What Are Token Swaps & How Do They Work?
A Brief Guide To Token Swaps
The token swap is one such innovative advancement designed to reduce the overhead cost and the time required to swap one crypto asset for another. In this article, we’ll go through the brief guide to token swaps, what are token swaps and how they work and why they are needed and the various ways you can swap tokens. Let’s get into it!
The cryptocurrency industry is geared towards innovation and simplification of digital assets in terms of how they are stored, handled, and used. This has clearly removed the complexities that were once associated with the crypto space, thus improving the overall user experience.
What Are Token Swaps?
A token swap is the transfer of digital tokens from one blockchain to another. It frequently occurs when a project raises funds on one blockchain and then migrates its tokens to a separate proprietary blockchain after the main net is released.
For a variety of reasons, blockchain projects may choose to use other blockchain networks. The project’s native token must be exchangeable for another token that is compatible with the new network, which must be provided by the development team.
Numerous exchange services exist on the market that allows users to buy and sell cryptocurrencies in return for traditional currencies or other cryptocurrencies. Due to restricted liquidity and the number of trading pairs accessible on each exchange, users who want to trade directly between two crypto tokens may find it impossible to do so.
This is particularly true for lesser-known tokens, which are usually offered on only a few exchanges. Instead of using fiat money, users must use one of the most prominent cryptocurrencies, such as BTC or ETH, as an intermediary.
Token Swaps, Atomic Swaps, And Token Migration — What Distinguish Them?
A token swap is synonymous with token migration. Likewise, the terms “coin swap” and “coin migration” mean the same. However, an atomic swap is entirely different and involves exchanging cryptocurrencies on a separate blockchain with a smart contract. This process eliminates the need for centralized intermediaries.
The term atomic swap is coined because atoms are conceptually indivisible. Moreover, an atomic trade is essentially an all-or-nothing affair. An atomic swap is complete when a buyer and seller do the transaction exactly like they have agreed to do, and if not, the transaction doesn’t happen at all.
As for token migration, it doesn’t mean buying one token for another, but the complete replacement of a token by a new token that doesn’t exist until the swap occurs. In general, if people are talking about atomic swaps, they are focusing on buying and selling. However, a token swap involves a system upgrade or change of tokens.
What Is The Level Of Token Swap?
If we see from buyers’ standpoint, then the principle motive of token swapping is to transform a specific token into one other cryptocurrency token. This has emerged as a simple manner for the customers who need to remodel their current crypto to a different and obtain the advantages. Many change platforms have understood the demand for swapping, and so they have launched the characteristic of crypto-to-crypto commerce to serve the buyers with greater expertise.
If we see token swapping from the builders’ eyes, then the first motivation is barely completely different. To ascertain a blockchain community, an honest quantity of funding is required to supply tokens for buyers to purchase. To realize this goal, builders construct a second-layer token on an already current blockchain community. That is extraordinarily useful for the builders because it allows them to function their tokens on a blockchain community while constructing their very own blockchain community.
How Does a Token Swap Work?
As an investor, you will not have to actively do anything if the token swap occurs on an exchange platform. Many exchange platforms simply process the token swaps, which are then credited as the new tokens in your account. This can be incredibly simple, and in a few steps, you can carry out the token swap.
On the other hand, the process gets a little complex when you hold the tokens in your wallet since it depends on the migration of each blockchain project. In general, if you are a token holder, you would have to register your tokens ahead of the token swap deadline to make sure that they are migrated to the new blockchain. This process is called mapping.
Why Do Token Swaps Happen?
Blockchains and tokens give companies the ability to take in investments and give them various options and control compared to the traditional issuing of shares. However, to build the foundation of blockchain, i.e., a “mainnet,” one needs investment. This creates a paradoxical situation where the blockchain itself requires investment to provide tokens (as an investment option).
A good solution for this is to create a token on an existing blockchain. Some blockchains can create a second layer on their native token via smart contract functionality. Thus, organizations have their tokens on other blockchains while building a blockchain of their own. One of the famous blockchains for creating custom tokens is Ethereum and ERC-20 tokens. In fact, the ERC-20 standard caused the explosion of new coins after its implementation in November 2017.
How Are Token Swaps Supported?
Token swaps are supported through a process of registering and auditing or are facilitated through a cryptocurrency exchange.
In the first case, token holders are gradually invited to register their tokens by the developer of a blockchain project, who then accredits such tokens through a supported wallet. Following a token swap date, old tokens are generally burned, while the official assets then replace them. In the other case, token holders are invited to store their funds on a cryptocurrency exchange. Over the process, the exchanges will cease to offer any trading options for that unit and will audit and exchange the deprecated assets for the newer ones.
How Can I Swap Tokens?
