With more emphasis on freedom of operations, a lot of decentralized finance projects have taken off on Ethereum by eliminating the presence of third parties from operations. Every entrepreneur interested in the opportunity of decentralized cryptocurrency exchange development must take into account factors such as financial surveillance, securities regulations, and complying with the prevailing law.
Let us understand the importance of these aspects in more detail.
Financial surveillance – Every customer’s identity and background must be thoroughly checked before onboarding them to an exchange. Hence, KYC (Know Your Customer) verification process must be done. Any suspicious activity on the platform must be immediately reported to the law enforcement authorities. Only those can unilaterally execute or prevent a cryptocurrency transaction on behalf of a customer should be regulated extensively. The USA has the BSA (Bank Secrecy Act) in place to regulate the operations of decentralized exchanges.
Securities regulations – The main aim of securities regulations for decentralized exchanges is to establish a proper framework for safeguarding investors from fraud and misrepresentation. The tokens issued by the firm are not securities since the holders would expect a profit from it in the future. In case, a token is recognized as a security by a regulatory body, it cannot be traded on exchanges that are not regulated by the US SEC (Securities and Exchange Commission). Exchange refers to a platform that matches the buyers and sellers or facilitates smooth settlement without any third-party custody of funds or data.
Complying with the prevailing law – More often, the constitution which has given its citizens the freedom of speech and protection against warrantless search and seizure can be used as an affirmative defense. Governments can step in and regulate decentralized exchanges only if there is a compelling state interest. Since decentralized exchanges aim at operating without the presence of middlemen and the prevalence of censorship using the help of smart contracts for managing funds on-chain, they can be safeguarded by the constitution.
Other factors to focus on while investing in Cryptocurrency exchange development
- Team up with a leading bank or a popular payment processor – For ensuring smooth and glitch-free processing of transactions and quick settlements, partner with either a bank or payment processor. It should also facilitate fast acceptance of deposits and authorization of withdrawals. The agreement between you and your payment solution provider will depend on your operational location and the current regulatory norms. A friendly ecosystem will offer more banking options than a highly regulated environment.
- Possess sufficient liquidity – Liquidity refers to the ease at which an asset can be converted into cash without influencing the current market price. It can lift the trading volume and profitability of a decentralized exchange. Various methods can be implemented to boost liquidity. Artificial accounts can be created and trades can be initiated. Higher liquidity can be achieved by connecting your exchange through API’s with the leading exchanges in the market.
- Invest in robust security measures for your platform – To gain the loyalty of investors to put their money in a risk-free environment, take steps like two-factor authentication, end-to-end encryption of the database, jail login, and password-protected user access to safeguard both the data and funds of users.
- Render maintenance and support services – Deal with bugs and glitches faced by users swiftly by hiring a dedicated team to provide maintenance services in multiple languages round the clock. Upgrade your exchange regularly with new features to stay ahead of your competitors by closely watching the market trends, understanding the preferences of investors, and competitors’ practices. This will help in building a strong customer relationship for your business which would prove to be helpful in the long run.
- The importance of having a user-friendly interface – An attractive and interactive user interface will achieve utmost customer satisfaction. It will also help in capturing the interests of potential investors and assist in standing out from the intense competition. Ensuring low transaction fees and extensive security verification practice will fetch a higher trading volume and boost your revenue by many notches.
- Prepare a risk management strategy – In these uncertain times where anything can occur at any time, take into account various risks such as hacking, unauthorized access, misappropriation of users’ funds, malware attack as it can ruin the reputation of your exchange. The data of users must be stored in a location independent from your operational servers. Create a backup of the data and use a strong password to protect it safely.
The different trends prevalent in Decentralized exchange development
- Off-chain order books – The order book will be brought off-chain reducing the latency and gas costs involved in placing an order. It has its limitations since users still have to pay cancellation fees and on-chain trade collisions occur when multiple takers compete simultaneously for the same order.
- Off-chain execution and on-chain settlement – It is more of a hybrid approach where both the order books and the trade execution process will move off-chain. This eliminates most of the problems associated with off-chain order books by removing the chances of on-trade collisions, gas fees for cancelled orders, and front-running issues. However, it requires a powerful matching engine for ensuring smooth trade execution without any network congestion.
- Automated market-making facility – It sorts the limitations of on-chain order books. Automated market-making makes use of their own liquidity pool to jumpstart trading of a new asset. Automated market-making may not be so effective in markets requiring sophisticated analytics.
Regardless of the obstacles imposed, the future will witness decentralized exchanges challenge the status-quo established by centralized exchanges. Centralized exchanges provide convenience but fall short in security. On the other hand, decentralized exchanges offer more asset control but lack liquidity and regulatory oversight. While traders need to maintain custody for their respective assets, complying with KYC and AML guidelines can not be neglected at any cost.