Editor's note: Many pig-butchering scam victims have seen what goes into the making of a fraudulent cryptocurrency exchange, but what is required to build a real one? In this guest post, Alma Ussery describes in broad strokes what's needed to set one up.
Do you want to start a cryptocurrency exchange? Don’t know where to begin? In this article, we’ll show you how to build a crypto exchange with the best chance for success.
Crypto exchanges are platforms that enable people to buy, sell, and trade cryptocurrencies. They can support multiple assets, like Bitcoin, Ethereum, Litecoin, and more.
How to ensure the most trustworthy anti-scam crypto exchange security
Crypto exchange security requires an effective system to protect user information and data from threats. In addition, the platform must be able to respond quickly to potential security issues.
The best crypto exchanges have robust security teams that collaborate with other projects, report on security vulnerabilities, and inform the public about resolved issues. They also incentivize the crypto community to help them combat cyber threats.
Crypto exchanges must also offer sufficient protection for internet network access. Often, they delay withdrawals to avoid exposing users to attacks. Similarly, they keep most funds in cold wallets to prevent fraudulent activity.
Exchanges can thwart fraud with powerful automated identity verification tools. Anti-fraud departments perform regular checks on suspicious accounts and investigate suspicious transactions. These processes ensure regulatory compliance and information integrity.
Security breaches reveal the weaknesses of a security infrastructure. This is especially important for crypto exchanges since users have expectations regarding the security of their money. A successful hack must keep the victim unaware, and the attacker must control withdrawals.
In order to safeguard their customers, some exchanges require them to undergo Know Your Customer (KYC) procedures. For example, the upcoming Payment Service Directive 2 (PSD2) mandates two-factor authentication. Some exchanges also require verification of documents.
Investing in a cryptocurrency exchange is a big decision, and it's crucial to choose wisely. Besides finding a trustworthy exchange, it's important to educate yourself about common mistakes and scams. You should look at reviews, forums, and other places for information.
How to start a cryptocurrency exchange
Before we dig into how to create a crypto exchange platform, we should look at what a crypto exchange is and how it operates. Centralized exchanges, or CEX, are operated by a company that functions like a middleman. The company holds assets on behalf of users and requires them to go through a verification process. This includes the compliance processes associated with know-your-customer (KYC) and anti-money laundering (AML) regulations, just like formal banks.
Decentralized exchanges, or DEX, are based on blockchain technology and facilitate peer-to-peer trading without a middleman involved. If you want to start an exchange for cryptocurrency, you should be aware that decentralized exchanges offer greater privacy than a CEX but have less liquidity.
Both exchanges offer different trading options, including:
● Spot trading
● Margin trading
● Futures trading
How to start a Bitcoin exchange site in a compliant way
If you want to create a Bitcoin exchange of your own, there are a few steps you will need to follow. Start by researching the market and the competition to understand what users may need from an exchange like yours.
You’ll also need to perform your legal due diligence. Obtain the necessary licenses and be sure to comply with regulations in your jurisdiction.
Once the groundwork is complete, you can develop the technology for your exchange. This may include trading engines, wallets, and security systems. You can build these from scratch or acquire them from third parties. Either way, you should expect to integrate different cryptocurrencies, payment methods, and other features into your exchange. Your exchange will probably need to undergo rigorous testing before launch, and after launch, you’ll need to keep a team of developers on hand to maintain and upgrade the exchange as user needs evolve.
What will you need in order to build your exchange?
Building an exchange is a complex process, and you’ll need a healthy mix of technical skills and resources. Your tech stack may vary depending on the type of exchange you are building and the features you would like to include.
An exchange will typically consist of the following:
● Trading engine: A core trading engine that is used to execute trades and manage the order book.
● Wallet: Wallets are used to store and manage users’ cryptocurrency assets.
● Security measures: Cryptocurrency exchanges are required to handle large amounts of money along with sensitive financial and personal information. You will need to ensure that you have robust security measures in place, including encryption, two-factor authentication, and cold storage for digital assets.
● User interface: Every exchange needs a user-friendly and easy-to-use interface that can attract and retain users.
● Backend: You will need a reliable backend server and database to manage and store trades and user information.
What makes for a successful exchange?
If you want to create a successful exchange, you will need a large user base to ensure sufficient liquidity and trading volumes. To attract that user base, you’ll need to ensure that your users’ assets and information are kept safe at all times and that your user experience is intuitive and simple enough to retain users. There should be solid customer support at all times to resolve user issues and build trust, and you must ensure that you are compliant with all of the legal requirements.
Make sure that you offer competitive fees and a wide range of trading options. You need sufficient liquidity in the market to execute your trades quickly and fairly at the right price.
The exchange itself should be scalable enough to handle a large number of users and transactions and that you remain up to date with the latest trends and advancements in order to stay relevant.
In addition to the developers you hire, ensure that you have a strong PR and marketing team to increase brand awareness and attract new users when you are ready to start a cryptocurrency exchange of your own.