A cryptocurrency exchange is a platform that allows users to buy/sell different tokens. It’s like a stock exchange, but instead of stocks, you buy or sell cryptocurrencies. In this article we would like to tell you how to create and open your crypto exchange in Europe.
Cryptocurrency Exchange Type
The first step in starting your own crypto exchange is to choose the type of trading platform you plan to create. This is important because the choice of the platform depends on the cryptocurrency exchange mechanism, how they are stored, liquidity management, the ability to trade FIAT currency and other functions of the cryptocurrency exchange.
Centralized exchanges (CEX) are the most common type of trading platform, the main feature of which is the presence of a centralized operator responsible for security, renewal and exchange functionality. The main advantages of centralized sites are the speed of crypto transactions and the absence of liquidity problems. The main weakness is security, as centralized exchanges store user funds on their wallets, which, as practice shows, quite often hack.
Possibility to earn money at CEX:
Spot trading. User trades his funds on the platform. Owner of the crypto platform earns commission.
Margin trading. The user has the opportunity to borrow for trading. Usually, a loan can be from x2 to x5 from your deposit. The platform owner earns from the bidding commission, the commission for the use of the loan and the liquidation of the user’s funds.
Derivatives. Users can enter positions with leverage up to x100 and sometimes more. High risks generate high returns, but statistics show that only 2% of users earn using this tool.
Decentralized Exchanges (DEX). Such platforms bring together cryptocurrency sellers and buyers, enabling them to automatically exchange assets without intermediaries to validate the transaction. Smart platform contracts that operate on the basis of open source software take on the role of transaction guarantor. This mechanism allows you to save on commission (no need to pay intermediaries) and increase the level of security (the exchange has no access to money and private keys users). The advantage is that when a decentralized exchange is established, the user takes responsibility for his own finances.
Instant exchangers. Very easy to use platforms that act like a normal exchange point. All a user needs to do is open a trade order, and it will be implemented instantly. This is possible because such platforms act as a broker that provides liquidity access to many exchanges. The speed charge is an increase in the number of intermediaries, which leads to higher fees and lower safety.
Also on the market you can find hybrid platforms that combine the properties of centralized and decentralized exchanges. For example, the service can be operated by third-party operators and give traders more control over their funds. Orders and transactions on such crypto exchanges are encrypted, fixed in time and stored on the blockchain, and order negotiation is performed outside the blockchain on a third-party host.
So, before creating a crypto exchange from scratch, you need to understand what type of platform you want to make and what kind of revenue it can bring you. Lawyers from Regulated United Europe recommend paying attention to the trade of derivatives (futures), as this type of platform brings maximum income.
Core and advanced features
At the next stage you need to decide what functionality should be implemented in your crypto exchange. It is usually divided into such modules:
Authentication and Verification. The path of a regular user to trading on the stock exchange begins with registration through email or accounts on social networks and Google. But the registration itself is usually not enough to start trading. For this you need identification – verification. This audit is necessary to ensure transparency of transactions and minimize the possibility of fraud, and because regulators require it.
Trading engine platform. It is responsible for the basic functionality of the trading platform. For example, the trading engine checks the balance on the user’s wallet to make sure that he has enough money for the transaction. It also compares trade orders and rates in real time, performs transactions, processes information about prices and commissions, creates graphs, etc.
User Interface. Depending on the target audience, the user interface can be simple and intuitive or relatively complex due to the presence of many indicators, trading signals, customizable graphics and other tools for experienced traders. In any case, the user should be able to place purchase and sale orders, view the current order book, past transactions, balances, statistics, etc. It should also be possible to configure the entire functionality of the crypto exchange under itself.
The administrator panel of the exchange. Before you create your crypto exchange you need to understand which admin panel you want to get. As a rule, it should have tools for tracking the current state of the exchange (traffic, volume of trades, number of transactions, income from commissions), traders, wallets, transactions and content. In addition, tools must be implemented to verify users, modify and remove content, ban and remove users, change commissions, manage marketing and affiliate programs.
It will also be convenient if you have a system of automatic checking of users for «strange» actions, as on Binance: if the trader does something compromising (strange, unusual, clearly unauthorized)the system will notify the administrator and can even temporarily freeze transactions on the compromised account and/or cancel the last action.
