How to Create a Cryptocurrency Exchange: *instinctools Ultimate Guide

Despite the up-and-down nature of the cryptocurrency market, many startups are determined to capitalize on it and want to know  how to create a crypto exchange of their own.

Statistics project that the yearly growth rate (CAGR 2022-2027) of income in the cryptocurrency sector will be 16.43%. This is welcome news for those who are looking to take advantage of the digital currencies market in the long-term. Furthermore, at the “Future of the crypto exchange” panel held in London this September, leaders of renowned crypto trading platforms like Binance and Huobi shared the impressive results they had achieved in spite of the difficult year.

Global payment systems are also moving in the crypto direction and forging new connections between digital and fiat money. For instance, Mastercard enables settlements using crypto on its network, and Visa has become the first major payment network to settle transactions in USDC. 

Huge brands, including TAG Heuer, Hublot, and Breitling, also accept cryptocurrencies for payment with the help of special crypto payment processors that allow customers to make purchases with, let’s say, Bitcoin or Ethereum, while the company can instantly get the equivalent sum paid in fiat money.

If you want to know how to create a crypto exchange and make it a truly lucrative solution, check how we’ve dealt with challenges while building one of the first white label crypto exchanges in Europe. 

What is a cryptocurrency exchange platform?

Determining what you want to end up with is crucial since “a cryptocurrency exchange” can imply different things. 

• A full-fledged trading platform where users have more than a basic understanding of crypto and are willing to become successful crypto traders. It’s a sophisticated technical solution and a serious investment of resources and money. For instance, you’ll need to develop crypto exchange software such as an order matching engine (OME), which is the backbone and beating heart of a crypto trading platform that gathers and synchronizes data across multiple trading pairs.
• An instant crypto exchange for crypto-to-fiat and fiat-to-crypto transactions. Unlike a crypto payment gateway, embedded into your existing solution, a crypto exchange is a full-fledged business with its own business model. It’s a practical high-demand option with easy access for users who don’t want to trade and need to convert one cryptocurrency to another or into fiat currencies. In this case, you have to deal with challenges such as integrations with financial institutions. But, the workload is much smaller compared to a trading platform. 

Either solution can become a profitable opportunity for your business. In this article, we mainly focus on instant crypto exchanges. Let’s investigate the pain points our experts have highlighted in more detail.

Types of cryptocurrency exchange platforms

Crypto exchanges can be centralized (CEX, managed privately) or decentralized (DEX, without central ownership). Many companies speak about DEX without knowing what it really means and whether a business can truly benefit from such an option. 

Choosing between a centralized or decentralized exchange is a no-brainer, as DEX is still the utopia of crypto enthusiasts. Decentralized crypto exchange platforms are tricky to manage because of the distributed assets. Also, they often have problems with a lack of liquidity.

If in CEX, centralized management ensures liquidity thanks to your partner banks, DEX mostly relies on the client’s money and uses complicated schemes to fulfill the liquidity pool. So, if users suddenly rush to sell cryptocurrencies, a decentralized exchange platform will most likely run for a few hours and stop, as the money will be gone, and there will be nowhere to get it from.

On top of that, DEX implies anonymity, which is synonymous with the unregulated zone, and one of the biggest challenges in cryptocurrency today. And this, in turn, completely contradicts the legal conduct of business. 

— Dmitry Gursky, Head of Crypto Service Line, *instinctools

Cryptocurrency exchange architecture explained

Let’s talk about how to build a crypto exchange platform in terms of architecture. Your solution can be monolithic (built on a single server) or based on microservices (each component is located on a separate server). 

Monolithic architecture

With such an approach, all the code is stored in a single repository instead of being fragmented across different services. So you will need top-tier development team as not everyone can operate with such a volume of code. 

Because of the high connectivity, monolithic architecture is hard to test. But it is possible to divide data into layers and work with them to speed up the process. Moreover, you’ll spend much less on support compared to microservices. 

— Maksim Zhuravel, Blockchain Technical Lead

This type of architecture is especially suitable for MVP projects, testing a hypothesis, and market research. For example, will your targeted audience use your solution to the extent you expect, if you make your own crypto exchange?

Microservices

A microservice architecture is known for its flexibility and scalability. It makes operating easier in a distributed system or when many changes are required. Furthermore, you’re not limited to one programming language and can leverage different ones for separate microservices.

You have a wide choice of specialists who can create separate microservices for your solution as different languages suit this. Be it Python, Java, PHP, or another language; you can implement the crypto part functionality in almost any of them.

— Maksim Zhuravel, Blockchain Technical Lead

A microservice architecture also paves the way to creating solutions with a high workload and performance speed, such as crypto trading platforms, because you can rely on Kubernetes (K8s). This orchestration system ensures the creation of self-healing environments while the system scales. Whenever K8s detects an infrastructure failure, the system can auto-restart, auto-replicate, or auto-scale to keep the infrastructure reliable.

