Overcoming Crypto Exchange Development Challenges

Author: Oodles Technologies

Cryptocurrency exchanges are popular FinTech applications that enable users to buy and sell different types of cryptocurrencies and altcoins. Crypto traders and altcoin enthusiasts use cryptocurrency exchanges to invest in cryptocurrencies. The popularity of cryptocurrencies has led to a spurt in crypto users. It makes developing and setting up cryptocurrency exchanges a lucrative business.

However, there are several challenges with cryptocurrency exchange development that need to be addressed proactively to avoid legal troubles and financial losses. Read further to understand how the challenges can be overcome, so businesses can efficiently run their operations.

Cryptocurrency Exchange Development Challenges
  • Security
  • Liquidity
  • Market Acceptance

Let’s take a detailed look at each of the above challenges.

Security Challenges

Security is a major concern for crypto users. According to a survey conducted by Encrybit, about 40 percent traders consider security the main bottleneck in the cryptocurrency exchange process. The growing security concerns of cryptocurrency users are backed by the increasing number of cyber attacks on cryptocurrency networks. Over the years, there has been a sharp incline in the number of DDoS attacks, Phishing attacks, and hacking instances. According to GIB, a cybersecurity company, cyber attacks on cryptocurrency networks increased by 700 percent in 2018. Besides, the ransomware attacks on cryptocurrency transactions have increased by a huge margin.

Several crypto exchanges have been targeted by hackers, black hats, and cybercriminals, causing losses that add up to millions of dollars. The list includes some prominent exchanges like Poloniex, BitFinex, Huobi, and Bitstamp.

Overcoming Security Challenges

The following steps are essential for strengthening crypto exchange development to prevent cyber attacks:

  • Introduce AML/KYC-based registration mechanism for enhanced security and authenticity
  • Use biometric-based login mechanisms for cryptocurrency wallets
  • Enable two-factor authentication for every login attempt
  • Introduce AI-based security modules that automatically detect suspicious activity
  • Implement secure transaction methods such as Escrow to gain users’ trust.

Also read Things to Know Before Choosing the First Cryptocurrency Wallet.

Liquidity Problems

Liquidity is a major driving factor for cryptocurrency exchanges which enables them to achieve higher trading volumes in the market. However, several cryptocurrency exchanges incur heavy losses due to lack of liquidity. The main reason for the reduced liquidity in the cryptocurrency market is the increasing number of trade/exchange platforms. As of today, there are nearly 250 worldwide exchanges in cryptocurrency landscape compared to 70 exchanges in 2013. Out of these, very few exchanges offer the required amount of liquidity for effective cryptocurrency trades to happen.

How Liquidity Impacts Cryptocurrency Exchanges

Cryptocurrency exchanges require a sufficient number of buyers and sellers for effective trade execution. The lack of liquidity causes problems for buyers and sellers in the form of increased transaction costs, reduced asset value, and uneven delays. In a survey conducted by Encrybit, 36% of traders reported poor liquidity on existing cryptocurrency exchanges.

Let’s evaluate the liquidity challenges from a seller’s perspective by considering the following scenario.

Klaus owns five tokens of a particular cryptocurrency. The market value of the cryptocurrency increases and Klaus decides to sell his tokens. The value he will get for his tokens very much depends on the market liquidity. If the market is liquid (high trade volumes), he can instantly sell his tokens without impacting their current market value. However, if the market is illiquid, which means there are not enough buyers for that particular cryptocurrency, Klaus will experience delays. He might have to sell his token at a lower price or wait for the market to gain liquidity. Selling a cryptocurrency in an illiquid market also increases the transaction costs and impacts its current market value.

Several investors and traders analyze factors like 24-hour trade volume and order book depth to ensure that an exchange offers enough liquidity. It is, therefore, essential for a cryptocurrency exchange to have a sufficient number of buyers and sellers and a higher trade volume.

Tackling Liquidity Issues

It is difficult for novice exchange owners to successfully attain the required level of trade volumes for seamless trade executions. A majority of new exchanges do not conduct 360-degree market research while rendering support for cryptocurrencies. Selecting the cryptocurrencies having a lower market demand or value may result in poor liquidity. Below are some useful tips that exchanges must follow to ensure a higher level of liquidity for their traders and investors:

  • Wisely choose the supported crypto tokens after conducting complete market research.
  • Provide token-to-token switch for easy cryptocurrency exchange and convertibility.
  • Offer a lower transaction fee for devaluing cryptocurrencies to encourage their mainstream adoption.
  • Delist low-performing cryptocurrencies.

You may also like Everything you Need to know about Security Token Offering.

Market Acceptance

Over the years, there has been substantial growth in the cryptocurrency market and millions of transactions are carried out every hour. Statistica’s survey reveals that worldwide crypto users have jumped from $6.7 million in 2016 to $34.6 million in 2019’s first quarter. However, the numbers are still quite less as compared to other payment options in fiat currencies. A majority of people refrain from using cryptocurrencies due to the following reasons:

  • Cryptocurrency transactions are not as swift as fiat currencies and have an unstable response rate.
  • Cryptocurrency payments are accepted by a very limited number of retailers, merchants, and other points of sales.
  • A majority of cryptocurrencies are unstable and their market value may depreciate unexpectedly.
  • There is a lack of awareness about the use of blockchain and cryptocurrencies in many countries.

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