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Getting started with crypto token swaps

Cryptocurrencies are predicted to be the future of money. DLT (Distributed Ledger Technology) uses different innovations and mechanisms to store, handle and trade crypto tokens, making the crypto trade seamless and easy. The token swap is one such major advancement in the crypto space where the crypto to crypto exchange is made cost-efficient and user-friendly.

In this article, let’s learn about token swaps and their work in the crypto space.

What are token swaps?

We can simply define token swap as transferring of digital tokens from one blockchain to another. This process can be explained better in the following two ways.

We can explain the first method as a process of direct exchange between two cryptocurrencies, without undergoing crypto to fiat currency exchange.

The second method would be the migration of projects or platforms from one blockchain to another blockchain. Here, the developers should ensure that the new blockchain platform is compatible with the native token for swapping. Blockchain migrations can be for various reasons, such as raising funds, compatibility, security, popularity, etc.

A few examples of services that allow token swap are: Meta mask, ShapeShift, and AirSwap.

Difference between token swaps, token migration, and atomic swaps

Token swap and token migration

Token swap and token migration are similar, as both move tokens from one blockchain to another. Because of the limited liquidity and the number of trading pairs available on each exchange, users who want to trade directly between two crypto tokens sometimes cannot do so. Token swap enables crypto traders to trade between two different cryptocurrencies without liquidity issues. It also reduces the trading cost involved in the crypto trade.

However, in token migration, one blockchain project developed on a proprietary blockchain may be migrated to another blockchain when a considerable change regarding compatibility or scalability is required. Here, the tokens are not migrated to buy new tokens but for the betterment of the project.

Atomic swap

Atomic swap is the exchange of cryptocurrencies based on a smart contract using no centralized intermediaries. If there are any discrepancies in the agreement, the transaction will not go through.

Working of token swaps

In a token swap, they swap tokens at a fixed rate, removing the need for third parties and costly intermediaries which were otherwise necessary for transactions.

For example, if you want to swap SOL(SOLANA) to CARDANO(ADA), you have very few options to swap them directly. First, you’ll have to trade SOL for fiat currencies, and then you can exchange the fiat coins for ADA, a very time-consuming and costly process. It also comes with a high transaction fee and, since the price of the crypto assets is volatile, this trade may even cause losses and impact profitability. To overcome these hurdles, exchanges and other platforms began directly depending on the token swapping process for swapping the tokens/coins instantly. 

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The only thing we need to do is enter the token amount we need to exchange and the token swap service platform will instantly convert or migrate the coin to your desired coin or token. Here, the transaction fees are only paid once. Platforms that offer token swapping perform the swapping through the custodian wallets. The wallet provides help in the secure swapping of the coins from the personal wallets of the coin holders. The primary advantage of token swapping is that it brings simplicity, speed, security, and affordability, making transitions easier for users.

Examples of platforms offering crypto swapping services are Changelly, Shapeshift, ChangeNow, Simpleswap, etc. 

Related article on How to launch an ICO, STO, or IEO in 2021?

What are the benefits of token swaps?

Token swaps provide convenient crypto trading in the crypto space, making the transactions more efficient and secure. Given below are some benefits of token swapping.

batch transfers of multiple fungible and non fungible tokens using ERC 1155
  • Liquidity – The user can use their tokens to trade with other tokens, increasing the liquidity. 
  • Data Integrity – The swap process and transaction records are stored on the blockchain, maintaining the data integrity of the swapped tokens.
  • Atomicity – Smart contracts guarantee the atomicity of the token swap.
  • Cost – Fewer transaction fees
  • Interoperability – Interoperability is achieved because of easier cross-chain transactions.

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How can you swap tokens?

Token swapping exists on the methods of exchanging. Given below are the means through which we do token swapping for the transactions of the tokens.