Token swap processes vary slightly from one another based on the token pair you wish to swap and the method of swap. But there are some things that you can make a note of whether you are using an exchange for swapping tokens or doing it yourself. To begin with, when you let an exchange handle a token swap for you, it should be noted that trading the current token is usually halted to not mix up with trades that may be in progress. Moreover, the coins used for coin creation and distribution for airdrops or rewards are typically halted. Thus, the time before a swap is just as crucial as the actual time of swap since exchanges have to prepare for certain things in advance.
Here are a few ways you can carry out a token swap:
Token Swap on an Exchange
One of the most popular ways of carrying out a token swap is to let an exchange handle it for you. The old tokens are stored in the wallet, and after the swap, a new wallet is created to which the swapped tokens are transferred. Once the swap is complete, the wallet with old tokens is destroyed. After trading begins on the new token, you can either withdraw them or trade them based on your preferences. Generally speaking, an exchange is an easier option than swapping tokens yourself since there are no hidden fees and everything is transparent and straightforward.
Swapping the Token Yourself
The process for handling the swap yourself is generally the same. The platform/person who issued the coin you are holding will give you a wallet to download or an online site to register with. In both cases, you will get two wallets; one for the old coin and the other one for the new. The old token then will have to be transferred to a specific address. Post this, the wallet for the new account will be credited. The manual method, however, has more risk associated with it.
Primarily, wallets and sites created by the token issuers are created just for swapping tokens specifically, and so it may be new for those new to token swaps. Moreover, the process may or may not work as described and designed, and so if you make a mistake, it will be permanent and irreversible. Therefore, manual swaps are best suited for those who are experienced in the cryptocurrency space. On a side note, the process described here is a rough overview of the manual swap and may vary depending on the token pairs and other factors.
What Are Some Benefits Of Token Swap?
Token swapping has introduced many enhancements within the crypto area. And, if you’re an investor, then it’s good to know the first advantages you may reap from this operation.
- One of the vital notable benefits of token swapping is that it has eased the operation of crypto-to-crypto commerce. The trades won’t solely be cost-effective and easy but are additionally extremely secured. You can be allowed to commerce with each custodial and non-custodial exchange. Some exchanges out there have even eliminated the necessity to ship cash to your crypto swapping exchanges to make direct crypto-to-crypto commerce.
- The associated transactions and token swap course get saved on a sequence, at the end growing the information integrity, which is taken into account among the finest advantages. The peace of mind of the token swap’s atomicity with the atomic swap can also be supplied to the customers.
- One other very important benefit of token swap is that the transactions grow to be extremely cost-effective because of the sensible contract characteristic. This implies buyers will have the ability to save a couple of bucks.
These have been helpful and real options that helped customers make the trades with no difficulties. Safety, user-friendly, cost-effective, and easy transactions are among the essential highlights that the majority of specialists confessed and praised while discussing the token swapping characteristic.
Many exchanges have additionally embraced the token swapping characteristic, and so they persist in working to enhance consumer expertise. The phrases like Defi and NFTs which have come into the limelight just some years in the past–have now begun to undertake the token swap operation. This exhibits how fruitful token swapping advantages are and the way they’ll explode out there shortly.
What Are The Drawbacks Of The Token Swap?
Now we’re fairly effectively conscious of what Token swap is and the way it can support buyers and builders of the crypto area. However other than these advantages, there are some things that might not be nice to your eyes.
Token swapping additionally comes with some disadvantages that you have to pay attention to, and right here we’re that will help you with that. Additional now, we can be discussing the principle dangers related to this rising characteristic of the crypto world.
- One of many vital disadvantages that customers have skilled is the dearth of privateness. The token swap is publicly seen, creating privateness issues for many individuals.
- The belief between each event will also be a priority. Firstly, it’s important for customers to have belief within the leaders of the mission. Secondly, customers should have sufficient confidence that the method can be accomplished as per the agreements. But when it lacks someplace, it might grow to be a root explanation for the issues.
- No governing authority in a blockchain community gives quite a few advantages, however, there’s a threat as effectively. Not having any increased authority can provide beginning to some sought of issues. For instance, if one thing goes mistaken in the course of the swapping, nobody may also help you resolve that drawback. That’s why most specialists put a strain on constructing sturdy agreements that each event observe in the course of the course.
- One other main threat is deadlines. If somebody fails to swap their token with the given time, then it will likely be misplaced completely. Extra exactly, your previous coin will lose its utility, and the change will even demolish it in order that every other service of the change can’t acknowledge it.
Typically, the token swap operation is taken into account cost-effective, however, generally, it might not be the case. There are some potentialities that some exchanges might impose an extra price, which can improve the buying and selling charges.
Best Token Swap Platforms
ChangeHero
It is one of the best crypto swap platforms that allow you to buy crypto instantly using cards. Further, you can swap crypto with crypto instantly without creating any accounts.
Simpleswap
It is integrated into the largest cryptocurrency exchanges platforms, allowing limitless swapping of cryptocurrencies directly transferred into your hardware wallet.
