Cryptocurrency exchanges are the backbone of the digital currency ecosystem, providing platforms for users to buy, sell, and trade various cryptocurrencies. These exchanges come in different forms, each with unique features and operational mechanisms.
Before you plan to establish your own exchange, please familiarize yourself with the following information.
Part 1. Types of Cryptocurrency Exchanges
Before diving into the fundamentals of developing a crypto exchange, it’s important to understand the different types available in the market. Here is an overview of the various types of cryptocurrency exchanges.
Centralized Exchanges(CEX)
The well-known platforms such as Coinbase and Binance are Centralized Exchanges.
In crypto, a CEX is an online trading platform that allows people connected to the internet to buy, sell, and swap cryptoassets. It is owned and operated by a private company, which means it is subject to the laws and regulations of every jurisdiction it operates in. A CEX requires users to sign up and open an account to participate, and a majority of CEXs demand Know-Your-Customer/Anti-Money Laundering (KYC/AML) ID verification to trade.
The CEX matches buyers and sellers by collecting their orders in an “order book.” The exchange acts as a trusted intermediary between the buyers and sellers. Users rely on the exchange for the entire transaction process, trusting that the exchange won’t use their privileged place of knowledge to its advantage. The exchange also acts as a custodian for any cash or crypto held in user accounts, hopefully providing a safe place for users to store their funds.
Soontech’s digital assets exchange systems are meticulously crafted with user preferences and regional customization in mind, guaranteeing a seamless user experience.
Decentralized Exchanges(DEX)
A decentralized cryptocurrency exchange, or DEX, is totally different from a CEX. Unlike CEXs, DEXs operate without a central authority, allowing users to trade directly with each other through smart contracts. Uniswap, Sushiswap and pancakeswap are all DEXs.
DEXs leverage blockchain technology and smart contracts to automate order matching and settlement processes. Users retain full control of their funds as they connect their wallets to the exchange, eliminating intermediaries. While this peer-to-peer approach enhances user control and privacy, it can sometimes lead to lower liquidity and a less user-friendly experience.
Soontech provides an innovative DEX contract trading system that effectively overcomes challenges such as complex operations, low liquidity and complex technical requirements.
Hybrid Exchanges
Hybrid exchanges combine CEX and DEX. They offer the convenience of centralized exchanges while maintaining the privacy of decentralized exchanges. These are relatively new concepts that are still gaining traction among crypto investors.
Part 2. Operation of Cryptocurrency Exchanges
A cryptocurrency exchange acts as a marketplace where investors can trade cryptocurrencies. It functions similarly to a stock exchange. To purchase cryptocurrency, users typically create an account with a crypto exchange. Through this account, they can buy and sell digital currencies to expand their portfolios.
Due to the high volume of transactions processed daily, crypto exchanges must maintain sufficient liquidity to prevent excessive volatility and stabilize market prices. In this context, liquidity refers to how easily a digital coin or token can be converted into cash or another digital asset. Crypto exchanges utilize liquidity pools to handle large transaction volumes efficiently, ensuring price stability.
July 27th, 2024