diff --git a/backend/.env.example b/backend/.env.example
index 457ec81..917665a 100644
--- a/backend/.env.example
+++ b/backend/.env.example
@@ -3,3 +3,7 @@
 
 # Database configuration
 DATABASE_URL="postgresql://USER:PASSWORD@localhost:5432/arcana_db?schema=public"
+
+# JWT Configuration
+JWT_SECRET="your-super-secret-jwt-key-change-this-in-production"
+PORT=3001
diff --git a/backend/API.md b/backend/API.md
new file mode 100644
index 0000000..8ab2325
--- /dev/null
+++ b/backend/API.md
@@ -0,0 +1,141 @@
+# Arcana Backend API Documentation
+
+## Base URL
+`http://localhost:3001`
+
+---
+
+## Authentication Endpoints
+
+### Register User
+**POST** `/api/users/register`
+
+Request Body:
+```json
+{
+  "username": "john_doe",
+  "email": "john@example.com",
+  "password": "securepassword123"
+}
+```
+
+Response (201 Created):
+```json
+{
+  "user": {
+    "id": "cuid...",
+    "username": "john_doe",
+    "email": "john@example.com",
+    "profile": null
+  },
+  "token": "jwt_token_here"
+}
+```
+
+### Login User
+**POST** `/api/users/login`
+
+Request Body:
+```json
+{
+  "email": "john@example.com",
+  "password": "securepassword123"
+}
+```
+
+Response (200 OK):
+```json
+{
+  "user": {
+    "id": "cuid...",
+    "username": "john_doe",
+    "email": "john@example.com",
+    "profile": null
+  },
+  "token": "jwt_token_here"
+}
+```
+
+### Get All Users
+**GET** `/api/users`
+
+Response (200 OK):
+```json
+{
+  "users": [
+    {
+      "id": "cuid...",
+      "username": "john_doe",
+      "email": "john@example.com",
+      "profile": null,
+      "createdAt": "2024-01-01T00:00:00.000Z",
+      "updatedAt": "2024-01-01T00:00:00.000Z"
+    }
+  ]
+}
+```
+
+### Get User By ID
+**GET** `/api/users/:id`
+
+---
+
+## Transaction Endpoints
+
+### Create Transaction
+**POST** `/api/transactions`
+
+Request Body:
+```json
+{
+  "userId": "cuid...",
+  "type": "deposit",
+  "amount": 100.50,
+  "currency": "ETH",
+  "status": "completed",
+  "hash": "0x..."
+}
+```
+
+Transaction Types: `deposit`, `withdraw`, `transfer`, `swap`
+Transaction Status: `pending`, `completed`, `failed`, `cancelled`
+
+Response (201 Created):
+```json
+{
+  "transaction": {
+    "id": "cuid...",
+    "userId": "cuid...",
+    "type": "deposit",
+    "amount": 100.5,
+    "currency": "ETH",
+    "status": "completed",
+    "hash": "0x...",
+    "createdAt": "2024-01-01T00:00:00.000Z",
+    "updatedAt": "2024-01-01T00:00:00.000Z"
+  }
+}
+```
+
+### Get All Transactions
+**GET** `/api/transactions`
+
+### Get Transaction By ID
+**GET** `/api/transactions/:id`
+
+### Get Transactions By User ID
+**GET** `/api/transactions/user/:userId`
+
+---
+
+## Health Check
+**GET** `/health`
+
+Response:
+```json
+{
+  "status": "ok",
+  "database": "connected",
+  "uptime": 123.45
+}
+```
diff --git a/backend/prisma/schema.prisma b/backend/prisma/schema.prisma
index 4528562..2cd2141 100644
--- a/backend/prisma/schema.prisma
+++ b/backend/prisma/schema.prisma
@@ -11,6 +11,7 @@ model User {
   id        String   @id @default(cuid())
   username  String   @unique
   email     String   @unique
+  password  String
   createdAt DateTime @default(now())
   updatedAt DateTime @updatedAt
   profile   Profile?
diff --git a/backend/src/controllers/transaction.controller.ts b/backend/src/controllers/transaction.controller.ts
new file mode 100644
index 0000000..3803a55
--- /dev/null
+++ b/backend/src/controllers/transaction.controller.ts
@@ -0,0 +1,57 @@
+import { Request, Response } from 'express';
+import prisma from '../lib/prisma';
+import { CreateTransactionInput } from '../validations/transaction.validations';
+
+export const createTransaction = async (
+  req: Request<{}, {}, CreateTransactionInput>,
+  res: Response
+) => {
+  const transaction = await prisma.transaction.create({
+    data: req.body,
+    include: {
+      user: true,
+    },
+  });
+
+  res.status(201).json({ transaction });
+};
+
+export const getTransactions = async (_req: Request, res: Response) => {
+  const transactions = await prisma.transaction.findMany({
