It is crypto exchanges that keep the crypto market alive. These services are used for buying, selling, and trading virtual currencies. Some exchanges allow you to trade a wide variety of cryptocurrencies, while others only allow a limited number of cryptocurrencies to be traded. In general, the process works the same regardless of exchange type.
The price of the cryptocurrencies on crypto exchanges is determined by crypto matching engines. Which are these engines, and how do they work? Let’s dive into this article to learn everything you need to know!
What is a matching engine?
Whenever an investor places an order on a cryptocurrency exchange, a trade matching engine is used to match the order. The matching engine is an algorithm that searches for cryptocurrency buyers and sellers. The engine, for instance, will look for a seller who is willing to sell 1 BTC if you place a buy order for 1 BTC. The trade will be executed once a match is found, and you will receive your crypto in your wallet. In the case there’s no matching order for your position, your order will be stored in the order book.
For matching buyers and sellers, crypto exchanges use a variety of algorithms. There are algorithms that take into account the price and quantity of each order. The algorithms used by others are more complicated and calculate factors such as market liquidity, order type, and timing.
There’s an algorithm called First In First Out (FIFO) on some exchanges, which matches the first buy order with the first sell order. In other exchanges, buy and sell orders are matched according to their sizes, using a Pro-rata algorithm. Some platforms may utilize optimized algorithms which take into account multiple factors in order to provide the best possible results.
A matching engine is an essential component of the trading platform, as you can understand. Keeping the order book updated and executing trades are its responsibilities. It would be impossible for centralized exchanges to operate without matching engines.
Programming languages like C++ are usually used to implement matching engines. The reason for this is that they must be quick and efficient. Moreover, they need to be able to process a large number of orders within a short period of time.
How do crypto matching engines set prices?
A crypto matching engine doesn’t set prices. On an exchange, prices are set by the market, which consists of all the buyers and sellers on the exchange, as well as the volume of trade. As the name of the algorithm implies, the purpose of the crypto matching engine is to match orders at the best possible price. A price on an exchange is determined by supply and demand and not by artificial price manipulation.
A matching engine works by matching orders in an order book. Order books are lists that contain the most recent buy and sell orders that have been placed for crypto assets, arranged according to their price.
When there’s not enough liquidity to match orders at a particular price level, the order remains open until it can be filled. If, for example, there is no other buyer willing to pay more than $10,000 per Bitcoin, then, for the time being, a sell order for one Bitcoin at $10,000 will remain open until someone is willing to pay that price for it.
There are constant changes going on in the order book because new orders are being placed and old orders are being matched. Matching engines are responsible for keeping track of all orders and executing trades as soon as a match is detected.
What factors affect cryptocurrency price?
A cryptocurrency’s price depends on a number of factors. Among them are:
- The supply and demand of the particular asset
- The trading volume
- The number of buyers and sellers
- The liquidity of the market
- The fees charged by the exchange
- The speed of the matching engine
All of these factors can have a significant impact on the price of a cryptocurrency. There are some factors that have more impact than others, such as trading volume.
How do crypto matching engines help to earn money?
As a way of getting money, crypto matching engines charge a fee for every trade that is executed through their service. The fee is often very small, and it can be even as low as 0.01% in some cases.
The exchanges that operate crypto matching engines collect the fees charged by the engines. Fees cover these exchanges’ costs and generate revenue.
Benefits of using a crypto matching engine
Using a crypto matching engine can provide a number of advantages, including the following:
- Matching engines are able to match orders very fast, meaning trades are executed more efficiently.
- In comparison to manually matching orders, a matching engine does not have the same human error potential. The result is a reduction in missed trades and an improvement in the execution of orders.
- Matching engines provide a more efficient way to match buyers and sellers, increasing a market’s liquidity.
- By automating order matching, crypto matching engines can allow traders to concentrate on the main aspects of their trading operations.
What are the drawbacks of crypto matching engines?
Using a crypto-matching engine has some potential drawbacks, including:
- In order to ensure the accuracy of match engines, data feeds, and trading platforms must be reliable and fast. Putting this in place and maintaining it can be expensive.
- The complexity of operating and understanding a matching engine limits its appeal for some traders.
- The technology that underpins a crypto matching engine makes it vulnerable to outages or technical issues.
Do crypto matching engines have the future?
Matching engines for crypto assets are likely to play an important role in the future. With the growth of the cryptocurrency market, more sophisticated and efficient ways of matching orders will also be needed in order to cope with this growing demand.
Matching engines could become more advanced as a result of this, allowing them to handle more jobs and deliver faster and more accurate results. All participants would benefit from it, and the overall market would be more liquid and efficient.
