Token Swap
The aim behind is to document my understanding about Token Swaps. It’s my rough notes. I’ll continue to edit and add more information to them.
A token swap has two distinct definitions/use cases within the crypto sphere.
The first connotes the process of instantaneously exchanging one cryptocurrency to another without having to first undertake a crypto-to-fiat exchange.
The second definition of token swap revolves around the migration of projects from one blockchain to another and the coin swapping requirements that often accompany such a move.
How Do Token Swaps Work?
For this, we will be focusing on the first definition of token swap. As mentioned earlier, this entails the use of seamless crypto-to-crypto exchange services rather than the often cost-inefficient and time-consuming approach of converting a digital asset to fiat before subsequently using the fiat to buy your desired coin. In most cases, this solution provides an easier gateway to cryptocurrencies with low market capitalization.
Why cost inefficient? Because, to execute such a trade, you would have to pay transaction fees at least more than once.
Why time-consuming?
In light of these drawbacks, exchanges, wallets, and other platforms began enabling instant swap functionalities. With this, users can exchange a crypto asset for another directly. All you need to do is enter the amount you want to exchange and your desired trading pair and the token swap service would instantly process and convert your coin. With this form of transacting, you only have to pay transaction fees once.
Second defination
The second definition of token swap revolves around the migration of projects from one blockchain to another and the token/coin swapping that often accompany such a move.
In some cases, blockchain projects may elect to ‘merge’ with others with complimentary goals, or may ‘fork’ to achieve new technologies and objectives.
In such cases, developers can apply their own ‘swap rate’ when exchanging digital assets. Swap rate can be anything, one-to-one ratio, or even ten, one hundred, or one thousand units per swapped asset.
Problem of Slippage
Slippage occurs when the number of cryptocurrency A you receive in exchange for another cryptocurrency B steeply declines before the transaction is finalized.
Some services eliminate slippage by offering fixed swap rates that are held from the start of the transaction to its finalization. The only added requirement of such offers is that you may have to pay a higher transaction fee.
Future
Token swap services are playing a pivotal role.
They eliminate the common barriers to entering the altcoin market.
They double down on user experience and put mechanisms in place to unlock the altcoin market to users that lack the technical expertise required to navigate crypto exchanges.
As the crypto industry continues to gravitate towards mainstream adoption, expect token swaps services to become more prominent.