How To Create Decentralized Exchange: Business and Tech Guide

Decentralized exchanges (DEXs) offer a high level of:

• transparency

• liquidity

• security in the cryptocurrency world

Building a DEX requires knowledge of blockchain, smart contracts, and UX design.

Using ProCoders knowledge and tapping into the years of experience, we’ll cover how to make a decentralized exchange in general, with the focus on DEX architecture, required technologies, development process, and provide business tips for launching and growth and bring recommendations that you will be able to use! With this guide, you can build a secure, scalable DEX tailored to your audience and business needs. Let’s get started!

How Does Decentralized Exchange Software Work?

A decentralized exchange (DEX) is a peer-to-peer (P2P) platform for trading cryptocurrencies.

Its main perk as the reason for its popularity is that there’s no central intermediary or authority. Hence the name.

Decentralized exchanges use smart contracts that are executed on the blockchain network. They allow for transparent trading.

Here is a simple overview of how decentralized exchange software work brought to you by ProCoder specialists:

To use a DEX:

1. Сonnect your cryptocurrency wallet to the exchange. Use a browser wallet like Metamask or a hardware wallet like Ledger.
2. View the order book with the current bids and asks on the exchange.
   Note: Unlike centralized exchanges, where a central server processes orders, decentralized exchanges aggregate orders from multiple sources and display them on a public ledger.
3. To make a trade, submit an order to the blockchain network. Create a transaction with defined parameters like the trading pair, price, and amount. The smart contract verifies the order and executes the trade if it meets the specified parameters.
4. The smart contract initiates the settlement process.
   Note: Settlement is the process of transferring the cryptocurrency between the parties involved in the trade. The smart contract escrows the cryptocurrencies held by the buyers and sellers during the trade execution. It then releases them upon successful completion of the trade.
5. The transaction is confirmed by the blockchain network and recorded immutably on the public ledger. These terms make the process completely transparent and tamper-proof.
6. The smart contract then updates the order book to reflect the new bid and ask prices.

Typical Architecture of a DEX

Blockchain Network 

The DEX is built on top of a blockchain network. This results in the security of all transactions and operations on the platform.

Ethereum is one of the most popular blockchain networks for building DEXs. Why? It’s versatile for both traders and developers.

Ethereum supports smart contracts and a wide range of programming languages.

Smart Contracts

Smart contracts are self-executing computer programs that run on the blockchain network. They are responsible for the automation of crypto exchange between users. Smart contracts define:

• business logic

• rules,

• regulations

for buying, selling, and transferring cryptocurrencies on the DEX.

Order Book

The order book is a space to place orders to trade cryptocurrencies.

In a decentralized exchange, smart contracts manage the order book, updating the bid and ask prices on the platform.

Wallets 

Decentralized exchanges use cryptocurrency wallets to manage funds and enable crypto exchange. In traditional centralized exchanges, users deposit funds into an exchange-managed account. The decentralized approach offers more ownership of users’ funds.

User Interface

The user interface is the frontend component of the DEX. There, users can interact with the platform to:

• place orders

• view orders

• cancel orders

• view balance

• view transaction history

The user interface can be:

• a web-based interface

• mobile app

• desktop client

Liquidity Providers 

One of the key challenges facing DEXs is the lack of liquidity compared to centralized exchanges.

To address this, some DEXs integrate with liquidity providers. They offer users better trading depth and smoother transactions between different cryptocurrencies.

Interoperability Protocol 

Interoperability protocols like:

• the Polkadot network

• the Cosmos Network

are a new trend in the DEX architecture.

These protocols allow different DEXs to connect and interoperate with each other. This helps create decentralized exchange that offers users access to a wider spectrum of digital assets. That being said, the process allows users to retain ownership of their assets.

Recommended: How to Create a DAO

Tech Stack You Need to Build a Decentralized Exchange

Building a decentralized exchange (DEX) can be a complex process that requires a good understanding of:

• blockchain technologies

• smart contracts

• user experience design

So, we at ProCoders have put together a list of technologies and programming languages you may need.

