What Is a Token Swap?
The massive success of the crypto industry depends largely on the power of innovation. Crypto has transformed the economy in different ways while also driving simplicity and seamless processes in the management, storage, purchase, and use of digital assets. As a result, crypto has substantially empowered user experiences alongside eliminating the complexities associated with crypto in the initial stages. One of the interesting interventions in the crypto space which has gained promising popularity is token swap. The primary objective of token swaps focuses on reducing the overhead costs alongside the time needed for exchanging crypto assets. Even if token swaps might seem like a very simple concept, many people struggle to find a perfect explanation for ‘what is token swap’. The following discussion would help you dive deeper into a fundamental understanding of token swaps and their working. Token swaps can refer to one of two things:
1. Direct exchange of a certain amount of one cryptocurrency token for another between users facilitated by a special exchange service
There are many exchange services on the market that allow users to buy and sell cryptocurrencies for traditional currencies or for other cryptos. However, due to the limited liquidity and number of trading pairs on each exchange, users that want to trade directly between two crypto tokens are sometimes unable to do so. This is especially true for the less popular tokens because they are often only available on a small number of exchanges. Instead of direct trade, users are forced to include the intermediate step of converting into and out of fiat money or one of the most popular cryptocurrencies, such as BTC or ETH. However, some exchange services target this issue specifically by aggregating multiple other exchanges and sourcing liquidity from them. The end result is that users are able to swap between two cryptocurrencies directly without the inconvenience and double fees associated with conducting trade in two steps. Some of the services that allow token swaps are Metamask, ShapeShift, and AirSwap.
2. Migration
In addition to serving their direct purpose — as decentralized digital money — some cryptocurrencies like ETH, BNB, NEO, and QTUM allow users to launch other crypto tokens on top of their blockchains. These second-layer tokens can “piggyback” off the underlying platforms and enjoy some of their security and popularity without having to spend time and resources on growing their own ecosystem from the ground up. However, in some cases, the platform a token is built upon may become inadequate for its current needs. For example, developers might build their token on Ethereum’s blockchain to leverage its large user base during the initial coin offering, but then decide that they need different underlying parameters for the actual product launch. In such cases, a token swap is possible, wherein the developers migrate their token from one blockchain base to another, while maintaining all address balances.
Working of Token Swaps
The most significant aspect in understanding ‘what is token swap’ would point out directly to the working of token swaps. Let us assume the definition of token swaps, which deals with the direct crypto exchange, for understanding their working in this discussion. The solution offers a promising reduction in barriers for cryptocurrencies featuring lower market capitalization. For example, users seeking opportunities for exchanging RAY coins to SOL will find exchanges offering the RAY/SOL trading pair. As a result, you might have to trade the COMP tokens into fiat currencies or popular cryptocurrencies such as ETH, USDT, or BTC. Then, users would have to exchange the renowned coins or fiat currency, directly to SOL.
Now, you can clearly notice that the process is not cost-effective and takes time to complete. In order to complete such a trade, you must pay the transaction fees more than once. Furthermore, the price volatility could also influence the profitability associated with the trade. It is important to note that crypto assets are generally volatile and the approach mentioned above could create difficulties in achieving the desired price entry you want.
Therefore, exchanges, wallets as well as other platforms started developing token swap functionalities. Users could exchange crypto assets with each other directly with the help of token swaps. You can just enter the amount you need to exchange alongside the desired trading pair for the swapping process. The token swap smart contract would process the transaction instantly, followed by conversion of the coin. In such types of transactions, you would pay the transaction fees only once.
Definition of Token Swaps
One of the foremost aspects in any introductory guide on token swaps would require a distinctive focus on finding answers for ‘what is token swap’. Token swaps or token migration is the process of transferring digital tokens from one blockchain to the other. A token swap is a common event when a specific project leverages one blockchain for raising funds and transfers its tokens to the proprietary blockchain, after the launch of the project’s main net. On the other hand, blockchain projects could also migrate to different blockchain networks for various reasons. Therefore, you can clearly note that token swaps have two different definitions in the world of crypto.
