A Beginner’s Guide To Token Swap

• Ayushi Abrol
• September 08, 2022

In the recent few years, there have been numerous changes and improvements in the crypto field. Most innovations have worked in favor of the system, especially for users, because processes like transferring, buying, and storing digital assets have become very convenient. 

One of the most prominent features that have entered the crypto market is Token Swap. The main motive behind this feature is to provide users with crypto-to-crypto trading. 

Many crypto aficionados may have been perplexed by token swapping and wondered, “What is a token swap?” If you’re having trouble figuring out what’s going on, just keep reading this piece.

Here we will discuss every vital aspect of the token swap and provide a guide, educating investors on how to swap their tokens and level up the trading game. Let’s get started. 

Introduction To Token Swaps

Token swaps can basically be used for two different functions in the crypto world. 

The first one is allowing users to exchange cryptocurrency without using fiat currency. This means now the users can exchange one cryptocurrency with another one they desire. 

Many users are moving forward and using the crypto-to-crypto trade exchange. 

Swapping can be done easily with well-known cryptos, but it might be tough to trade the cryptos that are less in popularity. Due to this reason, many experts don’t recommend you swap less popular tokens as the limited availability will hinder you from making a profit. Because to swap any less popular token, you will have to engage in the two steps of trading. Firstly, you will have to convert your crypto to fiat or another famous crypto like Bitcoin or Ethereum and then buy your desired coin. The central drawback of this process is that users have to pay double fees, which is not suitable for most people. 

Many exchanges are available in the market that solves this problem. They have taken the initiative to source their liquidity to the users. This has made many investors’ lives easy by eliminating the two-step trade process. Now investors can directly swap their crypto without double fees or other hindrances.

Several exchanges are providing the service of token swapping, but the most famous ones are:

• Shapeshift
• Airswap
• Metamask

As we mentioned above, the term ‘token swap’ can be used to describe two distinct functions. Now it’s time to discuss the second one. Ready? Let’s get into it. 

Another definition of the token swap indicates the migration of a particular blockchain project to another blockchain. This function is usually operated by the developers who use a blockchain network to collect funds from the investors and then migrate the tokens to another blockchain network. The main motive behind the migration of one blockchain to another probably is to avail some unique and beneficial features of the token. 

However, it should be the developer’s duty to help investors with the facility to swap the current native token to the new blockchain of the network without any significant inconvenience. ETH and NEO are some of the most popular cryptocurrencies that allow users to build their tokens on their network. 

There’s also the confusion many people have regarding the terms token swap, token migration, and atomic swap.

In general, token swap and token migration share the same meaning of buying one token for another, but token migration slightly differs from the swap. In token migration, the whole blockchain network of tokens is converted into another. And it comes into existence only when the transfer is completed. 

However, Atomic swap has an entirely different definition from token swap and migration. 

Atomic swap allows users to exchange tokens on the different blockchain networks. Smart contracts are also involved in this process. To process the transaction, the seller and buyer must agree on a contract mentioning the terms and conditions of the transaction. If both follow the conditions correctly, the transaction will be successful. Otherwise, the transaction will be neglected entirely. 

What Is The Point Of Token Swap?

If we see from investors’ point of view, then the main motive of token swapping is to convert a particular token into another cryptocurrency token. This has emerged as a straightforward way for the users who want to transform their existing crypto to another and receive the benefits. Many exchange platforms have understood the demand for swapping, and they have introduced the feature of crypto-to-crypto trade to serve the investors with a better experience.

If we see token swapping from the developers’ eyes, then the primary motivation is slightly different. To establish a blockchain network, a decent amount of investment is required to offer tokens for investors to buy. To attain this objective, developers build a second-layer token on an already existing blockchain network. This is extremely helpful for the developers as it enables them to operate their tokens on a blockchain network while building their own blockchain network.

What Are Some Advantages Of Token Swap?

Token swapping has brought many improvements in the crypto space. And, if you are an investor, then it’s good to know the primary benefits you can reap from this function. 

• One of the most notable advantages of token swapping is that it has eased the function of crypto-to-crypto trade. The trades will not only be cost-effective and effortless but also highly secured. You will be allowed to trade with both custodial and non-custodial exchanges. Some exchanges in the market have even removed the need to send coins to your crypto swapping exchanges to make direct crypto-to-crypto trade. 
• The related transactions and token swap process get stored on a chain, ultimately increasing the data integrity, which is considered one of the best benefits. The assurance of the token swap’s atomicity with the atomic swap is also provided to the users. 
• Another vital advantage of token swap is that the transactions become highly cost-effective due to the smart contract feature. This means investors will be able to save a few bucks. 