Cryptocurrency wallet. If you are developing a centralized platform, you need the functionality of an internal wallet. It is needed for faster access to money, which speeds up the process and makes it easier, as well as to ensure the liquidity of the exchange. In the case of decentralized exchanges and exchanges, it is usually not necessary to create an internal wallet.
It is also necessary to consider how users will be able to replenish their wallets and withdraw funds from them on a card or your cryptocurrency account. For example, Coinbase allows traders to connect their bank account and easily transfer funds to or from a wallet. This can be achieved through both manual withdrawal and automated algorithms/smart contracts.
Order Book and Transaction History. This is another important element that you should realize when running your own cryptocurrency exchange. The order book is a list of open orders to buy or sell cryptocurrency. The exchange creates it automatically by grouping purchase and sale orders into separate lists and matching them. When an order finds an offer that matches its terms, the system automatically exchanges and closes the order. A closed warrant disappears from the order book and enters the transaction history.
Analytical tools for traders. This feature will help to attract experienced traders to the platform. Analytical tools provide additional information on the current state of the market, forecast its movement, analyze trends, create and verify trading strategies. When you start your crypto exchange you have to decide what indicators you want to see on your platform. The most popular (mandatory) options are:
- Relative Strength Index (RSI), which shows the strength of the trend and the probability of its change. It works simply: the system measures the magnitude of recent price changes and displays the rate of price change.
- Moving average (MA). Another important indicator that helps to determine trends, showing the average price for the selected period.
- Convergence/divergence of moving averages (MACD). Used to estimate and forecast price fluctuations.
Push notifications and alerts. Allow you to communicate with users, informing them about important events on the stock exchange: shares, news, special applications, updates, etc. In addition, alerts can also be integrated into trading, to show traders notices of changes in the exchange rate of selected trading pairs, changes in the trend, notifications of the important indicator or closing the transaction. Warnings should be useful and customizable, not mandatory and irritating.
Security functions. One of the main problems of the cryptocurrency market is the low security of cryptocurrency exchanges. Not a year goes by without news of another major stock market hack. The loudest: Mt. Gox – 450 million dollars. Bitfinex – USD 65 million, Bithumb – USD 58 million, Binance – USD 40.5 million. Bithumb – USD 58.
Therefore, when creating your own trading platform, you need to do everything to protect your users’ data and money, especially if you want to create a centralized cryptocurrency exchange. The following should be done:
- Denial of service protection (DoS);
- Protection of HTTP-parameters;
- Distributed Denial of Service Protection (DDoS);
- Server side protection (SSRF);
- Protection against counterfeiting of intersite requests (CSRF);
- Two-factor and HTTPS authentication;
- Biometric authentication;
- Data encryption;
- SQL Injection.
KYC, KYT, AML compliance. If you want to work in the European market, where the exchanges have increased requirements to combat money laundering and terrorist financing, then you need to implement the following procedures and standards in your trading platform:
- KYC – «Know your client». Every user of the crypto exchange will have to pass a personal identification. Of course, you can independently collect user documents and carry out identification procedures using databases (PEP, sanctions lists, etc. .). You can also use ready-made services that allow easy and economical implementation of verification processes, such as Sumsub or Veriff.
- KYT – «Know your transaction». It requires crypto exchanges to check from which sources user tokens are taken and to block transactions from suspicious sources. You can also use an external service here, such as Traceer.
- AML Compliance. According to the legislation of most European countries, the crypto exchange must have a certified anti-money laundering officer who is responsible for tracking suspicious transactions and sending SAR (Suspicious Activity Reports) to financial monitoring bodies.
Liquidity management. Traders need an exchange that will allow them to easily exchange one asset for another in the shortest possible time. This is only possible if the site has enough liquidity: orders to buy or sell crypts to complete the transaction at a reasonable price. Liquidity can be provided by:
- Third party market maker. It involves agreements with liquidity providers that typically trade simultaneously in many different places and can provide the liquidity needed for one cryptocurrency exchange by trading on other trading platforms.
- Creating an inter-exchange market. This strategy also implies cooperation with the market maker, but in this case you conclude a contract directly with the operator of the external exchange, not a third party.