But consider that you need a strong DevOps team to set up Kubernetes and that a microservice architecture is expensive to build and maintain. Additional costs are conditioned by the complexity that microservices cast on the system and the necessity to hire more developers with first-rate skills.

In general, this option is suitable for organizations that already have a mature product with a growth trend and have developed the requirements for the technical solution in detail. 

If your system is not supposed to accept a million messages per second, you can comfortably and efficiently run it on a monolith. Microservices are more convenient if we’re talking about a very distributed team, like 50 developers working on different features in different time zones. Microservices are easier to deal with as each microservice is a dedicated piece of logic. And it’s always easier to work with a small amount of code than with a large one. 

So the question is always about the scale of your solution and the size of your team. From my experience, 90% of startups have a monolithic architecture. Yes, microservices scale better and faster, but it doesn’t mean that large-scale projects can’t be built on a monolith. Even banks run successfully on a monolithic architecture. 

— Maksim Zhuravel, Blockchain Technical Lead

Whichever you choose, remember that you have room for change. A monolith can be divided into microservices. It’s possible to design the solution architecture in such a way that moving to microservices will take no more than a month. And, vice versa, microservices can be assembled into a monolithic architecture if they are too troublesome to manage.

Four challenges to deal with when building a crypto exchange

Here comes the trickiest part, where you have to solve issues at a granular level. It involves choosing appropriate functional blocks for the solution, developing an intuitive UX/UI design, ensuring proper security measures, and testing the platform before going live. 

Functional modules selection based on our client’s success story

Each crypto exchange platform is made up of functional blocks. Their selection depends on your business goals, desire to stand out from the competition, customer needs, and regulatory requirements.

For example, you should investigate whether you can store users’ sensitive information in the cloud. In the case of crypto-to-crypto exchange platforms, it may be acceptable and won’t cause regulatory compliance issues. But in the case of crypto-to-fiat solutions, cloud services are most likely not an option, as it happened with our crypto exchange project in Europe when the regulator imposed a ban on storing users’ sensitive data in the cloud. 

In addition to limitations related to building a white label crypto exchange, we had to consider the client’s expectations regarding the technical features of the solution. It had to include highly intelligent hedging and a high degree of the calculator’s personalization depending on various parameters while keeping the user interface simple. Intrigued? Then let’s dive deeper into what’s under the hood and what’s on the surface in this case. 

Cryptocurrency exchange software, like any software, includes backend and frontend development.

The back end 

In the crypto exchange solution we’ve created, the following functional blocks are linked to the back end:

• Blockchain processors. This module is responsible for blockchain integrations and provides access to cryptocurrency operations. 
• Card processors. An additional module if you want to reach more users and offer a crypto exchange for fiat. It’s the block of integrations with the financial institutions – banks or PSP service providers, such as PayPal in the US and Europe, and Alipay in Asia. 
• Admin module. Here you manage depersonalized users, transactions (and fix suspended transactions), and the exchange itself (you handle fees, commission, etc.). There are two points you should pay special attention to hedging and interacting with your liquidity provider.

Hedging. It’s an automated process of balancing your fiat and crypto assets at the level of daily transactions. When a user exchanges $100 for crypto, automatic hedging is responsible for a mirror purchase of cryptocurrency from your liquidity provider. 

In the crypto exchange software we’ve created, hedging is not just automated but intelligent. Instead of hedging every transaction, the system keeps a certain corridor of fiat and cryptocurrency balance. We’ve streamlined the hedging process so that the system can interact with the liquidity provider only when transactions step out of the balance corridor.

— Dmitry Gursky, Head of Crypto Service Line, *instinctools

Interactions with your liquidity providers. You need them to fuel your crypto exchange platform with cryptocurrencies and fiat money. In contrast to hedging, here we’re talking about balancing an amount of money within a 2-3 days turnover of your crypto exchange platform.

In a dream world, exchange operations are balanced. However, reality interferes with this dream, showing a constant disproportion either on the side of cryptocurrency or on the side of fiat. That’s why you should keep your finger on the pulse to reach out to your liquidity providers in time. 

— Dmitry Gursky, Head of Crypto Service Line, *instinctools

• CRM. As we’ve mentioned before, in the case of our client, the regulator had a strict requirement to store customers’ personal data only in the country of their citizenship. Furthermore, due to security reasons, only a limited group of employees have access to the CRM module, where all the sensitive information about the users and the history of the interactions with each of them is stored. 
• Customer support. This service is interlinked with the CRM, since, to access tickets of a particular user, you first need to get their data from the CRM. 

The client’s front end

It’s the web version of your cryptocurrency exchange platform that users interact with. In addition to the main service window, it includes a personal account that functions similarly to a personal account in a typical banking application. 

A calculator is crucial to the crypto exchange software’s front end. 

A calculator can be simple when the cryptocurrency exchange rate is the same for all registered users. However, in our crypto exchange solution, the calculator is highly personalized and calculates the exchange rate individually for each user considering a plethora of parameters.