These were useful and genuine features that helped users make the trades without any difficulties. Security, user-friendly, cost-effective, and effortless transactions are some of the main highlights that most experts confessed and praised while discussing the token swapping feature. 

Many exchanges have also embraced the token swapping feature, and they persist in working to improve the user experience. The terms like Defi and NFTs that have come into the limelight just a few years ago–have now started to adopt the token swap function. This shows how fruitful token swapping benefits are and how they can explode in the market shortly. 

What Are The Drawbacks Of the Token Swap?

Now we are pretty well aware of what Token swap is and how it can aid investors and developers of the crypto space. But apart from these benefits, there are a few things that may not be pleasant to your eyes. 

Token swapping also comes with some disadvantages that you must be aware of, and here we are to help you with that. Further now, we will be discussing the main risks associated with this emerging feature of the crypto world. 

• One of the significant disadvantages that users have experienced is the lack of privacy. The token swap is publicly visible, creating privacy problems for many people. 
• The trust between both parties can also be a concern. Firstly, it is essential for users to have trust in the leaders of the project. Secondly, users must have enough confidence that the process will be completed as per the agreements. But if it lacks somewhere, it can become a root cause of the problems. 
• No governing authority in a blockchain network provides numerous benefits, but there’s a risk as well. Not having any higher authority can give birth to some sought of problems. For example, if something goes wrong during the swapping, no one can help you resolve that problem. That’s why most experts put pressure on building strong agreements that both parties follow during the process. 
• Another major risk is deadlines. If someone fails to swap their token with the given time, then it will be lost entirely. More precisely, your old coin will lose its utility, and the exchange will also demolish it so that any other service of the exchange can’t recognize it. 

Generally, the token swap function is considered cost-effective, but sometimes it may not be the case. There are some possibilities that some exchanges may impose an additional cost, which may increase the trading fees.

How Do Token Swap Functions?

Now it’s time to understand how token swap functions. Anyone planning to swap their tokens in the future must know the basic mechanism behind token swap. It will help in trading more effectively.

As we mentioned above, exchanging your token with another asset in a general manner can be expensive and inconvenient because it includes a two-step process that includes double fees. Along with that, the volatility of the crypto market can also cause a reduction in the total profit. Now it can be easily seen how inefficient this process is for investors. 

To solve this problem, a token swap takes an entry. Token swapping function on the crypto exchange platforms enables users to swap their tokens quickly without any trouble. It has become so easy, literally. You just have to go on the platform, select the option of the token swap, enter the amount you’re willing to exchange with your desired token. That’s it; you are done with the swapping process. The smart contracts will take care of the further process. 

One of the best things about these functions is that you don’t have to put extra effort into converting your token into fiat or any other famous crypto. And, you don’t have to pay the double fees as well.

Investor’s Guide To Token Swapping

Now comes the most important part—the process to swap your tokens. 

One of the best-known ways to swap your token in an easy manner is using an exchange platform. In this process, you grant permission to the platform to swap your coins as per your instructions. You will have to just go through a few clicks, and you will be done with the trading process. After the completion of the transaction, your wallet exchange will demolish your wallet containing old coins. This process is highly sufficient as the transparency is provided fully and doesn’t include any extra fees. 

Many exchanges in the crypto world offer swapping services, but only a few of them are trustworthy. That’s why it’s highly recommended to do good research before you choose an exchange service. Make sure that it fulfills all of your required needs at a reasonable cost. 

Make sure to proceed with transactions very carefully and double-check the amount you’ve put into the swapping. It will help you avoid unwanted problems.

One of the most popular swap exchange services in the crypto market is known as Kaleido.io. This platform allows users to swap their tokens in a highly secure and easy to use along with other useful functions like hashed locks, atomic swap,  a flexible process of cross-token swapping. 

Conclusion

Token swapping has emerged as a very favorable function for many investors. Most of them hold some assets that they want to exchange for some specific reasons. The reason can be anything–maybe they see potential in another cryptocurrency. 

Token swapping comes along with many benefits and some risks as well. It’s imperative for investors to consider all the consequences of swapping, only then proceed further. It will be helpful in tackling the risks that may occur during the trade.

However, the exchange platforms have destroyed investors’ load of processing swap tokens. Many platforms have added the swapping feature with the main focus of solving problems like double fees, security, two-step process, etc. Keep in mind that there are many exchanges available in the market, and only a few of them can be a good fit for you. So, before you pick any platform, make sure to weigh the benefits and risks, then choose accordingly.