- Liquidity Mining. This method is most related to decentralized communities, as it rewards users for their help in providing liquidity. The simplest option: the user places money in the exchange account and once a month or year receives a reward in the form of interest from his deposit.
Architecture, Technology Stack and API
Exchange Architecture. This concept usually refers to the structure of the platform, which helps to define logically and visually the relationship and the way of interaction between all components of the exchange: the login screen, trading engine, user interface, security functions, API, databases, etc.
Technology Stack. This is a set of development tools, such as programming languages, libraries, frameworks, database management systems, compilers, APIs, etc. to create backend and frontend platforms.
The cryptocurrency exchange should be launched only through custom design, because only in this way can you ensure the proper quality and security of the software. Ready-made solutions (scripts) are available, but they are usually created by amateurs and/or carry the risk that there will be many security holes in the code created intentionally or inadvertently. Given the situation with so many breaches of cryptocurrency exchanges, the risk in this case is too great.
Crypto Exchange Development
Once you select a developer, the process of creating a cryptocurrency exchange will be as follows:
- Treaty signing. You and the developer discuss the general concept of a cryptocurrency exchange, on the basis of which a technical description of the project is created. After that you agree on terms, cost, KPI, channels of communication and sign a cooperation agreement.
- Platform Prototyping. At the next stage, the designer, business analyst, and/or customer creates the design framework of the cryptocurrency exchange, which is then negotiated and brought to an ideal state.
- Create interface design. Then on the basis of the framework, designers develop a layout and/or prototype of the platform interface, which shows how it will look for traders and admins.
- Direct coding. After the creation of the design and technical description it is given to programmers who implement all this in the code. This is the responsibility of frontend, backend, blockchain and mobile developers.
- Product testing. Almost immediately after the beginning of coding, QA engineers take over the case, who check the fresh code for errors, and so on until the software is written.
- Deployment and support. Once the cryptocurrency exchange software is ready for launch, a marketing company is launched to attract traders. The site is entered into business listings and social networks.
Types of crypto exchanges and earning opportunities
There are several main types of crypto exchanges. Consider each in more detail and describe the advantages and disadvantages, as well as indicate their cost.
Platforms for exchange fiat (dollar, euro, pound, etc.) and cryptocurrency between different users. Typically, the platform acts as a conditional deposit system (escrow). On the one hand, the user creates an order to sell or buy cryptocurrency for fiat, and on the other, the user performs this order.
On the one hand, the platform may seem simple, but it is worth considering a few difficulties:
- The system should have a convenient chat between users, where details of the transaction will be discussed.
- The platform must have a conditional deposit system (escrow). A flexible tool to ensure the security of funds of one of the parties.
- There should be a dispute system on the platform. Sometimes the platform can use fraudsters, so it is very important to analyze each case in detail and ensure the safety of users’ funds.
Revenue. The platform owner earns commission for the transaction. As a rule, this figure is about 1%.
Crypto Exchange (spot, margin, derivatives)
A platform where users can trade cryptocurrencies among themselves. Additional features can be added to such systems – margin trading, futures, options, etc. This allows users to trade with credit leverage.
High volatility of cryptocurrencies gives users a good opportunity to significantly increase their income, but on the other hand there are risks of complete elimination of the position or the entire budget. This uses the owners of crypto exchanges and usually adds one or more functions of trading derivatives. Statistics say at least 95% of users lose their funds using the leverage, 3% of users trade with zero income and only 2% of users actually have income from this type of trade.
Income. This type of platform combines several business models – commission earnings and elimination of user positions.
Decentralized crypto exchanges have recently become popular. This is due to the collapse of one of the top centralized crypto platforms – FTX. This story changed the market for crypto platforms. For example, Binance has acquired more users, while other platforms have lost some of their users. Only six months later, the market began to level out. But at that time, the DEX platforms became very popular. You can trade only through decentralized wallets, so your funds are always safe.
What you need to know about the start and development cost
If you want to create a very large project with a huge number of users, consider the possibility of using the maximum number of trading tools and development based on microservice architecture.
One of the most difficult moments in the development and launch of the crypto exchange is the development of a trading module. The platform must withstand large loads, as the number of transactions per second can reach several thousand.
