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Crypto exchanges are an essential part of the digital economy as they connect buyers and sellers for digital currency transactions. Users of exchanges view them primarily as a trading outlet. However, exchanges are sophisticated business entities that have multiple channels to create revenue. Trading fees, as well as other interactive products such as derivatives and loans, are all ways crypto exchanges can monetize their customers while maintaining a liquid market, secure infrastructure and compliance with regulatory authorities.
If you're an entrepreneur and want to start your own exchange or interested in understanding how exchanges sustain long-term, understanding how exchanges generate revenue is essential. Explore this blog to know more about this.
Types of Cryptocurrency Exchange
Centralized Exchanges
Centralized exchanges are intermediary entities that link buyers and sellers. The type of revenue generated by the well-known centralized exchanges primarily originates from two areas:
- Trading and listing fees for cryptocurrencies,
- Withdrawal charges for moving fiat currency to the exchange and, in many cases, withdrawal fees for withdrawing cryptocurrencies.
Centralized exchanges have higher levels of liquidity, are generally faster at processing orders than decentralized exchanges and provide the flexibility to use more sophisticated trading options than decentralized exchanges.
Decentralized Exchanges
Decentralized exchanges are essentially built upon the architecture of the blockchain through the development of smart contracts, while hybrid exchanges combine the advantages of both types of exchanges (centralized and decentralized).
Operating costs are lower than on centralized exchanges; therefore, the revenue of DEXs depends largely on the amount of trading and the liquidity that is provided by users.
Hybrid Exchanges
A hybrid exchange creates a decentralized model for safeguarding assets and a centralized order-matching platform to allow for fast, efficient, trade execution. They allow for a decentralized custody of assets while having a centralized order-matching system that ensures an efficient and fast execution of trades.
Hybrid exchanges generate revenue streams, just like centralized exchanges. However, they may also have additional DeFi revenue streams as well.
Primary Revenue Streams for Crypto Exchanges
Trading Fees
For centralized and decentralized exchanges, the largest and most consistent revenue source is the trading fee. Each time a user places a buy or sell order, there will be a trading fee charged. Most exchanges use the maker-taker fee designation, meaning the maker (liquidity provider) pays a lower fee than the taker (liquidity recipient).
Trading fees only represent a small percentage of a given transaction. However, the total trading fees revenue is significant because of the high volume of sales transactions conducted by multiple users.
Withdrawal and Deposit Fees
Exchange users may incur fees for withdrawing cryptocurrencies and fiat currencies from their exchange account. The total amount charged to users through these fees will vary widely based on how busy the blockchain network is, the type of currency being withdrawn and how they choose to withdraw it.
Users are less likely to see deposit fees from exchanges. However, most users will incur processing charges when depositing money into their exchange accounts using bank transfer and payment gateway methods, adding to the exchange's overall revenue.
Listing Fees
Many new crypto projects pay exchanges a listing fee in order to list their token on the exchange so that it can be traded. Typically, being listed on an established exchange increases the visibility and liquidity of the new project.
The listing fee can range from a few thousand dollars to several million dollars, depending on how popular and well-known the exchange is and how large the user base is, thus making it one of the more substantial sources of revenue for exchanges.
Margin and Leverage Crypto Exchange Fees
Exchanges generating margin and leverage trading products mainly generate earnings/losses from the interest charged on borrowed capital, as well as liquidation fees received when traders get liquidated and the trading commissions associated with higher-volume trades.
Advanced trading features like this appeal to professional traders and institutions, which in turn greatly increase the revenue per-user figure for these exchanges.
Extra Revenue Streams for Crypto Exchanges
Affiliate Programs
Through referral/affiliate programs, exchanges can also generate income by rewarding users who bring new users to the platform. Any commissions on trading fees generated by referred users go back to the affiliate, and the exchange benefits from attracting new users with a lower marketing cost.
Liquidity Pools
Many exchange types, including DEX and hybrid exchanges, generate earnings/losses through liquidity pools. When traders execute trades through liquidity pools, the liquidity providers and the exchange both benefit from the fees generated from these trades.
Accumulation of Yield
An exchange offering staking, lending and/or yield farming as services earns its share from the-yield received from all assets deposited by users. By pooling capital and distributing the capital across dapps within the defi ecosystem, exchanges can generate additional revenue for the stakeholders while providing users a competitive rate of return.
Financial Product Cross-Selling
Cryptocurrency exchanges often cross-sell other financial products like crypto wallets, debit/credit cards, NFT's, launchpads, derivatives and insurance. By providing these additional products and services to the users of the exchange, exchanges provide additional sources of revenue diversification and help decrease reliance on trading fees, which all help increase the long-term profitability of the exchange.
How Profitable Is It to Run a Cryptocurrency Exchange?
Operating a cryptocurrency exchange can provide substantial profits; however, an exchange must have substantial levels of trading volume, sufficient liquidity and most importantly, trust from its users.
Top exchanges in the world today make millions of dollars each day purely from their trading fees. There are many different factors involved in determining the profitability of an exchange, including how well a company acquires new users, whether a company is compliant with exchange rules and regulations, how secure a company’s exchange is, how efficient a company is at maintaining an exchange’s operations, and finally, whether or not the overall crypto market is doing well.
While there are high start-up and compliance costs, crypto exchanges are highly scalable and should continue to generate an ongoing stream of revenue over time and should be a long-term investment opportunity for people interested in operating a cryptocurrency exchange.
Why Is Fourcrypt the Best Partner to Launch Your Crypto Exchange?
Fourcrypt is trusted cryptocurrency exchange development company delivers ultimate solution for building a fully secure, scalable, and revenue-generating cryptocurrency exchange as a partner you can trust. Fourcrypt has expertise in building centralized, decentralized, and hybrid exchanges for your business. They also provide both customizable and pre-built software solutions based on your company’s specific needs.
They focus on security, speed of their trading engines, remaining fully compliant with all regulations and having multiple ways to make money on an exchange. Fourcrypt has all of the advanced products and services necessary to provide Entrepreneurs the ability to launch a successful crypto exchange as quickly and smoothly as possible, reducing risk while enabling them to make profits sooner.
Conclusion
A crypto exchange is not simply a trading platform; it is a multi-faceted financial ecosystem with multiple different types of revenue streams. In addition to making money from trading fees and from listing, exchangers are also able to generate revenue from yield generation, cross-selling of financial products and making use of other revenue-generating related activities.
It is essential for entrepreneurs starting an exchange to understand this revenue generation strategy to maximize their chances of successfully building a profitable exchange.
If you are looking to start a crypto exchange, the Fourcrypt team is here to help you with it. Get in touch with us!
