Token Swap or Coin Swap has become increasingly popular among blockchain projects. Notably, Tron (TRX) and EOS mainnet, two of the top 25 cryptocurrencies trading globally, have just completed their transition. ICX, PACCOIN, Nebulas, Qtum and Waltonchain (WTC) are also undergoing the token swap process this year. But usually there is little understanding of what token swap meaning is. Let’s dive into the subject.
What is a Token Swap?
A token swap is a process by which one cryptocurrency is exchanged for another at a predetermined rate. Unlike selling one coin to buy another, a token swap is rather a replacement of one coin for another. It means that you are required to exchange the old coin for the new one, otherwise, you will lose the value.
A token swap is not a simple rebranding, as that can happen without the participation of anyone holding the coin. With a rebranding, tokens might change names or have their ticker symbol switched to something else, but with a token swap, the underlying blockchain that supports the token is being changed entirely, and holders have to take some actions.
Sometimes, if you are holding the tokens on an exchange that is assisting with the token swap, they will take care of the token swap for you. However, since it’s advisable to hold your own tokens in a wallet you control, you should be aware of how to handle a token swap, so that you can manage the process yourself. It’s not difficult, but it does require your attention so that you don’t find yourself holding an old coin that isn’t worth a penny anymore.
Fiat currencies swap
Fiat currencies endure ‘swaps’ or ‘replacements’ when regulators introduce new denominations, print a new version of a banknote, or ‘deprecate’ a certain denomination. In such cases, transacting parties can typically either use old banknotes in conjunction with new ones (as newer notes replace older designs and denominations) or can approach a bank to replace or reconstitute their cash. In other cases, regulators may even introduce different forms of banknote – sometimes colloquially called a ‘star note’ when a particular denomination is misprinted.
Since crypto coins are based on the cryptography and exist only digitally in an immutable blockchain, it is not possible to easily substitute one digital asset for another without introducing new code, frameworks, or support structures to do so.
As such, the process of introducing new cryptocurrency units which rely on a different technical structure or foundation is done through the process of what is called a ‘token swap’ or ‘coin swap’. Broadly, this typically involves exchanging one cryptocurrency asset for another on a ratio of one-to-one, where the old asset is discarded and the new asset is awarded to token holders as a fully fungible replacement that shares the same market value.
Token swaps often require the cryptocurrency to have achieved a basis of critical milestones, and as anyone who works in software knows, deadlines and timing can be highly variable. For this reason, it’s hard to establish a calendar of tokens heading toward a token swap more than a couple months in advance.
How it Works
Token swaps might have slight differences in process, but there are generalities you can learn to get a sense of how it works.
For users and investors, the degree of their involvement in the token migration process varies – typically according to where they store their tokens.
Projects typically implement cut-off periods by which users must swap their tokens. In projects such as EOS, these are ‘hard’ deadlines after which tokens on the old blockchain will be “frozen” and inaccessible to users. While other projects allow for open-ended migration.
Whether you let an exchange handle it for you or you do it yourself, you should be aware that in advance of the token swap, trading on the current token will often be halted so as to not confuse the process with any trades that might be in progress. Also, as some coins have mechanisms for coin creation and distribution in the form of block rewards, air drops, or other offerings, those will also be halted.
So you need to be aware that it’s not just a matter of the deadline for when the token occurs – different exchanges may take action to prepare at slightly different times in advance.
Tokens storage on the exchanges
For those who store their tokens on exchanges, it is unlikely that they will have to take any steps to participate in the migration. Major exchange Binance, for example, says it handles “all technical requirements” of the process for the EOS, Tron, ICON and Ontology migrations.
In this case, you simply put your tokens on the participating exchange. They hold it in a wallet for you, and when the swap happens, they will create a new wallet for within your user account on that exchange, and then transfer new tokens into it. The wallet with the old tokens will be destroyed. Once trading begins on the new token, you can withdraw them to your own wallet or trade them, or whatever you usually do with your tokens. Simple as that!