+    include: {
+      user: true,
+    },
+  });
+
+  res.json({ transactions });
+};
+
+export const getTransactionById = async (req: Request, res: Response) => {
+  const { id } = req.params;
+
+  const transaction = await prisma.transaction.findUnique({
+    where: { id },
+    include: {
+      user: true,
+    },
+  });
+
+  if (!transaction) {
+    return res.status(404).json({ error: 'Transaction not found' });
+  }
+
+  res.json({ transaction });
+};
+
+export const getTransactionsByUserId = async (req: Request, res: Response) => {
+  const { userId } = req.params;
+
+  const transactions = await prisma.transaction.findMany({
+    where: { userId },
+    include: {
+      user: true,
+    },
+  });
+
+  res.json({ transactions });
+};
diff --git a/backend/src/controllers/user.controller.ts b/backend/src/controllers/user.controller.ts
new file mode 100644
index 0000000..4f62556
--- /dev/null
+++ b/backend/src/controllers/user.controller.ts
@@ -0,0 +1,106 @@
+import { Request, Response } from 'express';
+import bcrypt from 'bcrypt';
+import jwt from 'jsonwebtoken';
+import prisma from '../lib/prisma';
+import { RegisterUserInput, LoginUserInput } from '../validations/user.validations';
+
+const JWT_SECRET = process.env.JWT_SECRET || 'arcana-secret-key-change-in-production';
+
+export const registerUser = async (req: Request<{}, {}, RegisterUserInput>, res: Response) => {
+  const { username, email, password } = req.body;
+
+  const existingUser = await prisma.user.findFirst({
+    where: {
+      OR: [{ email }, { username }],
+    },
+  });
+
+  if (existingUser) {
+    return res.status(409).json({ error: 'User with email or username already exists' });
+  }
+
+  const hashedPassword = await bcrypt.hash(password, 12);
+
+  const user = await prisma.user.create({
+    data: {
+      username,
+      email,
+      password: hashedPassword,
+    },
+    include: {
+      profile: true,
+    },
+  });
+
+  const token = jwt.sign({ userId: user.id }, JWT_SECRET, { expiresIn: '7d' });
+
+  res.status(201).json({
+    user: {
+      id: user.id,
+      username: user.username,
+      email: user.email,
+      profile: user.profile,
+    },
+    token,
+  });
+};
+
+export const loginUser = async (req: Request<{}, {}, LoginUserInput>, res: Response) => {
+  const { email, password } = req.body;
+
+  const user = await prisma.user.findUnique({
+    where: { email },
+    include: {
+      profile: true,
+    },
+  });
+
+  if (!user) {
+    return res.status(401).json({ error: 'Invalid credentials' });
+  }
+
+  const passwordMatch = await bcrypt.compare(password, user.password);
+
+  if (!passwordMatch) {
+    return res.status(401).json({ error: 'Invalid credentials' });
+  }
+
+  const token = jwt.sign({ userId: user.id }, JWT_SECRET, { expiresIn: '7d' });
+
+  res.json({
+    user: {
+      id: user.id,
+      username: user.username,
+      email: user.email,
+      profile: user.profile,
+    },
+    token,
+  });
+};
+
+export const getUsers = async (_req: Request, res: Response) => {
+  const users = await prisma.user.findMany({
+    include: {
+      profile: true,
+    },
+  });
+
+  res.json({ users });
+};
+
+export const getUserById = async (req: Request, res: Response) => {
+  const { id } = req.params;
+
+  const user = await prisma.user.findUnique({
+    where: { id },
+    include: {
+      profile: true,
+    },
+  });
+
+  if (!user) {
+    return res.status(404).json({ error: 'User not found' });
+  }
+
+  res.json({ user });
+};
diff --git a/backend/src/index.ts b/backend/src/index.ts
index ff509c4..1bc3459 100644
--- a/backend/src/index.ts
+++ b/backend/src/index.ts
@@ -1,16 +1,21 @@
-import 'dotenv/config'
+import 'dotenv/config';
 import express from 'express';
 import morgan from 'morgan';
+import cors from 'cors';
 import prisma from './lib/prisma';
+import userRoutes from './routes/user.routes';
+import transactionRoutes from './routes/transaction.routes';
+import { errorHandler } from './middleware/error.middleware';
 