Token Swaps for Direct Crypto Trades
The first definition of token swaps focuses on the instantaneous exchange of cryptocurrencies without any crypto-to-fiat exchange. As of now, you can find different exchange services on the market, enabling users for purchasing and selling cryptocurrencies for other crypto or traditional currencies. On the other hand, reduced liquidity and lesser trading pairs on every exchange encourage users for trading directly with two crypto assets. Some of the less popular tokens cannot achieve such functionality due to their restricted availability on certain exchanges only.
Rather than trading directly, users should include the intermediary step of crypto-to-fiat conversion or converting crypto into popular cryptocurrencies like ETH or BTC. On the other hand, certain exchanges address this issue directly with token swap through the aggregation of multiple exchanges. In addition, the exchanges also source liquidity from the different exchanges for swapping two cryptocurrencies directly without any inconvenience. Furthermore, the exchanges can also take away the issues of double fees required for conducting trade in two different steps. The notable services in the token swap list which offer such functionalities include Metamask, AirSwap, and ShapeShift.
Token Swap and Migration of Projects
Another notable definition of token swap focuses on the migration of platforms or projects from one blockchain to the other. In such cases, the projects would face some critical coin swapping requirements. Projects may switch to other blockchains for some unique token standards and developers should ensure facilities for swapping the native token of the project to other tokens supported on the new blockchain platform. The process clearly shows an answer to ‘what is token swap’ in the crypto sphere.
Certain cryptocurrencies such as BNB, NEO, and Ether serve another distinct purpose beyond their primary role as decentralized digital money. Such types of cryptocurrencies also enable users for launching other crypto tokens over their blockchains. These second-layer tokens could operate on the underlying platforms while leveraging the value of popularity and security of the crypto platforms. As a result, the second-layer tokens could help in avoiding expenses in time and resources for building a new ecosystem from scratch. On the other hand, depending on a popular cryptocurrency blockchain platform has its drawbacks. For example, the platform could be insufficient for the existing needs of the developers. In such cases, token swap comes to the rescue and helps developers in transferring their tokens from one blockchain to another. At the same time, developers could also keep track of all address balances.
Difference between Token Swaps, Token Migration, and Atomic Swaps
One of the common things you would find in discussions regarding token swaps is the confusion with token migration. It is obvious that token swap and token migration are basically the same things. However, atomic swaps are a completely different concept. Atomic swaps focus on the exchange of cryptocurrencies on separate blockchains with a smart contract. With the help of atomic swaps, centralized intermediaries do not have any role to play. Atomic swaps basically point out the conceptually indivisible nature of atoms. Atomic swaps are complete only when buyers and sellers carry out the transaction exactly as they agreed to. Any discrepancy in fulfilling the conditions of the contract would result in no transaction at all. Therefore, you can notice token swap smart contract functionalities with atomic swaps.
Token migration also has a slight difference with token swaps in the fact that it doesn’t focus on buying one token in return for another. On the contrary, token migration involves completely replacing a token with a new token that does not exist until the transfer. Similarly, people also focus on purchasing and selling in discussions on atomic swaps.
The motivation behind Token Swaps
Another important factor that can help in understanding the concept of token swap better is a reflection on its underlying motivation. Blockchains and tokens offer the ability for enterprises to bring in investments while ensuring access to different options alongside control. Enterprises could find better flexibility with blockchain and tokens in comparison to traditional approaches for issuing shares. On the other hand, developing the foundation of a blockchain network requires considerable investment. Therefore, the blockchain would require investment for offering tokens like an investment option.
In such cases, the best solution would refer to developing a token on an existing blockchain like a second-layer token. In such cases, smart contract functionality can help in creating a second layer on the native token. As a result, the token swap could help organizations in building their own blockchain while operating tokens on other blockchains. Ethereum is one of the popular examples in creating custom tokens with its ERC-20 tokens. As a matter of fact, token swap smart contract functionality gained profound recognition with the ERC-20 standard resulting in the arrival of many new coins.
Benefits of Token Swaps
The next crucial factor in understanding token swaps would refer to their value in the present times. Different entries in the token swap list which have been successful in leveraging the benefits of token swapping clearly showcase its value. Here is an outline of some of Convenient Crypto Trading Gatewaythe notable value advantages of token swaps.
