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What is a Cryptocurrency Exchange?
A Cryptocurrency Exchange is actually a digital platform where the users can buy, sell and trade the cryptocurrencies. For example, Bitcoin, Ethereal etc. These platforms works similar to financial markets that offers a marketplace where traders and investors can exchange digital assets. They come in the following two main types :
1. Centralised Exchanges: They are managed by a Central Authority and it simply offers high liquidity and also user friendly interfaces.
2. Decentralised Exchanges: These exchanges operates on then blockchain technology that allow peer to peer trading without any intermediaries.
Each of the types has it own specialisations and drawbacks at the same time. Both of them has a crucial role in the growing world of digital trading.
Centralised Exchange
A Centralised Exchange also known as CEX is a cryptocurrency trading platform that is operated by a company which acts as an intermediary between the purchaser and the seller itself. It hold custody of user’s funds, maintain an order book, matching trades, and gives the infrastructure for converting cryptocurrency to fiat currency. When you create account and deposits some funds into the wallets controlled by this exchange instead of trading peer to peer the buyer and seller place orders in the order book then the platform’s engine make sure to execute the requests correspondingly at Security Tokens vs Utility Tokens.
This is based on a custodian model that works on your behalf. Here the user do not posses the private key to his crypto instead it is entrusted with the platform. They are made in compliance with the Anti Money Laundering Act and the KYC regulations that requires the user to submit your government authorised Identification before he begins the trading.
Decentralised Exchange
A decentralised exchange also known as DEX is a peer to peer marketplace on which the users can trade the cryptocurrencies directly from the wallets that they have custody of. Now the user without relying on an intermediary can have the access to the exchange platforms. They can utilize smart contracts that executes the contracts automatically if some condition fulfils that is already needed to the system. As the user do not need to create an account or verify his identity, decentralised exchange allow for private and permissionless access to global token markets. The popular platforms falls into the following three categories:
- Automated Market Makers: For users the trade against the reserves of tokens are funded by other users who in return earns yield.
- Aggregators: There are tools like 1inch that can scan multiple decentralised exchanges simultaneously to route the trade and aim at minimising the prices fluctuation and get the best token price for the user.
- Order Books: In the order books there happens the actual confirmation of the order that has been bought or sold .
Essential features of Crypto Exchanges
Following are the features of cryptocurrency exchanges, to create your own crypto one would need to comply with these as well:
- For the new users the cryptocurrency exchanges offers the new user registration and verification.
- The cryptocurrency exchanges are also equipped with the Know Your Customer (KYC) as they handle virtual assets those need protection from the frauds.
- User Interface , the best cryptocurrency platforms uses great interfaces for a good experience of the users like access to the wallet, change of information etc.
- Wallet integration is the most important part of this. This process connects a crypto wallet with an exchange. A diverse integration can give more and more options to the user at Building a Web3 Business.
How to Start a Cryptocurrency Exchange
Starting a cryptocurrency exchange may sound difficult, lets make it easy by understanding the following steps in detail own how to start a cryptocurrency exchange:
- Kind of Exchange: The person starting the exchange has to first decide on the type of exchange that he has to inclination to, from;
- Centralised Exchange or
- Decentralised Exchange.
- Get an idea about the legal and regulatory side: First of all the person has to check the rules and regulations governing the type of exchange that one is trying to start. Depending on the country or jurisdiction one may need the following;
- A license for transmitting;
- or to register as a Virtual Asset Provider;
- provisions or features to comply with the Anti Money Laundering Laws and Know Your Customer provisions.
- Also one has to be concerned with the tax reporting obligations.
Figure out the business plan: which goes into figuring out the;
- Users that are to be targeted by the business it can be a retail trader, institutions or specific country or a region to be served with the services, and
- The amount of capital needed for the business to run.
- Get the technology: It is entirely on the person if he want to build it from scratch or buy it from a good company that has been in business for enough and secure time, but it may prove to be a less unique one , though can prove to be a fast and affordable option.
- Set up all the banking and payment options: This is the toughest part for the business to gather as one will need a relationships with the banks or the so called payment processors so that the users can deposit or withdraw money regularly. The current scenario is that the bank are a bit reluctant to the concept of crypto so they may be a little difficult to be convinced.
- Liquidity: Once the platform is launched, it would need users, without the user interaction it can not work. The exchange platform partners with the market makers or liquidity providers for making sure that there are always crowd of buyer and sellers on the platform, it helps to make the trade execution goes smoothly.
- Build trust and stay compliant with current regulations: The more a business stays transparent on the working, track records, customer services the more there are chances of the business to grow. Also the laws and regulations regarding cryptocurrency hasn’t fully developed so there are high chances of it to change frequently therefore the platform should be up to date regarding the laws and regulations.
Frequently Asked Questions (FAQ)
What is the estimated amount of funds needed?
It depends on the scale of the business that a person is going to build, a basic exchange platform may cost around 10 lakh rupees to get started. The compliance with the legal rules and regulations may also add up thereafter.
How do these platforms actually make money?
The platforms actually makes money from the fees they charge on their platform for buying or selling the cryptocurrencies, it is usually a small percentage of the amount of cryptocurrency. For example , withdrawal fee etc.
What are the consequences if the regulations changes after the launch?
As already discussed before the regulations are not fully developed so they are subject to change frequently. The platform has to adapt to the new regulation within the limited time periods issues by the governing bodies.
What is a wallet in this matter?
A wallet is just like a digital bank account to store all the cryptocurrencies. It is used when the cryptocurrency is bought or sold. It is a digital safe provided for the transaction of the cryptocurrencies.
What is the meaning of liquidity?
Liquidity means that there has to be enough of the users say buyers and sellers own the platform so that the trade can be done on fair prices. Low liquidity often is the reason for the failure of the exchange platforms.
