The Beginner's Guide to Token Swaps
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The Beginner's Guide to Token Swaps

With the rise in popularity of trading altcoins, how can token swaps help crypto investors?

The Beginner's Guide to Token Swaps

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The crypto industry is skewed towards the innovation of simple and seamless processes for handling, storing, buying and using digital assets. This prevailing theme has directly improved user experience and eliminated some of the complexities once attributed to the emerging sector. One of such innovative advancements came in the form of token swaps, designed to reduce the overhead cost and the time required to exchange one crypto asset for another. 

However, as impressive as this sounds, not many seem to grasp the importance of such functionalities. In this guide, we will discuss the workings of token swaps and how they fit into the industry as a whole.

What Are Token Swaps?

A token swap has two distinct definitions 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. This definition encapsulates the workings of prominent platforms like Changelly, Shapeshift and Airswap.

On the other hand, the second definition of token swap revolves around the migration of projects or platforms from one blockchain to another and the coin swapping requirements that often accompany such a move. In this case, a project has for one reason or the other chosen to switch its operation base to another blockchain with unique token standards. As such, the development team must provide the means for investors and users to swap the project’s native token to another token that is compatible with the new blockchain network. The process involved is what we call token swapping or token migration.

How Do Token Swaps Work?

For this guide, 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. 

For example, if you want to exchange your COMP coin to ZIL, you will most likely discover that exchanges that provide the COMP/ZIL trading pair are few and far between. As such, you may have to first trade your COMP tokens for fiat currencies or other established coins like BTC, ETH and USDT. From there you can exchange the popular coins or fiat directly to ZIL. 

You will agree that this process is long and cost-ineffective. To execute such a trade, you would have to pay transaction fees at least more than once. Also, it is impossible to gauge how price volatility can impact the profitability of the trade. Remember that the prices of crypto assets are often volatile. Therefore, the above-mentioned approach could make it difficult to achieve your desired price entry. 

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. 

Platforms with token swapping offer a convenient and secure crypto-to-crypto gateway: you can do all the exchanging you want from either a custodial or non-custodial wallet. Depending on the robustness of your wallet, you may not need to transfer your coins to a crypto swapping service or exchange before accessing an instant crypto-to-crypto exchange feature. Wallet providers often incorporate crypto swapping services so that users can convert their coins securely from their personal wallets. 

Essentially, what such crypto swapping services bring to the table is simplicity, speed, affordability and security. Some even go as far as allowing users to buy cryptocurrencies with credit or debit cards.

Examples of solutions offering dedicated crypto swapping services are Changelly, Shapeshift, ChangeNow,and Simpleswap. Exchanges and wallets have also begun to create their in-house swapping services. Moreover, the DeFi craze of 2020 further spurred the emergence of DeFi token swap solutions. The same trend is currently sweeping across the NFT market. When it comes to token swaps, the options are practically unlimited. 

Owing to the explosion of swapping services, it has become increasingly important to carry out due diligence before choosing one. Things to look out for include the availability of a wide array of crypto pairs, the security prowess of the platform and the speed at which coins are swapped. Note that high speed negates the possibility 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. 

It is worth mentioning that 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. 

What Does the Future Hold for Token Swap Services?

While Bitcoin remains the go-to crypto asset for many new investors, it is their foray into the altcoin market that eventually exposes them to the myriad of opportunities embedded in the digital asset space. This is where token swap services enter the fray. 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. However, this expectation puts added pressure on service providers to improve their offerings. The onus is on them to boost security, increase swap speed and deliver more user-centric features. 

Conclusion

Token swap services are playing a pivotal role in the ongoing crypto renaissance. They eliminate the common barriers to entering the altcoin market. In some cases, these solutions provide an easier gateway to cryptocurrencies with low market capitalization. Judging by their simple, fast and less complicated approach to digital asset exchange, there is every reason to believe that token swaps will continue to feature prominently in the crypto industry. 

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