE BLOG

Blockchain

How To Create A Cryptocurrency Exchange: Step By Step With Our Expertise

how to make a bitcoin exchange

Cryptocurrency exchange is highly unpredictable, inconstant and very risky. Still, it can become really profitable to those who know how it works and how to work with it. But how to start your own crypto exchange? What should you consider before you start?

Let us share our experience and give you some pointers to avoid the most common pitfalls.

What you need to know before you decide to open a bitcoin exchange

Resolve legal issues

In order to gain the confidence of your future clients and financial structures, you need to confer legal status on the exchange. The vital thing is to decide where to incorporate your business. You’ll need to obtain licensing, and this whole process entails loads of paperwork and monetary cost. Many exchanges operate without a license, but it is worth taking into account that this norm is not permanent and it may change any day, so it’s better safe than sorry, and even if you’re able to operate without it this moment, you should think about obtaining a license in the future. It’s not for your customers, who are mostly interested in your reputation and in the quality of the platform you provide; it is much more for banks and government regulators. You have to decide whether the exchange is functioning worldwide or just with a few countries. This has to do with the fact that your exchange has to be in conformity with the laws of each country where it operates. Different states have different perspectives on cryptocurrencies’ development, and government directives may vary considerably, so to ensure that the local government approves cryptocurrency as a legal currency is a must. Most of the governments also demand that all organizations of the financial sphere adhere to the KYC (know your customer) and AML (Anti-Money Laundering) rules in order to resist illegal intentions. This is what companies do to verify the identity of their clients when they start doing business with them. It means to get documents of customers (passports or id-cards) and keep a record of the same, and you’ll need to integrate it in the exchange. Switzerland, Japan Mexico, Canada, Liechtenstein, Singapore, Malta are considered to be the most crypto-friendly countries with reliable jurisdictions.

To sum up, violating of laws and regulations may end up with heavy administrative fines and litigations. At it worth, it can lead even to a criminal matter. That why to ensure that your business doesn’t violate any single law or regulation and to avoid any unforeseen circumstances from the government the best option is to hire an experienced law specialist. He will guide how to open a cryptocurrency exchange business with its strict adherence to international law.

Conclude an agreement with a bank

In order to conduct transactions with traditional, fiat currencies you would need to interact with general financial entities – banks and payment systems. You need to have an account for business transactions to allow your clients to buy and sell bitcoins for money. So the primary purpose is to provide an opportunity for the users to add and withdraw funds as they wish, using a payment processing (preferably rapid) and a payment gateway API. Still, it may be easier said than done since most banks usually hesitate to open accounts for cryptocurrency-linked companies. It depends directly on the regulations in your environment: if it’s a highly regulated, such as in the US or the UK, you stand a good chance of succeeding; if it’s controlled less, you’ll have much more limited banking options. However, there’s no need in this function if you don’t touch fiat.

Build your own cryptocurrency exchange platform

Development of the software itself is the most challenging, time and money-consuming process, and moreover, it’s a vital step in the successful launching of cryptocurrency exchange. It is a complex and complicated issue that must be and will be considered separately in greater detail. However, before the programming, you need to think through the UI and functionality of your future site, its speed as well as implementation of its trading platform and wallet. The crucial factor affecting the reputation of your exchange is its security, so it’s better to find an experienced professional in cyber-security ahead of time.

Provide liquidity management

Liquidity is an essential aspect for the success of any market. Yet it is one of the most significant problems of new cryptocurrency exchanges. Its liquidity position depends on the trades, and without intensive trading activity, no exchange can exist. In order to provide liquidity, your exchange has to be promising enough to attract investors and traders. These problems can be solved in several ways. Firstly, with the help of implementation of an API interface which shares trade volume information between your exchange and another existing bitcoin exchange. Secondly, becoming a part of a big cryptocurrency exchanges network can also improve liquidity position. It links together the liquidity of all the exchanges of this network, therefore, the larger it is, the better the liquidity. Thirdly, some of them can simulate activity by trading between several fake accounts on the exchange. The choice of the most suitable option is up to you.