ShealthEX
It is a user-friendly crypto exchange that is operating since October 2018. The platform offers various features such as instant transactions, no limits, floated and fixed exchange rates, etc.
Changelly
It is the oldest and most trustable platform as it has several features like instant swapping or exchange and affiliate programs. The advanced version, Changelly Pro, is for advanced and experienced users.
Uniswap
Another top-rated decentralised exchange is Uniswap, where you can trade any Ethereum based token with more than 50000 trade pairs. Its upgraded version, Uniswap V3, allows users to calculate Time Weighted Average Price(TWAP) and geometric mean TWAP.
PancakeSwap
PancakeSwap is a decentralised exchange built and is the biggest Automated market maker(AMM) exchange on Bitcoin Smart Chain. The PancakeSwap is a breakfast-themed platform that involves the use of food-based tokens.
SushiSwap
SushiSwap is a decentralised exchange that runs on Ethereum Blockchain. Just like Pancakeswap, it promotes its users to participate more by providing good incentives. In addition, it operates a customised Automated Market maker(AMM), ensuring no liquidity issues and automated trading between two cryptocurrency assets.
The Motivation Behind Token Swaps
A reflection on the underlying reason is another significant component that can aid in better comprehending the concept of token exchange. Enterprises may use blockchains and tokens to attract investments while maintaining control and access to many choices.
In comparison to traditional methods of issuing shares, blockchain and tokens may provide more flexibility to businesses. On the other hand, laying the groundwork for a blockchain network necessitates a significant investment. As a result, selling tokens as an investment option would require investing in the blockchain.
In these situations, the best option would be to create a second-layer token atop an existing blockchain. Smart contract capability can assist in the creation of a second layer on the native token in such instances.
As a result, the token swap might aid businesses in the development of their own blockchain while also allowing them to operate tokens on other blockchains. With its ERC-20 tokens, Ethereum is one of the most common examples of creating bespoke tokens.
Token swap smart contract functionality got widespread acceptance with the ERC-20 standard, leading to the emergence of a slew of new coins.
These are the 5 things you should know before you start token swapping:
1. Don’t Forget About Ethereum Gas Fees
Ethereum lets projects use smart contracts to produce ERC20 tokens. These coins must be processed through Ethereum, which necessitates the payment of a gas fee. Gas fees might be costly depending on market trading volumes, lowering your profits on every single trade. It’s even worse for switching because certain methods necessitate multiple coin swaps to achieve any advantage.
2. Learn About Exchange Fees
In addition to petrol, consumers must consider exchange fees, which vary greatly. Before completing your transaction, crypto swapping sites will have this listed in their FAQs or highlighted.
Importantly, double-check the amount of cryptocurrency you expect to receive from each swap. Some sites will display a dollar equivalent of your desired token, which may be less than you anticipated.
3. Use The Right Wallet
Before sending your newly switched cryptocurrency to your wallet, make sure it’s supported. Some tokens that were originally ERC20 tokens but have since been migrated to their native protocols will be difficult to migrate. Before you complete a transaction, double-check that you have covered all potential areas of discrepancy.
4. Consider Liquidity & Slippage
When a trade is executed at a different price than when it was initiated, this is known as slippage. Slippage is unavoidable in some trades due to the unpredictable nature of cryptocurrency markets. Some platforms impose limits on slippage, preventing transactions from being executed if slippage reaches a certain threshold.
You’d think that when it comes to liquidity, switching rates would remain constant regardless of amount. That isn’t the case at all. Swapping rates fluctuate according to the number of cryptocurrencies available for swapping. Changing your transaction will entice a cryptocurrency with limited liquidity to offer you better rates.
5. Follow Tried-and-true Security Procedures
Use two-factor authentication to access your wallets and other accounts related to your crypto operations whenever possible. Don’t share your private keys with anyone, and never use them on a website directly. If an offer looks too good to be true, it probably is.
Only use reliable exchanges and keep in mind their centralised nature. When you store your cryptocurrency on a centralised exchange, you give up complete control over it. If something goes wrong, you won’t be able to access your crypto until the issue is resolved.
Conclusion
Token swaps may seem complicated but can be easily carried out with the right knowledge and resources. Choosing an exchange or swapping the token yourself is a personal decision. The main reason many people like to carry out the swaps themselves is ideological, as they don’t want to rely on third parties. On the other hand, some users are comfortable trusting exchanges to carry out the token swaps for them. However, it is not always possible to get the exact swap pair that you are looking for. In any case, the token swap doesn’t require any specialist knowledge, and you can carry it out. As long as you follow the steps carefully and adhere to the timelines, you should be able to manage it well.
Wrap Up
I hope, you’d completely understand the brief guide to token swaps! Let me know in the comment section if you have any questions related to this. Follow me on LinkedIn to stay connected → https://www.linkedin.com/in/ishanshahzad/