Token swapping with an exchange

The most common method of token swapping happens with an exchange that may manage the token swap process. Here the old tokens are swapped for new tokens, and they will get stored in a wallet. The users can withdraw the new tokens in trading when required. Using an exchange for the swapping process helps in transparency, as there are no hidden fees and, it helps in easier trading.

Token swapping DIY

Token swapping on your own is like the swapping process that happens through an exchange. However, the manual swapping process will be complicated for beginners and the mistakes once done would be irreversible. In Manual token swapping, the users will get two wallets, one for the old coins and the other for the new coins. Once a swapping transaction happens, the wallets/accounts with the new coins will receive credit.

Is swapping crypto tokens worth it?

Swapping crypto is often considered interesting for varied reasons which include profit-making and diversifying the portfolio. Trading or swapping cryptocurrencies is one way to make money with cryptocurrencies.

Crypto swapping can make profits in the following two ways:

  • Swapping, then holding

Less popular crypto coins can be purchased at lesser prices at the swap sites and if in case you can identify a token of a promising project, then a huge profit margin can be made through this crypto swap. As the crypto token gains popularity, its value will also increase, which will generate profits for the crypto traders.

  • Margin swapping

Market volatility plays a huge role in coin swaps, as they can attain significant gains due to the value differences arising from the market volatility. The only point to be remembered is a well-calculated crypto swap during such times.

A crypto swap is done when one crypto token is deprecated in exchange for a replacement. The profits resulting from the swapping of cryptocurrencies are subjected to tax under the tax of income. An IRS provides the guidelines on taxable crypto activities. Crypto gains fall under the capital gains and they attract a tax between 10%-37%.

Related article on How to launch a cryptocurrency exchange?

How can it help a crypto investor?

The crypto investors can benefit from the token swap by eliminating third-party compensation for better profits. Token swapping can also help the investors with the cost-effectiveness during the crypto trade as it will take away the issues of double fees required for trading in distinct steps. 

Risks involved in token swapping

  • Gas fee: Processing these coins through blockchains like Ethereum requires gas fees. They can be costly based on the trading volumes and could reduce the profit in every trade you make.
  • Exchange fees: Exchange fees can vary with each trade transaction. Also, the amount of cryptocurrency received after the swap should get analyzed, as sometimes it can be less than expected.
  • Use of right wallet: Make sure you’re using a wallet that supports the swapping and, before completing a transaction, all the potential areas of the discrepancy should be checked and covered.
  • Liquidity and slippage: Slippage is inevitable because of the unpredictable character of the crypto market. Slippage occurs when a trade gets conducted at a different price than its price at the time of initiation. Some platforms set slippage limits, containing transactions when they reach a certain cusp of slippage. And with liquidity, swapping- rates flutter according to the number of cryptocurrencies that are available for swapping.
  • Security measures: Do Not share private keys with anyone and never use them on the websites directly. Opt for two-factor authentication to access the wallets and only depend on reliable exchanges.

Closing thoughts

Even though Bitcoin and Ethereum are the most popularly used cryptocurrencies in the crypto market, many newer coins are grasping investors’ attention. Token swap services will provide better user experiences with liquidity and cost-effectiveness, simplifying the digital asset exchange. Swapping crypto tokens help us boost liquidity by allowing users to buy different tokens with their tokens. Because of this reason, we believe that token swapping will continue to have a prominent space in crypto. As each token swap transaction happens on a blockchain network, the data integrity of the tokens is strictly maintained. But before jumping into any operations in the crypto space, detailed research is always recommended.

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Author

Rahul A R is a technologist and full stack developer who specializes in Blockchain technologies and Cryptocurrencies. Though he’s worked within numerous privacy and security sectors, Rahul’s recent emphasis has been on solutions built on Ethereum, Tezos, smart contracts, and smart signatures, in particular, decentralized self-sovereign identity. He’s Helped clients, from start-ups to Fortune 500 companies, across North America and Asia, develop their blockchain strategy and build several decentralized applications using blockchains and smart contracts.

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