Work on customer support

Rapid and courteous support team with real profile pictures is one of the sure signs of how reliable the cryptocurrency exchange is. Hire a friendly team to get your clients and to handle their problems when things go wrong because a reputation of a crypto exchange is the key factor of its success.
You also need to think through own features to distinguish yourself from competitors and to find new ways to earn money. You can establish lower fees compared to competitors to attract clients. You can add new coins and allow customers to trade multiple cryptocurrencies so that you could profit from listing fees, but this measure would also lead to the increase of cost of development. You can provide customers with token issuing support, or you can launch your own ICO and tokens in the very beginning – to get off the ground. You can develop enhanced account management. Or you can provide fee-based advisory services for beginners. You can do numerous things based on your own perspectives – there’s no quote-unquote “one-size-fits-all” solution for everyone.

We will gladly help you in choosing your best USP.

Cryptocurrency Exchange Development

Cryptocurrency exchange development

Types of exchange platforms

As stated above, the choice of software and technology is too important and requires an in-depth review. However, before you develop your crypto exchange platform, you have to decide its type, which, in turn, defines the structure of the future product.

There are 2 common types of exchanges platforms:

  • centralized. Such exchanges act as middlemen between buyers and sellers, handle their assets and earn trading fees from transactions made on their platform. Such platforms are easier to use, especially for newbies, have high liquidity, rapid transactions, may have both crypto/crypto and fiat/crypto pairings and account recovery in case of loss of private key is way easier here. But they are less secure since clients of centralized exchange have to feed in their private key to move their digital assets from wallet to exchanges, which is potentially leading to keylogging attacks, and usually non-anonymous since they may require personal data of clients;
  • decentralized. All trades here are peer-to-peer, they are made directly between users through smart contracts, so there’s no single intermediary. Only users can manage assets and private keys. However, this platform has higher entry barriers, and transactions are slower. Thus liquidity, as well as volumes, is much lower here.

Cryptocurrency exchange platforms can also be divided into:

  • trading platforms. They connect buyers and sellers and take a fee from all transactions;
  • direct trading platforms. They offer direct person to person trading without fixed market prices; each seller sets his own rates;
  • brokerage platforms. They offer to buy cryptocurrencies at a set by brokers price.

Cryptocurrency exchange website development

Types of software architecture

In order to build an exchange, it’s necessary to choose the architecture based on its planned transaction volumes scaling. There are three main types:

  • Synchronous (small). These exchanges are very simple, and it’s easy to set them up since a request can be completed in a single transaction, but they are limited in scale and trade volumes;
  • Asynchronous (medium). It is distinguished by more significant amounts in trading volumes. It becomes possible by processing the requests by using separate modules (layers). Each layer operates severally and hinges upon received data and interface. API and cross-level requests compile connections. Every single feature of an exchange runs as a separate layer, which is generally located on a different machine or server. The majority of exchanges are asynchronous;
  • Distributed (large). It is similar to an asynchronous type, but it splits customer requests into fragments called shards. These shards act independently, and based on a cloud scaling such exchange can grow infinitely.

Essential components of your future crypto exchange

Once you decide a type of platform and architecture for your future exchange you need to implement following vital components, which form a foundation of exchanges software:

  • trade engine;
  • user interface (UI);
  • market making;
  • wallet;
  • admin panel.

Trade engine, or trading platform, or order processing engine, is a center of the whole exchange. It puts buy and sell orders together and performs transactions. It must be fast and capable of dealing with the highest number of orders per second.

With the help of UI, you need to:

  • allow your clients to register,
  • sign in and access their accounts,
  • create orders,
  • view the history of transactions,
  • have access to tech support and to a graphical module, which includes dynamic charts and well-designed analytical graphs, market indicators for seasoned traders, etc.

It should be mobile-friendly and support multiple languages.

Market making system allows to provide artificial liquidity with the help of artificial trading accounts and thus creates internal exchange liquidity.

