Innovations in Fintech: Detailing the Process of Crypto Derivatives Exchange Development
Blockchain technologies have revolutionized the way business is conducted, the digital asset industry is constantly innovating novel ways to improve traditional finance. Digital asset products such as cryptocurrencies are leading the market innovation and the digital asset-based derivatives markets have gone through rapid growth within the last decade.
Conventional cryptocurrency exchanges have expanded their range of trading choices to include other alternatives like trading crypto derivatives. In March 2023, the crypto derivatives market size grew to 74.8% share of the entire transacted volume of $2.95 trillion in the cryptocurrency market. Crypto derivatives are generating millions of dollars in revenue and are increasingly becoming popular. Many entrepreneurs are venturing into creating crypto derivative trading platforms, no doubt, this is a good time to develop your crypto derivative exchange development.
Creating a crypto derivatives trading platform requires a well-developed plan, and we have compiled this detailed process of crypto derivatives exchange development for you. In this publication, we will help you understand the basics of crypto derivatives and key considerations to develop a crypto derivatives exchange.
This is a step-by-step guide that would take you through the development process of creating a crypto derivatives exchange and at the end of this blog, you would be well-equipped with the needed information to create your crypto derivatives exchange.
Understanding the Basics of Crypto Derivatives
A crypto derivative or a crypto derivative contract is a financial instrument whose value is derived from other cryptocurrencies.
They function as a tradable wager and determine how stakeholders will exchange these assets in the future, this contract is similar to predicting the price motion of a virtual currency, with the exchange’s value tied to the other cryptocurrency price. With crypto derivatives, people can speculate on the price movements without purchasing or selling the crypto themselves.
Most Popular Crypto Derivatives Instruments
In this section, we’ll break down the three most popular crypto derivatives instruments. By the end of this section, you will have a clear picture of what these instruments are, their mechanism, risk profile, reward profile, and their availability.
1. Futures
Futures is an obligatory agreement that requires both parties (buyer and seller) to buy or sell crypto at an agreed price at a set time. In futures, the buyer and seller are required to fulfill their agreement at the stipulated price on a specified date. This instrument is highly volatile so there is potential for large losses, however there is also a high potential for gains. Futures are available at centralized and decentralized exchanges.
2. Options
Options is similar to futures as it is an agreement between two parties (buyer and seller). The key difference is that in options the buyer is not obliged to exercise their agreement to buy or sell. In options, the buyer pays a premium for the right and the seller is obligated if the option is exercised. The buyers have limited losses but sellers might experience large losses. Buyers have limited risk and potential high gains. Options are available at some centralized exchanges and they are gradually growing in decentralized finance (DeFi).
3. Swaps
Swaps is a contract to exchange cash flows or other financial instruments. In swaps, traders have an agreement to exchange succession of cash flows over based and this is based on an agreed term. These instruments are customizable however, they have the potential to experience market risk and counterparty risk. They are available over the counter (OTC) and on decentralized platforms.
Key Considerations for Crypto Derivatives Exchange Development
Some key considerations to note while developing your crypto exchange are:
1. Regulatory compliance
Adhering to local and international regulations is essential, you need to be able to navigate the complex regulatory landscape when operating a derivative exchange. The regulatory bodies and cost vary by jurisdiction however you should be prepared to comply with Anti-Money Laundering (AML), Know Your Customer (KYC) requirements, obtain necessary licenses, and partner with legal counsel.
2. Security and risk management
A robust security measure is paramount in the development of crypto derivatives exchange. Protecting user data and funds is mandatory and you can achieve this by implementing advanced encryption protocols, two-factor authentication (2FA), and multi-signature wallets.
3. Technology infrastructure
Technology infrastructure such as databases, networking equipment, software development, and servers are the backbone of a crypto derivative exchange. You can decide to start from scratch, that is develop an in-house solution or implement a white-label solution. Your choice determines the initial cost and rate of maintenance. Essential technologies to integrate for a seamless exchange include high-performance technology, distributed ledger technology, and blockchain. Building or licensing these technologies ensures you have a robust trading engine that is capable of managing complex order books and high-frequency trading (HFT).
4. Liquidity and market-making
Liquidity is important for sustaining and ensuring your crypto derivatives exchange is successful. Liquidity is a major factor that drives the market so you need to work towards getting a strong and reliable liquidity provider (LP). You can reach out to businesses that provide liquidity sourcing to help you get a sustainable LP from their global LP network.
You can get market makers and sustain liquidity through thorough research to know the best liquidity source that suits your needs. This will save you from outages and security issues which are detrimental to any exchange.
Implementing a white-label cryptocurrency exchange is a good way of attracting clients, clients consider the liquidity before choosing an exchange and if you implement a white-label cryptocurrency exchange it will help your clients profit from the pooled liquidity from the LP.
The Development Process: A Step-by-Step Guide
Developing a crypto derivatives exchange platform is a lengthy process that requires detailed planning and technical expertise. In this section, we will break down a step-by-step guide to the development process of a crypto derivatives exchange.
1. Conceptualizing and planning
Before you take any other step you need to outline the key features and functionalities of your crypto derivatives exchange. Carefully create a detailed development roadmap and take time to revise this roadmap before moving to the next step.
2. Technology selection and planning
When planning and selecting the technology to integrate, choose appropriate technologies that meet the industry standard and guarantee success. Design the system architecture and when you do this consider the performance, scalability, and security requirements required to develop a successful exchange.
3. Development and testing
Building your exchange platform from scratch might be a lengthy and costly development process yet, it is highly recommendable. If you have the resources and you’re considering this, ensure you have a well-experienced team that is ready to put in the effort. When building your exchange platform, your team should include a trading engine, order matching, and settlement mechanisms for a reliable and robust exchange platform. Conduct rigorous testing as this would help in identifying and fixing bugs.
4. Security audits and penetration testing
Hire independent cybersecurity experts to conduct periodic security audits and vulnerability assessments to identify and curb potential losses. Implement necessary security patches and measures and ensure your exchange complies with industry standards such as ISO 27001 and GDPR.
5. Launch and post-launch operations
Now that you have successfully established the previous steps, it is time for your exchange to go live. Once your exchange is live, ensure you adequately monitor your exchange performance, address any prospective issue as soon as you observe them, and continuously improve every aspect of your exchange you can improve to keep satisfying your customers and to stay ahead of the competition.
Final Thoughts
Digital asset derivatives are in high demand, futures, swaps, and options are attracting traders globally and this is a good time to aid in easing the demand for derivative contracts by starting a crypto derivative exchange and making profits.
To succeed as a crypto derivative exchange you have to patiently and critically analyze and then follow a detailed process to develop your crypto derivative exchange and this blog is at your disposal to help you make your dream a reality.