Convenient Crypto Trading Gateway
Platforms that offer token swapping functionalities generally work as a convenient, flexible, and highly secure crypto-to-crypto trading gateway. The platforms enable exchanging from the custodial or non-custodial wallets. Furthermore, some wallets don’t require transferring of coins to crypto swapping services or exchanges prior to access for crypto-to-crypto exchanges. The wallet provides generally incorporates token swap services for providing better flexibility to users for secure conversion of coins from personal wallets. As a result, token swapping has become a popular concept in the crypto space for all the right reasons.
Improving Value in Crypto Trading with Token Swaps
Token swaps are a convenient crypto trading gateway for a wide variety of reasons. They offer improved liquidity, as users could use their tokens for purchasing other types of tokens. Users could get the benefit of data integrity as the token swap process and related transactions are stored on the chain. Token swap also provides the assurance of atomicity of the token swap with atomic swaps. You could also find better scope for interoperability with cross-chain token swapping. Most important of all, the token swap smart contract benefits could take away the third-party service fee, resulting in payment to an escrow. As a result, token swapping could offer better cost-effectiveness in crypto trading.
Therefore, you can clearly notice the value advantages of token swaps in the improved simplicity, security, affordability, and speed. Some of the solutions in the token swap list which offer dedicated token swapping services include Simpleswap. Many other exchanges and wallets have also started working on the development of in-house swapping solutions. In addition, the DeFi movement which has gained momentum in 2020 has also led to the rise of DeFi token swap solutions. Similar trends have also been clearly evident in the NFT market with many token swapping solutions emerging in the sector. However, the options are quite limited when you think of token swaps.
Token Swapping with an Exchange
The most popular approach for token swapping involves allocating permission for an exchange to manage the swapping process. Generally, the old tokens are present in the wallet and a new wallet is created after the swap, where the swapped tokens are stored. After completing the swap, the wallet with the old tokens is destroyed. When trading starts on the new token, users could choose to withdraw them or use them in trading. The exchange definitely provides an easier and more convenient option for token swap than carrying it out on your own. Token swapping with exchanges involves complete transparency without any hidden fees. However, you could not trade with the current token for avoiding any mix-ups with other trades in progress.
Token Swapping DIY
You can also choose a DIY approach for token swapping with any crypto assets in the token swap list. Interestingly, the DIY process for token swapping is also the same as that on an exchange. The platform or individual issuing the coin will offer a wallet for downloading or a website for users to register. Users would get two wallets, among which one would be for the old coin and the other one would be for the new coin. After the process, the wallet for the new coin or account will receive credit. On the other hand, the manual approach for token swapping could present some prominent risks.
The wallets and sites developed by token issuers specifically for token swap could present complicated for beginners. Furthermore, the process could also exhibit discrepancies between functionalities and their description and design. Therefore, a small mistake could lead to irreversible and permanent consequences. So, manual token swaps are a better choice for people who have a strong command over the crypto sphere. The description of the manual token swapping process presents a rough overview of the manual swap process. The different variations in the process would depend on many other factors such as the token pairs.
Risks of Token Swaps
The formidable growth in popularity of token swapping services definitely puts all the limelight on their value advantages. However, it is important to pay attention to due diligence before selecting a swapping service. Some of the important factors while searching for a token swap platform could include the availability of different crypto pairs, the speed of swapping coins, and the security infrastructure of the platform. It is also evident that high speed would reduce the possibility of slippage, thereby saving users from price volatility. Some token swapping services offer relief from slippage with fixed swap rates, albeit with higher transaction fees. Therefore, it is also important to take note of the crucial risks associated with token swaps.
One of the foremost drawbacks of token swap refers to the public visibility of token swaps, thereby reducing privacy. Token swap smart contract functionalities also imply a certain lack of flexibility in some cases. If a specific party does not withdraw out the tokens in a specified time period through submission of an off-chain secret, the tokens might be sent back to the payer or locked in. So, you either have a transaction or not at all. While cost is one of the foremost value propositions associated with token swaps, it could also present a noticeable setback. The exchange rate might impose an additional cost. In event of using a public blockchain, the cost for deploying and using the token swap smart contract would add further burden.
Conclusion
Token swap services are playing a pivotal role in the ongoing crypto renaissance. They eliminate the common barriers to entering the altcoin market. In some cases, these solutions provide an easier gateway to cryptocurrencies with low market capitalization. Judging by their simple, fast, and less complicated approach to digital asset exchange, there is every reason to believe that token swaps will continue to feature prominently in the crypto industry.