 const app = express();
-const PORT = 3001;
+const PORT = process.env.PORT || 3001;
 
+app.use(cors());
 app.use(morgan('dev'));
 app.use(express.json());
 
 app.get('/', (_req, res) => {
-  res.send('Arcana Backend - Database Integrated');
+  res.send('Arcana Backend - API v1');
 });
 
 app.get('/health', async (_req, res) => {
@@ -22,45 +27,10 @@ app.get('/health', async (_req, res) => {
   }
 });
 
-app.get('/users', async (_req, res) => {
-  try {
-    const users = await prisma.user.findMany({ include: { profile: true } });
-    res.json({ users });
-  } catch (error) {
-    res.status(500).json({ error: String(error) });
-  }
-});
-
-app.post('/users', async (req, res) => {
-  try {
-    const { username, email } = req.body;
-    const user = await prisma.user.create({ data: { username, email } });
-    res.json({ user });
-  } catch (error) {
-    res.status(500).json({ error: String(error) });
-  }
-});
+app.use('/api/users', userRoutes);
+app.use('/api/transactions', transactionRoutes);
 
-app.get('/transactions', async (_req, res) => {
-  try {
-    const transactions = await prisma.transaction.findMany();
-    res.json({ transactions });
-  } catch (error) {
-    res.status(500).json({ error: String(error) });
-  }
-});
-
-app.post('/transactions', async (req, res) => {
-  try {
-    const { userId, type, amount, currency, status } = req.body;
-    const transaction = await prisma.transaction.create({
-      data: { userId, type, amount, currency, status }
-    });
-    res.json({ transaction });
-  } catch (error) {
-    res.status(500).json({ error: String(error) });
-  }
-});
+app.use(errorHandler);
 
