Exchanges are the cryptocurrency market’s backbone because nobody can buy, sell, and trade digital currencies without them. There are several types of exchanges, yet the method is basically the same regardless of the kind of exchange used.

Rates on cryptocurrency exchanges are obtained through so-called “crypto matching engines.” But what is a crypto matching engine, and how does it work? Let’s find out. 

What Are Crypto Matching Engines, and How Do They Work?

A cryptocurrency trade matching engine is a technology that pairs purchase and sell orders on a cryptocurrency exchange. Whenever you purchase or sell a transaction for a specific quantity of crypto, the matching engine finds someone who wants to exchange the same transaction. If you submit a purchase order for 1 BTC, for example, the algorithm will hunt for a seller that would like to sell 1 BTC.

It will complete the transaction and send you your cryptocurrency if it detects a match. If there is no connection, your transaction will be retained in the order book until it is paired with another transaction.

Crypto exchanges utilize several algorithms to match buyer and seller demands. Some employ basic algorithms that consider the value and amount of each transaction. Others employ more advanced algorithms that account for market liquidity, order type, and timing.

Some exchanges, for example, may utilize a First In First Out (FIFO) algorithm, which connects the first purchase and sell orders. Other exchanges may use a Pro-rata algorithm to match buy and sell orders in accordance with their size. Others may utilize a customized algorithm that considers various criteria to achieve the most significant outcomes.

As you can see, the matching engine is a vital part of an exchange. It is in charge of carrying out deals and maintaining the order book. An exchange would be unable to function without a corresponding engine.

Most matching engines are developed in low-level programming languages such as C++. This is due to the fact that they must be practical and accessible. They must also be able to manage a high volume of orders with low to no delay.

How Do Crypto Matching Engines Set Prices?

Note that cryptocurrency matching engines do not establish prices. Prices are determined by the market, which is formed by all buyers and sellers on an exchange. The crypto matching engine’s duty is to match orders at the best available price. This implies that the rates you see on an exchange are determined by supply and demand rather than by any fake fixing prices.

Order book matching is a technique used by matching engines. An order book lists all purchase and sell orders for a particular cryptocurrency asset, sorted by value. Orders are matched based on price, with the highest purchase orders paired with the lowest sell orders.

Say there is insufficient liquidity at a certain price level to match a specific order. That would mean the trade will remain open until it can be filled. If no other buyers are prepared to pay more than $10,000 per Bitcoin, for example, a sell order for one Bitcoin for $10,000 will stay open until an individual is interested in buying it at that price.

The order book continually updates as incoming orders are submitted and old ones are fulfilled. The matching engine’s purpose is to record all orders and execute transactions when there is a good fit.

What Factors Influence The Price of a Cryptocurrency?

Numerous distinct things affect the cost of a cryptocurrency. Some of these elements are:

  • The supply and demand of the cryptocurrency
  • The trading volume
  • The number of buyers and sellers
  • The type of orders that are being placed
  • The liquidity of the market
  • The fees charged by the exchange
  • The speed of the matching engine

Every one of these factors can have an impact on the value of a cryptocurrency. Some elements, such as trade volume, influence more significantly than others. However, on average, all of these things affect the cost.

How do crypto matching engines make money?

Crypto matching engines generate revenue by collecting fees for each completed trade. These costs are often extremely tiny, a few percentage points (0.01% or lower).

The fees imposed by cryptocurrency matching engines are paid to the exchanges that run them. These exchanges use fees to offset their expenditures and generate a profit.

What Are The Benefits of Using a Crypto Matching Engine?

There are several advantages to employing a crypto matching engine, which include:

Reduced latency: Because a matching engine could match orders considerably quicker than a human trader, deals may be completed more rapidly and at a smaller price.

Increased accuracy: Efficiency is enhanced since a matching engine is not vulnerable to the same human mistakes that might arise when directly matching orders. This leads to reduced failed transactions and better order execution.

Improved liquidity: By offering a more effective means to match buy and sell orders, a well-functioning matching engine can help boost market liquidity.

Automation: A crypto matching engine may streamline the order matching process, allowing traders to devote more time to other areas of their trading strategy.

Are There Any Drawbacks of Using a Crypto Matching Engine?

There are many possible disadvantages to employing a crypto matching engine, which includes:

Infrastructure costs: A matching engine must have availability to consistent, high-speed data streams and trading platforms. Setting up and maintaining this might be expensive, be aware of that. 

Complexity: A matching engine can be challenging to use and comprehend, which limits its attractiveness to some traders.

Dependence on technology: Because a crypto matching engine is based on technology, it may be prone to technical issues or breakdowns.

What Is The Future of Crypto Matching Engines?

The future of cryptocurrency matching engines seems promising. As the cryptocurrency industry expands, so will the desire for more complex and faster order-matching methods.

This might result in creating more sophisticated matching engines that can handle more requests with higher precision and speed. Thus, this might increase market liquidity and efficiency, rewarding all parties involved.