For example, the rate will be different for cardholders of different banks, owners of basic and premium cards, ordinary and VIP clients. It also will depend on a transfer method (card or a bank account), the availability of a one-time or permanent promo code, etc.

The calculator, in this case, is a microservice that is tricky to build at the code level as you have to handle a mind-boggling number of possible errors. For instance, with all the personalization, you must consider AML and card limits for each user.

— Dmitry Gursky, Head of Crypto Service Line, *instinctools

Here is the interconnection scheme between the backend and frontend modules in the crypto exchange solution we’ve built for our client.

Intuitive UX/UI

Exchanging crypto for fiat and vice versa raises more questions than regular exchange transactions. That’s why proper UX/UI design is vital to provide users with all the necessary information while not overloading them with information. 

Never underestimate the complexity of creating a simple solution. On the one hand, you might want to put as much meaningful information on the calculator’s screen as possible. Payment methods, service and blockchain fees, standard exchange rates and exclusive rates for the cardholders of a particular bank, limits, customer support, etc. – all seem equally important. On the other hand, you had to create a concise crypto exchange platform that users can grasp intuitively.

— Dmitry Gursky, Head of Crypto Service Line, *instinctools

Here are the final desktop and mobile user interfaces of the white label cryptocurrency exchange created by our client.  

Security issues

The challenge here is not only how to create a crypto exchange platform but also how to build a secure solution both externally and internally. Let’s sort things out.

External security of a crypto exchange refers to infrastructure and service.

• Infrastructural security. You can host your crypto solution on AWS, Azure, Google Cloud, or similar cloud services. Any cloud provider will offer you basic protection against external cyberattacks. If we use AWS as an example, it can automatically detect and mitigate most external attacks. 

Your provider guarantees a complete set of protection mechanisms against various hazardous events. And if you’re building a self-hosted solution, you’ll have to take responsibility and ensure protection against different risks by yourself or with the help of a reliable development partner. 

• Service security. It applies to handling your database, customers’ sensitive information, and private and public keys. Let’s look at each case.

Your database should be stored appropriately on a separate server. Take into account your regulator’s storage requirements when building a crypto exchange. For instance, even if your code is stored in the Cloud, the regulators may insist on keeping the database on your company’s servers locally. Also, ensure that your code interacts with the database securely and that information can’t be intercepted.

A breach of your customers’ data (e.g., a list of your clients’ names) can’t result in a withdrawal of money, but it has reputational risks for your company. So, there are general steps you should take to ensure sensitive data safety, such as having de-personalized databases and storing personal data in a separate location. 

When creating a crypto exchange, one more point to consider is the security of public keys (used for users’ identification) and private keys (needed for authentication and encryption). For instance, all private keys must be encrypted and stored in a distributed way to make them inaccessible from the outside.

Internal security also includes working with personal data and ensuring proper protection against your administrators, as they have access to system addresses. The rights of access and disposal of these addresses must be automated. Otherwise, if employees are allowed to carry out payments, their rights need to be strictly limited or double-checked with a multi-signature system, meaning another employee, such as a security officer, approves the transaction.

We’ve already mentioned the importance of a strong DevOps team in your crypto solution’s architecture. DevOps specialists are also in charge of setting up and securing the internal infrastructure. They ensure that the databases remain unchanged – any attempt to break into the data is logged and monitored to prevent intruders from covering their traces.

Testing peculiarities

Testing is an indispensable part of cryptocurrency exchange software development projects. There are different types of tests, which we scrutinized in the article about performance testing. However, you don’t have to run them all. Choose the ones that are particularly crucial for your requirements. Based on the experience of our crypto specialists, we can say that it’s vital to perform load, stress, and spike tests. 

For example, you’ve initially chosen a microservices architecture for your crypto exchange platform that can handle a thousand transactions per second. In this case, you need to test whether the solution can sustain such a load. It’s the load type of testing. Stress and spike tests are next in line. 

Most blockchains have a testnet. It is a copy of the mainchain, a live environment where you can perform transactions with any amount of tokens using your test addresses and nodes with zero risk. 

Working with the testnet has its own peculiarities. So it’s better to have an experienced tech partner by your side who knows how to set up a development process accordingly. 

— Dmitry Gursky, Head of Crypto Service Line, *instinctools

If your crypto exchange platform allows not only crypto-to-crypto operations but also crypto-to-fiat transactions, you’ll need testing on the fiat side as well. If you integrate with banks, they’ll offer you their sandboxes to run transactions in a testing mode. 

Finding a reliable tech partner to create a cryptocurrency exchange is half the battle

Starting your own centralized cryptocurrency exchange may look tricky and scary. Until you find an experienced technology partner who can create a crypto exchange in a form that best suits your business needs and customers’ expectations. A reliable tech ally chooses the appropriate architecture and identifies the suitable functional modules for your solution as well as creates an intuitive UX/UI design, provides the crypto exchange platform with a proper level of security, and runs testing responsibly.