A cryptocurrency wallet is a tool that allows to add, transfer digital currencies and store public and private keys which grant access to them. The new standards in industry require implementation of hot/cold wallet management to achieve a golden mean between security and comfy use. Hot wallets have an active connection to the Internet and allow users to send coins and tokens immediately, but this may have implications for security. Cold wallets are offline wallets, so they can’t be hacked.

Admin panel grants access to admins of exchange to information (such as users’ personal data, transactions details, alerts of changes in assets, etc.) and to specific functions (including altering liquidity, managing cryptocurrencies) according to their access level to monitor trades and provide user management.

How to get the software for your crypto exchange: 3 options

When it comes to the development of the website itself, you have 3 options depending on your amount of the budget and time availability.

The first, the cheapest and the fastest way to develop an exchange is to use an open source script. You can simply download it let’s say from GitHub, deploy it on the server and launch. However, this option is full of pitfalls. The quality of such codes most likely to be inadequate and contain lots of bugs, you won’t find there a secure framework, a code can even be malicious. Thus security will be put at risk, not to mention that there won’t be any unique features and it’ll take time to hire skilled developers and to implement, modify and customize there your own ones. This option is not the best to choose; nevertheless, it is acceptable if you want for instance to get acquainted with how it works in test mode, inaccessible for real clients, to decide what should be created and implemented.

The second option is to prefer a white label exchange software. The core elements of such software have already been formed, tested and fixed from top to bottom, so it enables you to modify and customize it in accordance with your requirements (e.g., multiple languages and currencies, design, individual features, etc.). It is trustful, it saves a lot of your time and money. However, its downside is that there are still much fewer options compared to developing exchange from scratch, it has problems with support, and you’ll need to make regular payments for a license (monthly or annually).

The third way is to gather a team of developers and to make a custom exchange from scratch. Yet it is the most worthwhile if you want to start a brand new exchange. The choice of high-skilled and reliable team, which is well-versed in how blockchain and cryptocurrency technologies work, is of prime importance. Typically, it takes around 5-6 months to establish an exchange from the ground up.

The importance of security

An excellent security system is a vital part of a cryptocurrency exchange development. Hacks are not rare in this sphere. Moreover, they can lead to substantial monetary losses, or even to bankruptcy, as it happened to Korean exchange Youbit in December 2017. The general vulnerabilities of cryptocurrency exchanges are as follows:

  • openness to phishing (e.g., phishing attack against Bitstamp in 2015);
  • lack of reliable protection of hot wallets (it leads to private key attacks, as happened with Bitfinex in 2016 and Parity in 2017);
  • week protection of administrator privileges (attacks against BitThumb, NiceHash, and YouBit in 2017);
  • software vulnerabilities;
  • transactions susceptibility (through the manipulations with signature, as happened with Mt.Gox in 2014).

The vulnerabilities of all the ever hacked cryptocurrency exchanges are listed on the Blockchain Graveyard. In this regard, we can define primary means of protection to prevent breaches of security.

Clients’ personal data security is a matter of the highest priority. Available methods of protection are:

  • using protected frameworks;
  • multi-factor authentication;
  • KYC and AML (mostly suitable for exchanges which allow transactions with fiat currencies; this item suggests
  • requirements of users’ documents);
  • manual confirmation of high volume transactions from admins.

To secure a system from weaknesses compromised admin accounts, it is possible to:

  • define clear lines of responsibilities and privileges of administrators;
  • determine collective access to high volume transactions;
  • run development platform apart from production.

There are following protection methods to secure the system from malware:

  • automatic DDoS defense solutions through an active firewall to detect, lessen and report on DDoS attacks of any scale;
  • encryption of cloud servers;
  • provide only authorized and secured access;
  • notify administrators about questionable activities.

But sometimes even some technical faults can occur. You need to keep following rules to protect the exchange and minimize such risks:

  • all transactions have to be calculated and reversed if they turn out to be invalid;
  • regularly backup all the data;
  • implement sum validations;
  • notify administrators about abnormal activities.

