All You Need to Know to Get Started on Building a Crypto Exchange

All You Need to Know to Get Started on Building a Crypto Exchange

Grab a piece of the crypto pie by launching your own crypto exchange.

2021 has been a great year for cryptocurrencies. In fact, the crypto market is expected to grow from US$1.6 billion to US$2.2 billion by 2026. The tremendous growth potential of crypto has inspired many to dive into the business. The typical way to go about getting into the crypto business would be to buy some of it. However, if you are someone with an entrepreneurial spirit and want to make cash on crypto, starting your own crypto exchange might be the way to go. Here’s everything you need to know!

Types of crypto exchanges

Before jumping into creating your own crypto exchange, you need to have a basic understanding of the types of existing exchanges. 

Centralized crypto exchange

A centralized crypto exchange (CEX) is like any other stock exchange. Here, buyers and sellers interact with each other, and the exchange acts as the middle man. Since they are operated and controlled by a middle man, they offer reliability to crypto transactions. Almost 99% of all crypto transactions go through CEXs. They provide fast transaction speeds and high liquidity. They hold funds for traders in their own specific wallets (also known as hot wallets) which are readily accessible, thereby making them easier to hack. Some well-known CEXs are Coinbase, Gemini and Robinhood. 

Decentralized crypto exchange

Unlike centralized crypto exchanges, a decentralized exchange (DEX) has no middle man. DEXs allow for peer-to-peer transactions, providing direct interactions between buyers and sellers with automated smart contracts. This means that the exchange has no involvement in the transaction, which provides a level of anonymity to every transaction they facilitate. They also don’t enforce anti-money laundering or know-your-customer (KYC) regulations. Some DEXs include Uniswap, 0x Protocol and Stellar DEX. 

However, in spite of the anonymity they provide, DEXs come with their fair share of disadvantages. With no middleman involvement or enforcement of regulations, DEX’s are hotbeds of illegal activity. This is perhaps the reason why they are not quite as popular as CEXs. 

Hybrid crypto exchange

A hybrid crypto exchange combines the best features of a CEX and DEX. They provide the liquidity and usability of a CEX along with the buyer and seller anonymity of a DEX. Hybrid exchanges comply with the legal regulations imposed on cryptocurrencies and provide the highest form of security against cyber-attacks. Some hybrid crypto exchanges include Qurrex, Eidoo and Legalos. 

Steps to establishing a crypto exchange

Now that you know the various types of exchanges and have an idea of which one you want to start, here are the key steps you need to follow. 

Do market research

The first step you need to follow is to research the features that crypto investors are looking for today. For example, an appealing exchange should offer a wide variety of cryptocurrencies to choose from, high transaction security and low transaction fees. This will help you create a platform that actually has the usability a crypto trader or investor wants. 

You also need to research the right location to launch your platform. For this, you need to know which countries are saying yay and nay to crypto. For instance, China has declared all crypto transactions illegal and as per recent news updates, India has been planning to put regulations on crypto as well. Doing proper research will tell you which countries to avoid as the operational base for your platform.   

Get the proper license

You must seek proper legal counsel to make sure that you meet all the regulatory requirements to start a crypto exchange. Typically, crypto exchanges are required to meet know-your-customer (KYC) requirements to combat money laundering. If you don’t have the right license, you might end up in a situation like Binance. The platform was issued a warning for not having the proper license to operate in Singapore in September this year. Since then, Binance’s global platform is no longer available to Singapore residents.

Designing the exchange and finding a payment processor 

To create a user-friendly platform, your exchange must have the following features—a quick registration process, an interface for depositing and withdrawing crypto, access to trading accounts, customer support, a process to review past transactions, infographics and charts, among others.. You also need to connect with a payment processor with the lowest transaction rate so that you set yourself apart from the competition. 

These are just a few of the many aspects you need to consider when establishing your crypto exchange. But now that you have a general guideline of what to do, you must be wondering how much does it cost to build a crypto exchange? The base amount of US$21,000 would get you the most essential functionality. Be mindful that crypto is highly volatile, so any kind of investment in it would be prone to high risks. All the best on your entrepreneurial journey! 

Header image courtesy of Unsplash

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