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. 

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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 mainnet. 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 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. 

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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. 

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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. 

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 COMP coin to ZIL will find exchanges offering the COMP/ZIL 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 ZIL.

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. 

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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 the 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. 

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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, speed of swapping coins, and 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 exchanged 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.

How Can You Swap Tokens?

The process for token swap differs in terms of the method of swapping and token pair selected for swapping. In addition, you need to consider whether you will use an exchange for swapping tokens or achieve it on your own. Here is an outline of the ways to swap tokens.

  • 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 complicacies 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. 

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Example of Token Swapping Solution

One of the foremost examples of a token swap solution refers to Kaleido.io. The platform offers a simple and intuitive interface for secure token swaps with other network participants. It offers the functionalities of the atomic swap, hashed time-lock contract, and the flexibility for cross-token swapping. 

Kaleido ensures atomic swap functionalities for ensuring trading parties act with integrity in all transactions. The hashed time-lock contract functionality implies the need for a proper secret for claiming tokens. Furthermore, Kaleido also enables cross token swapping which helps in trading different fungible and non-fungible tokens as well as a mix of both. 

Bottom Line

Even if Bitcoin and ETH are some of the most popular cryptocurrencies in the present market, investors are interested in many of the emerging alternatives. As a matter of fact, altcoins present access to a broad range of opportunities associated with the digital space. Token swap services could provide better improvements in user experience with quick and direct crypto trades with cost-effectiveness. 

At the same time, due diligence also comes into the equation before choosing a token swapping service. A detailed understanding of the risks presented by token swaps such as time restrictions and added costs due to slippage is also essential for anticipating their true value. Learn more about token swapping and find the best solution for your needs.

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*Disclaimer: The article should not be taken as, and is not intended to provide any investment advice. Claims made in this article do not constitute investment advice and should not be taken as such. 101 Blockchains shall not be responsible for any loss sustained by any person who relies on this article. Do your own research!