It is worth paying attention to the provision of liquidity and portfolios. In the first stages, users who register will see an empty trading glass, which significantly slows down the progress of the project. Therefore, we recommend developing an additional bot-marketer that can generate trades.
Cryptocurrencies for listing
The more different cryptocurrencies you give users, the more outreach and interest you have in the cryptocurrency exchange platform. Contrary to the erroneous view, cryptocurrencies are not much more difficult to maintain. But first we need to integrate them, and this process takes time. After you have dealt with the two previous items, proceed to the next.
Our company recommends creating your own cryptocurrency when creating a crypto exchange – such a proven way chosen by companies such as Binance, Crypto.com and many other exchanges. They offer a discount using their coin as an internal volume. This is a safe strategy and a profitable strategy as users get a discount and the exchange increases the capitalization of your coin.
Security and Protection of the Crypto Exchange
Initially, I would like to clarify what common problems, holes and vulnerabilities you may encounter in the security of the system:
- Unauthorized access to administrator account (hacking)
- Violation of access to the server
- Fraudulent process due to privileges
- Security issues on external platforms
User Hosting. The security of personal data is paramount, and access to the system should be strictly regulated. Popular tools for protecting this layer are:
- Use of secure and secure libraries and frameworks.
- Two-factor authentication using a Google password.
- Request documents from users (KYC and AML). This item is mainly related to the exchange of cryptocurrency to Fiat and vice versa. As a rule, you only need a passport, driver’s license or identity card; also a statement from the bank or utility bill to check the 2nd level.
- Manual confirmation from the administrator of large volumes of transactions and/or their large amounts. The cold wallet is optional, but I strongly recommend it.
Admin panel. Allows staff and owners to see key indicators of the crypto exchange. The main functions:
- Distinguish between administrators’ duties and privileges; create additional groups and roles. Each manager manages with limited rights.
- Command solution. Administrators from different groups need to confirm critical functions.
- Development and production are at least two separate areas. Limited access to each group. Manual migration of the database, which is controlled by managers, such as the technical director.
Malicious processes. Caused by malicious software or because of an intruder.
- DDoS-Attacks. Requests must pass through specific servers and clear for the final project.
- Firewall vulnerability. They are solved quite simply – a professional system administrator or reliable hosting. AWS is probably the best solution, at least if your government allows the platform to be placed in the cloud. Otherwise you will have to look at dedicated servers with load balancing.
- Authorized and protected access. Two-factor authentication is mandatory, whether you choose Google Authenticator, SMS, or even both. If you decide to create a decentralized cryptocurrency exchange, you can skip this item.
- Alert administrators to suspicious activity. Well, you and your team should be informed and aware of the current phase.
Technical problems. Sometimes something breaks. Software problems or damaged hardware. Everything should be monitored and have a plan B, as well as a backup in a safe place.
- Calculate delivery, exchange and trading operations, and if something is wrong – there is a return of transactions.
- Verification of the amount.
- Regular backups.
- Available user log files.
- Administrative notices in case of suspicious activity.
We recommend paying attention to security when creating a crypto exchange and still use the cold wallet feature.
Timing of the creation of a crypto exchange
So, if you decide to launch a crypto exchange and decide on the cost, the development of the platform can take from 2 to 6 months. It all depends on the type of platform and the number of tools.
Typically, the following team is involved in the development process:
- Business analyst. Offers ideas to improve your idea.
- Project Manager. Collects requirements and controls the development process.
- Design team. Design according to your requirements.
- Development team.
- The test team.
- DevOps command to install your project on the server.
Developing a cryptocurrency platform requires knowledge and skills such as a deep understanding of trading and cryptocurrency integration. First of all, it is necessary to consider the high load and high security level of the crypto exchange. Over the years, Regulated United Europe has acquired many partners and our company can help not only to obtain a cryptocurrency license in Europe, but also to advise on the choice of the provider to create its own crypto exchange.
At the moment, the main services of our company are legal and compliance solutions for FinTech projects. Our offices are located in Tallinn, Vilnius, Prague, and Warsaw. The legal team can assist with legal analysis, project structuring, and legal regulation.