Cryptocurrency exchange application development

The choice of OS

If you decide to create the application for your exchange, you’ll need to choose a suitable mobile application development platform to fit your requirements. It’s always better to create separate apps for each OS (Android and iOS). However, it demands additional costs. So if the budget is limited, the choice of OS can depend on the expected target audience. E.g., if you aim at working with North American, West European clients, you may be more interested in creating an app for the iOS platform. And on the contrary, if you aim at working with clients from Central/Eastern Europe, you may prefer to create an app for Android platform, though in Asia the number of users of Android and iOS devices is approximately equal with a slight difference in favor of iOS devices. However, as you can see from the graph below, Android takes a much bigger part of a worldwide market.

how to create a cryptocurrency exchange

Native or compiled app development?

You also have options in approaches of the creation of your application. You can prefer native (app is written in native language for a specific platform) or compiled (app is compiled to native code) app development. Native app development is the most common. It allows building an app for a particular platform using the tools for this platform. Thus, Android platform apps are coded in Java or Kotlin and use the Android studio for the environment. iOS platform apps are coded in Swift or Objective-C, and its IDE is Xcode. Compiled apps usually built with NativeScript or React Native.

You can use popular SDKs or open source libraries for faster and easier development, including the creation of transactions on the server, implementation of common functionality and synchronizing with the blockchain. The most well-known of them are BitcoinJ SDK, Coinbase, Chain-java. However, crypto exchange apps have a complex server structure, and each case is individual.

What is necessary for MVP development

The principal, vital features you need to include in your application are the following:

  • Authorization;
  • User verification;
  • Wallet;
  • Transactions management;
  • Analysis tools;
  • Internal API;
  • Admin Panel.

Still, this list is non-exhaustive, and making an app not just usable but also reliable and user-friendly is up to you.

Before you launch a fully functional product, either a site or an app, it’s also possible to create a prototype or MVP (minimum viable product). It can help to kill two birds with one stone: to test the product and gain customer validation one the one side and to highlight a product to prospective investors on the other side.

Our Case

We built a high-effective, reliable and secured decentralized web cryptocurrency exchange platform with further app development for our client. It was provided for crypto-to-crypto trading, transactions with fiat currencies are not envisaged. Currently, it allows to trade between the most popular types of cryptocurrencies such as BTC, BTC Cash, ETH and also VPC (Vipcoin.gold).

Inn4Science team provided a full-stack development including following services: business analysis, making a specification, development of architecture, product development itself, using cutting-edge blockchain technologies, along with design, integration with PSP and technical support after the launch. In order to ensure continuing access to the exchange, our plans include the creation of the mobile application.

Choice of a blockchain framework

The most challenging, responsible and controversial issue was a choice of a blockchain framework with open source solutions specifically for cryptocurrency exchanges, which could ensure the required speed of processing transactions. Since this step is crucial for defining the potential capacity of a future system, we examined over five platforms before making out our choice. We were choosing among several platforms, such as Hyperledger and Graphene, Exonum, but once we considered all the possibilities and opportunities, we finally went for EOS. It was precisely this platform which leads to the highest rates of system performance and reliability.

How long did it it take to complete the development?

While planning, we estimate the time needed to solve unforeseen circumstances. It allowed us to forecast the outcome adequately. Thus the project was finished on time. It took us 36 weeks to complete the work.

How much does it cost to develop a cryptocurrency exchange?

Every single project is individual; consequently, even an approximate workload assessment may vary. However, our experience has shown that MVP development takes about 1.5 months, wherein a fully functional product is ready in 9 months. The estimated cost of MVP is 50 000.00$ and of a fully-fledged product is 350 000.00$.

Summary

We’ve outlined the main aspects you need to know before developing a Bitcoin exchange app. Considering to create your own cryptocurrency exchange?We are ready to help. Drop us a line – and let’s talk.

DO YOU HAVE ANY QUESTIONS?

LET'S DISCUSS! BOOK A CONSULTATION WITH OUR SPECIALIST


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