HOW TO BUILD A DECENTRALIZED CRYPTOCURRENCY EXCHANGE

One of the greatest advantages of cryptocurrency is the decentralization. Unlike the centralized trading exchange which has components like the trading agency, wallets, user interface, and admin system, the White label decentralized exchange offers advantages like security and authenticated transaction.

What is a cryptocurrency exchange?

Cryptocurrency exchanges enable transacting cryptocurrencies for acquiring value-established fiat currencies or digital assets for a nominal fee.

Why Decentralize?

That have been instances of cryptocurrency acquiring a dubious spammy garnish. An isolated occurrence of someone losing money tarnishes the image of cryptocurrency. However, in the last few years, cryptocurrency exchanges have been booming worldwide. The intervention of global giants like JP Morgan in creating an exclusive blockchain for BFSI and the Hyperledger Fabric, a blockchain created by Linux Foundation with the support of IBM has redefined the perception of blockchain and cryptocurrency.

The increase in the volume of trading also proportionally increases the probability of intrusion. Instances of the entire exchange getting hacked and coins getting stolen are also possible in the centralized exchange. The threats like these call for decentralization.

A few advantages of using decentralized exchange are:

Security

One of the greatest advantages of using a decentralized exchange is security. While the classical notion of security might be about storing all the information in a place that requires the highest levels of authentication and authorization, decentralization believes otherwise. Decentralization puts the access for both the funds and the coins to the users and only to the users, and it does not make any sense to hack the system because the hackers will, at the most, be able to get access to that particular transaction and that particular set of users.

Identification

One of the aspects that tags along with decentralized exchange are the use of blockchain Technology. All the decentralized exchanges like Ethereum and Bitshares support decentralized exchanges.

In the blockchain technology, the information that is recorded on the blockchain cannot be modified once it is recorded. This would mean that the blockchain information can be used for identification and authorization. Since the recorded information can not suffer any modification or removal, the entire system becomes transparent and trustworthy.

The Components of a Decentralized Exchange

Any exchange might be required to have a graphical user interface, A trading engine, cryptocurrency wallet and liquidity, all to be governed by an administrative system. However, when it comes to decentralized exchanges, these components might not make complete sense. There are a few components that might not find their relevance in a decentralized exchange.

The graphic user interface is what gives your users the means to communicate with your trading engine. As a best practice, the graphic user interface is expected to comply with the visual dimensions of the web, mobile, and even smart televisions.

The trading engine has two parts, namely, the Order book and the trading bot engine. Since on a peer-to-peer exchange, there is a fluctuation of prices and the records cannot be rewritten, it might not be required to incorporate a trading engine. This is one of the biggest reasons why decentralized exchanges are not able to compete with other centralized exchanges.

Cryptocurrency wallets serve as centralizers of Information and it defeats the entire purpose of decentralization.

Liquidity is considered to be the weakest point in a decentralized system. Solutions like sharing the liquidity and market makers might not work and there are no funds to be transferred between users accounts by a system. Solving the issue of liquidity is probably one of the biggest challenges in a decentralized exchange. Hybrid cryptocurrency exchanges might effectively solve the problem where there is a separate component that takes care of liquidity.

Given the list of registered users, the huge history of trades and transactions and the financial system, having an Admin system in place is probably one of the most urgent and preferable needs for a decentralized exchange system.

Anonymity

The last couple of years have been vital in transforming the perception of cryptocurrencies. Many governments have started to regulate and tax cryptocurrencies and some of them have completely banned them. The cryptocurrency industry provided a lucrative alternative to the Monopoly of banks and financial trading.

At this juncture, anonymity becomes an aspect of Paramount importance. There is no mandate to disclose your identity in a decentralized exchange.

Scalability

One of the greatest advantages of decentralized exchange systems yes its capacity to scale. Since decentralized exchanges rely on blockchains for transactions, the only limit is the bandwidth, which again is dependent on the Execution fee (Gas in the case of Ethereum). This cost determines how quickly miners execute your request. The best part about decentralized exchanges is that the excess of transactions do not slow the system down but rather accelerate it.

Coins and Tokens

The only factor that alters the capacity to launch new coins and tokens is the blockchain that you launch your exchange on. If you launch your decentralized exchange on Ethereum, it would mean that all the ERC tokens will be available automatically.

Access to the Coins

There are several options to access the coins. A few of them are the generation of private key or seed phrases, metamask integration using web3.js, importing a binary file or accessing your favorite ledger.

Frameworks

Some of the most popular blockchain Framework these days are Ethereum, which uses the 0x protocol. Ethereum is the second largest Framework by capitalization of cryptocurrency. What makes Ethereum a preferred Framework is the functionality of the smart contract that helps remove the intermediaries and the cost involved, automate the process.

The advantages of Decentralization

In a cryptocurrency market where there is always a constant threat to privacy, decentralization helps in creating the anonymous where even a compromise of privacy doesn't mean a breach of private information. Launching your own decentralized exchange might be a hassle but with the assistance and the workmanship of Blockchain App Factory, all you need to do is drop us a line and we will get in touch with you to provide the essential solutions in developing a decentralized cryptocurrency exchange.