Tokens storage in wallets
However, users who store their tokens in wallets may need to initiate the process manually. Generally speaking, the people who issued the coin you are currently holding will issue a wallet or online site that you either download or register with, respectively. In either case, you will see an account with 2 wallets, one for the old coin and one for the new. You will be prompted to transfer your old token to a specific address. When you do, you should soon see the wallet for the new account be credited.
More specifically, you must undergo token registration, also called “mapping,” in order to send their tokens from the previous blockchain to the new network. In practice, this process typically entails generating a project-specific key (for example, an EOS key) and sending tokens to it from the key address where the tokens were initially stored after purchase, prior to the mainnet launch (for example, an Ethereum key).
Exchanges vs Wallet Token Swap
|(+) Automated method
All technical steps will be handled by the exchange without any special fees charged above the normal fees that come with transferring your coins on and off.
|(-) Manual method
You need initiate the coin swap process manually
|(+) Regular interface
The exchange will create a new wallet within their platform that will look the same as your old one.
|(-) Unfamiliar interface
The wallets and sites created by the token issuers are often newly created, or created specifically for this task, so it may be an unfamiliar interface, and it may not work as described or designed.
|(+) Technical support
If you let an exchange handle the swap, if something goes wrong you might be able to appeal to them for help.
|(-) No second chance
If somehow you make a mistake, there will be no recourse to undo it.
Coin swap risks
Token migration might not be that simple and there’s always a chance that you could screw things up:
- Missing the deadline
The primary risk of a token swap is missing the deadline. Sometimes there are fallback methods offered to help people who missed the swap day, but you shouldn’t rely on that. Ultimately, after a certain point, there will come a time when the old coin will be deprecated entirely, and it becomes worthless. Exchanges will delist the old token, wallets will stop supporting it, and services and Dapps associated with that token will no longer recognize it.
- No “trustless” process
Perhaps the most significant risk associated with token migrations is that they are not “trustless” processes. Instead, users must place their trust in those in charge of the project to implement the shift according to plan. However, because token migrations are relatively novel, there is often no blueprint for their execution.
- No governing body
Like so much in the world of crypto, though, there is no governing body that you can appeal to if things go wrong. If a token swap happens and you didn’t participate or made a mistake by transferring coins to a wrong address, you will have no recourse.
Why Coin Swap?
Why would a project need to complete a token migration in the first place?
Often, the shifts are carried out by projects that begin by using the Ethereum blockchain to raise money and distribute their tokens. The tokens distributed at this phase typically act as “placeholders” for those that will eventually be used when the project is live.
One benefit of this strategy is that traders don’t have to lock up this capital. Rather, they’re able to exchange these placeholder tokens on exchanges while they develop their technologies.
Therefore, a “token migration” has come to describe the process by which token holders’ balances are transmitted from their Ethereum wallets to a given project’s new compatible wallets. After the switch, tokens have effectively “moved” from one blockchain to another.
However, it’s important to note that token migrations are not exclusively linked to live blockchain launches, and also take place when projects merely shift from one protocol to another. For example, Storj’s token migration was prompted by its decision to move from a bitcoin-based protocol to Ethereum due to scalability issues.
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. For example, developers need not necessarily exchange tokens on a one-to-one ratio, and may even afford ten, one hundred, or one thousand units per swapped asset depending on the total circulating supply of a new cryptocurrency.
As you can see, a token swap is nothing that requires any specialist knowledge or should concern you too much. So long as you take action in the specified time and carefully walk through each step, you should find it a very manageable process.
On the other hand, it is a critical process that affects the value of your holdings. You absolutely need to be aware of when your token is intending to do a token swap, under what circumstances, and how it will be handled.
Overall, a token swap is a good thing, as it means that the token initiating a swap has hit their goals sufficiently to warrant proceeding.