Blockchain Network

Ethereum is one of the best networks nowadays for decentralized exchanges. At this stage, consider your routing contract with the network provider for smooth data flow.

Web Development

Web development tools and frameworks like:

• React

• Angular

• Vue.js

can be used to create a user-friendly interface for the DEX. If you are looking for cryptocurrency developers for hire – come to ProCoders.

Smart Contracts

You would need to write smart contracts in a programming language like Solidity or Vyper. Choose one that is compatible with the blockchain network you are building on.

Backend

The backend of the DEX should manage:

• the communication between the user interface

• the blockchain network

You can use programming languages like JavaScript or Python, together with frameworks like Node.js, to develop the backend.

API Integration

You will need to integrate various APIs to provide additional functionality to the DEX. For example, you may want to integrate with a cryptocurrency price aggregator API or a token swap protocol API.

Security

Security is critical for a DEX. You can use tools like Truffle or Embark to test smart contracts for vulnerabilitiesю You should also integrate security protocols like:

• Two-Factor Authentication (2FA)

• SSL

Cloud Services

Deploying a DEX on the blockchain network and maintaining it over time can be challenging. Cloud services can provide scalable and reliable infrastructure to host the DEX. You can choose from:

• Amazon Web Services

• Microsoft Azure

• Google Cloud Platform

How to Create a Decentralized Cryptocurrency Exchange: Guide From ProCoders

Here is a general step-by-step guide that we ProCoders have put together so you can create your own DEX:

1. Define your requirements and business goals:

Define:

• the purpose of your DEX

• the types of cryptocurrencies you want to support

• the target audience

• the desired user experience

Also, determine:

• how the DEX will generate revenue

• what fees will be charged

• how users will interact with the platform

We at ProCoders can help you here with our Discovery Phase. During this phase, we analyze your needs, create a plan, and support you in understanding the requirements needed for your business idea to come to life.

2. Choose the blockchain network:

Look for a blockchain platform that corresponds with your needs. As we’ve said before, Ethereum is one of the most commonly used blockchain for DEX development. But we at ProCoders can help you choose the perfect one!

3. Create Smart Contracts:

Develop smart contracts that allow users to trade and exchange cryptocurrencies. For more details on How to Make a Smart Contract, we at ProCoders have created an in-depth guide!

4. Build the User Interface (UI):

Develop an intuitive and user-friendly interface. It should allow users to interact with smart contracts on the blockchain network. You can use web development frameworks or libraries like:

• Angular

• React

• Vue.js

ProCoders can provide you with frontend specialists and designers for your application.

5. Test the Smart Contracts:

Before deploying the smart contracts to the blockchain, you need to test them for vulnerabilities and bugs. Use testing frameworks like Truffle or Embark. You can also simulate different transaction scenarios to check if the system is secure and efficient.

6. Deploy the Smart Contracts:

This step usually involves:

• compiling the smart contracts into bytecode

• uploading the bytecode to the blockchain network

7. Integrate with Web3 Provider:

Integrate the user interface with web3 provider. This allows the interface to access and interact with the smart contracts on the blockchain network.

8. Implement Advanced Features:

Implement advanced features like liquidity pools, governance protocols, token swap protocols to enhance the functionality of your DEX. Which ones you require can be better determined during the discovery phase, allowing more accurate budgeting.

9. Launch:

Once the DEX is ready to be launched, deploy it on a test network. Invite users to test the platform and gather feedback. Make any required adjustments before launching it on the main network.

10. Market and Promote:

Market and promote your DEX to the target audience through social media, advertising, and community engagement. Offer enticing incentives to attract traders and liquidity providers. Also, remember to budget for marketing; not enough attention paid to marketing and brand awareness can cause problems.