 app.listen(PORT, () => {
   console.log(`Server running on http://localhost:${PORT}`);
diff --git a/backend/src/middleware/error.middleware.ts b/backend/src/middleware/error.middleware.ts
new file mode 100644
index 0000000..fd72fb3
--- /dev/null
+++ b/backend/src/middleware/error.middleware.ts
@@ -0,0 +1,20 @@
+import { Request, Response, NextFunction } from 'express';
+
+export const errorHandler = (
+  error: any,
+  _req: Request,
+  res: Response,
+  _next: NextFunction
+) => {
+  console.error('Error:', error);
+  
+  if (error.code === 'P2002') {
+    return res.status(409).json({ error: 'Resource already exists' });
+  }
+  
+  if (error.code === 'P2025') {
+    return res.status(404).json({ error: 'Resource not found' });
+  }
+  
+  res.status(500).json({ error: 'Internal server error' });
+};
diff --git a/backend/src/middleware/validation.middleware.ts b/backend/src/middleware/validation.middleware.ts
new file mode 100644
index 0000000..19685fc
--- /dev/null
+++ b/backend/src/middleware/validation.middleware.ts
@@ -0,0 +1,16 @@
+import { Request, Response, NextFunction } from 'express';
+import { ZodSchema } from 'zod';
+
+export const validateRequest = (schema: ZodSchema) => {
+  return (req: Request, res: Response, next: NextFunction) => {
+    try {
+      schema.parse(req.body);
+      next();
+    } catch (error: any) {
+      res.status(400).json({
+        error: 'Validation failed',
+        details: error.errors,
+      });
+    }
+  };
+};
diff --git a/backend/src/routes/transaction.routes.ts b/backend/src/routes/transaction.routes.ts
new file mode 100644
index 0000000..db14c31
--- /dev/null
+++ b/backend/src/routes/transaction.routes.ts
@@ -0,0 +1,18 @@
+import express from 'express';
+import {
+  createTransaction,
+  getTransactions,
+  getTransactionById,
+  getTransactionsByUserId,
+} from '../controllers/transaction.controller';
+import { validateRequest } from '../middleware/validation.middleware';
+import { createTransactionSchema } from '../validations/transaction.validations';
+
+const router = express.Router();
+
+router.post('/', validateRequest(createTransactionSchema), createTransaction);
+router.get('/', getTransactions);
+router.get('/:id', getTransactionById);
+router.get('/user/:userId', getTransactionsByUserId);
+
+export default router;
diff --git a/backend/src/routes/user.routes.ts b/backend/src/routes/user.routes.ts
new file mode 100644
index 0000000..6700a41
--- /dev/null
+++ b/backend/src/routes/user.routes.ts
@@ -0,0 +1,18 @@
+import express from 'express';
+import {
+  registerUser,
+  loginUser,
+  getUsers,
+  getUserById,
+} from '../controllers/user.controller';
+import { validateRequest } from '../middleware/validation.middleware';
+import { registerUserSchema, loginUserSchema } from '../validations/user.validations';
+
+const router = express.Router();
+
+router.post('/register', validateRequest(registerUserSchema), registerUser);
+router.post('/login', validateRequest(loginUserSchema), loginUser);
+router.get('/', getUsers);
+router.get('/:id', getUserById);
+
+export default router;
diff --git a/backend/src/validations/transaction.validations.ts b/backend/src/validations/transaction.validations.ts
new file mode 100644
index 0000000..bafc7e5
--- /dev/null
+++ b/backend/src/validations/transaction.validations.ts
@@ -0,0 +1,13 @@
+import { z } from 'zod';
+
+export const createTransactionSchema = z.object({
+  userId: z.string(),
+  type: z.enum(['deposit', 'withdraw', 'transfer', 'swap']),
+  amount: z.number().positive(),
+  currency: z.string().min(1),
+  status: z.enum(['pending', 'completed', 'failed', 'cancelled']),
+  hash: z.string().optional(),
+  metadata: z.any().optional(),
+});
+
+export type CreateTransactionInput = z.infer<typeof createTransactionSchema>;
diff --git a/backend/src/validations/user.validations.ts b/backend/src/validations/user.validations.ts
new file mode 100644
index 0000000..349b3f9
--- /dev/null
+++ b/backend/src/validations/user.validations.ts
@@ -0,0 +1,15 @@
+import { z } from 'zod';
+
+export const registerUserSchema = z.object({
+  username: z.string().min(3).max(50),
+  email: z.string().email(),
+  password: z.string().min(8),
+});
+
+export const loginUserSchema = z.object({
+  email: z.string().email(),
+  password: z.string().min(8),
+});
+
+export type RegisterUserInput = z.infer<typeof registerUserSchema>;
+export type LoginUserInput = z.infer<typeof loginUserSchema>;