A beginners guide to Token Swaps

the transfer of digital tokens from one blockchain to another is known as a token swap (or token migration). It commonly happens when a startup raises funding on one blockchain and then migrates its tokens to a different proprietary blockchain after launching the project.

· 4 min read
A beginners guide to Token Swaps

In this Article:

1. Why is Token Swap?

2. How do they work?

3. Things you should be aware of while swapping tokens!

4. What are the risks?

5. Conclusion

What is Token Swap?

The transfer of digital tokens from one blockchain to another is known as a token swap (or token migration). It commonly happens when a startup raises funding on one blockchain (such as the Ethereum network) and then migrates its tokens to a different proprietary blockchain after launching the project's main net. On the other hand, for a variety of reasons, blockchain projects may shift to different blockchain networks. Investors and users must be able to exchange the project's native token for another token that is compatible with the new network, which must be provided by the development team.

Another function of token swaps is the instantaneous exchange of one cryptocurrency for another without the need for a crypto-to-fiat conversion. Investors may already find a variety of exchange services on the market that allow them to buy and sell cryptos for traditional currencies or digital assets. However, customers are more likely to trade directly between two crypto assets due to lower liquidity and fewer trading pairs on different exchanges. Trading on less popular cryptos may not be as beneficial in this instance, since they are unable to reach full functioning due to their limited availability on exchanges.

How do they work?

The most important component of knowing 'what is a token swap' is to understand how token swaps function. To understand how token swaps function in this talk, let us accept the concept of token swaps, which deals with direct crypto exchange. For cryptocurrencies with lesser market capitalization, the approach offers a promising reduction in hurdles. Users looking to exchange COMP currency for ZIL, for example, will find exchanges that offer the COMP/ZIL trading pair. As a result, you may need to convert your COMP tokens into fiat currency or a popular cryptocurrency like ETH, USDT, or BTC. Users would then have to trade their well-known coins or fiat currencies for ZIL.

You can see that the procedure is not cost-effective and takes a long time to finish. To execute such a transaction, you must pay the transaction fees multiple times. Furthermore, price volatility may have an impact on the trade's profitability. It's vital to remember that crypto assets are inherently volatile, and using the method described above may make it difficult to achieve the ideal price entry.

As a result, exchanges, wallets, and other platforms began to build token swap features. Token swaps allowed users to directly exchange crypto assets with one another. For the exchanging process, simply input the amount to be exchanged and the preferred trading pair. The transaction would be processed quickly by the token swap smart contract, followed by the conversion of the coin. You would only pay transaction fees once in these types of transactions.

Things you should be aware of while swapping tokens!

Depending on the token pair you want to swap and the manner of the swap, the token swap process varies slightly. However, whether you use an exchange to swap tokens or do it yourself, there are a few things to keep in mind. To begin, it's important to remember that when you let an exchange handle a token swap for you, trading the current token is normally paused in order to avoid interfering with other trades. Furthermore, the coins that are utilized for coin generation and distribution for airdrops or prizes are usually paused. As a result, the time leading up to a swap is just as important as the time of the swap itself, because exchanges must prepare for certain things ahead of time.

What are the risks?

  • The most significant risk associated with a token swap is missing the deadline. In the event that someone misses a token swap day, there are fallback methods available. However, they should not rely upon them totally. The old coin will eventually lose its value and become obsolete. At times, exchanges will delist the old token, and wallets will stop supporting it. Similarly, the token's associated services and dapps will cease to recognise it.
  • Aside from the token swap deadline, there is also the risk of mishandling the transaction. Again, if you skip any of the critical procedures, you will be unable to contact any authority for assistance. Fiat currency, like company-issued equities, has its own set of rules and restrictions for use and distribution. When it comes to cryptocurrencies, though, there is no controlling authority to turn to if things go south.
  • One of the downsides of token swaps is that they are publicly visible, lowering its privacy.

Conclusion

Token swaps may appear complicated, but they are simple to execute if you have the necessary information and resources. It is a personal choice whether to use an exchange or to swap the token yourself. Many people prefer to perform the swaps themselves for ideological reasons, as they do not want to rely on third parties. On the other side, some consumers are comfortable entrusting their token trades to exchanges. However, getting the exact swap pair that you want is not always attainable. In any event, the token swap does not necessitate any specialised understanding and may be completed by anyone. You should be able to handle it well if you carefully follow the instructions and stick to the deadlines.