We had a case that underscores the importance of marketing and market research that happened with an eCommerce startup we assisted. We helped them develop an innovative delivery app, featuring groundbreaking technology, including live tracking of your delivery in real-time. Despite the remarkable concept and excellent execution, the startup failed in its marketing efforts.

They didn’t conduct thorough market research, choosing to launch in a city where there were no competitors. Unfortunately, the lack of competition was due to a dormant market in the chosen location. Despite their innovative app and the absence of direct competitors, they failed to attract users. This resulted in financial difficulties and ultimately, the closure of the startup.

This demonstrates the importance of understanding your market before launching your product, regardless of how innovative or technically superior it may be. It’s a critical lesson we at ProCoders always remember and why we always advise planning ahead.

Building a DEX is complex, and ProCoders can help you navigate any or all of these steps, ensuring a seamless process from conception to launch. As a core provider, our primary role is to supply the essential services that form the backbone of your operations.

How to Create a DEX: Business Tips on How to Start a Decentralized Exchange

We at ProCoders have put together some business tips on how to make a DEX and start it:

DEX Monetization

A DEX generates revenue by charging fees on transactions processed on the platform.

You can also create your own token. We happen to have a tutorial on how to create a cryptocurrency token for you.

After that, you can charge fees for your token. Offering a lower transaction fee than existing centralized exchanges will help to attract users to your DEX.

For example, Uniswap charges a small fee on each transaction, which contributes to its revenue.

Save on Development Costs

Yes, to build a DEX requires expertise in:

• blockchain technologies

• smart contracts

• web development

• user experience design

Or do you? Instead of building from scratch, consider using existing open-source protocols or platforms like:

• 0x

• Loopring

• Kyber Network

You can also choose a software development company such as ProCoders to build a platform for you.

At ProCoders, we can help you save on development costs and provide you with ready-made solutions. We can build a solution that is customized to meet your business requirements.

Here, we can learn from the success of PancakeSwap, a decentralized exchange built on the Binance Smart Chain.

PancakeSwap used the existing infrastructure and community of Binance Smart Chain to create a thriving DEX ecosystem. They saved on development costs while benefiting from the network effect.

Scale and Keep Being Profitable

To succeed in the long run, it is essential to have a well-defined plan for scaling the DEX and keeping it profitable. You can scale the DEX by integrating with other DEXs, providing cross-trading options with other blockchains, or launching your token swap protocol. Additionally, providing an attractive incentive program to traders and liquidity providers is a key factor in keeping your DEX profitable.

We love what Sushiswap did, they introduced yield farming and staking mechanisms, encouraging liquidity providers to contribute assets and earn rewards. This innovative approach helped Sushiswap scale rapidly and maintain profitability.

Marketing and Promotion

Marketing and Promotion is critical for DEX growth. Engaging with blockchain communities, leverage social media, creating a blog, or run events like hackathons, and offering rewards to early adopters. It is also beneficial to establish partnerships with other blockchain-related enterprises and community influencers to attract a wider audience.

A smart strategy has been devised by 1inch, They actively engage with the blockchain community, conduct airdrops and token giveaways, and partner with other projects to expand their user base. Building strategic alliances and actively promoting the platform through various channels have been instrumental in their success.

Incorporating similar concepts, adapting them to your unique circumstances, and tapping into the expertise of ProCoders can enhance the potential success of your own DEX.

Conclusion

I am sure that by now you know how to build a decentralized exchange, but remember, creating a decentralized exchange (DEX) is a challenge that requires technical knowledge, strategic planning, and effective marketing. It’s natural to have lingering questions and a multitude of ideas to explore. To address these uncertainties and discover the potential of your idea, reach out to us at ProCoders.

With ProCoders as your partner, we can help simplify the complex process of DEX development, turning your vision into a user-friendly platform. So, embark on your DeFi journey with patience, adaptability, and a willingness to learn. Together with ProCoders, let’s shape the future of finance! Do read about how to set up a crypto exchange and how to create a defi app for a further insight.