Token Swap: How It Works

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Token Swap

Token swap is a process in which one cryptocurrency is exchanged for another at a predetermined rate. Unlike selling one coin to buy another, when replacing tokens, a new coin replaces the old one, which means that this operation is required, otherwise the owner will lose money.

Token swap is not a simple rebranding that coin holders may not notice, because only the name or the exchange ticker changes. Replacing the token affects the cryptocurrency blockchain itself, and the owners have to take some action. If the user holds tokens on the exchange, she can take care of the exchange for him.

However, it is safer to keep tokens in a wallet controlled directly by the owner, so it would be nice to be able to carry out this procedure yourself. There is nothing complicated in this, but it is important to be careful and not to stay with the old, worthless coin.

Why do you need token swaps

The advent of blockchain and tokens has given companies and communities the opportunity to take investments or sell services for their own coins – this provides more opportunities and greater control over the situation than traditional methods of issuing shares.

At the same time, creating your own blockchain is a rather costly process, and this creates a kind of chicken and egg problem for a start-up blockchain company: businesses need to issue tokens in order to finance the creation of the blockchain, but to issue tokens it is necessary to create a blockchain.

However, this problem has a solution: you can make a token on an existing blockchain. The fact is that smart contracts implemented on some blockchains allow you to create a second layer of functionality on top of the original tokens, that is, create your own token on someone else’s blockchain and start collecting funds simultaneously with building your own blockchain.

The most famous blockchain of this kind is the Ethereum project, within the framework of which the ERC-20 standard was developed. ERC is the internal system for proposals for updating the Ethereum blockchain, and 20 is simply the number of a specific proposal in accordance with which the issue of tokens was implemented.

Although almost any blockchain that supports smart contracts can theoretically be used to create tokens, today ERC-20 tokens are the most common – it was after its creation in November 2017 that a wave of creation of new coins began.

 Token migration, token swap, atomic swap – what’s the difference

Token migration, coin swap, and coin migration are the same as token swap. But atomic exchange, or atomic swap, is quite another. In this case, someone buys a coin in one blockchain for a coin from another blockchain without involving an exchange service in the transaction.

Such an exchange is called atomic because the concept of an atom implies indivisibility, and the described transaction is conducted on the same principle – all or nothing. A successful atomic swap means that the transaction went exactly as the buyer and seller agreed, otherwise the transaction does not occur at all.

Migration of tokens is not a deal at the market price, it is a complete replacement of one token with another, which until that moment did not exist. When people talk about an atomic swap, this is just one way to buy and sell, and a token swap is updating or changing an entire system.

How does a token swap happen

Whoever makes the replacement, you personally or the exchange, before starting the procedure, token trading often stops so that transactions do not interfere with the process. In addition, since some cryptocurrencies have mechanisms for creating new coins and distributing them – as a reward for completing the block, for free distribution or use in other procedures – they will also be stopped. And do not focus on the declared deadline – exchanges can take action in advance.

Often the user has the opportunity to choose which exchange to entrust the replacement with – just transfer the tokens to the desired platform for this. She will keep your money with her and, when a replacement occurs, she will create a new wallet for your account and transfer tokens to it, and the wallet with old tokens will be destroyed.

Later, as soon as the trading of a new token begins, it can be withdrawn to your wallet or exchanged – as usual. Pretty simple. If you want to carry out the procedure yourself, it will be quite similar. Usually, people who have issued a coin that you own, launch a wallet that you will need to download, or a website where you will need to register. In any case, you will have an account with two wallets, one for the old coin and one for the new one, and you will be asked to transfer yours to a specific address.

Soon after, you will see that funds have appeared on the new account. Although the procedures are very similar, doing everything yourself is somewhat more risky. Wallets and sites created by token issuers are often designed specifically for this task, so they may have an unfamiliar interface, and something may not work as described in the documentation. In addition, we describe the process in the most general terms, and in a particular case it may be necessary to select some parameters, and this can create some confusion.

And finally, in the event of an error, there will be no way to rectify the situation. If the replacement occurs on the exchange, then if something goes wrong, you will have someone to turn to for help. In general, it is easier to carry out this procedure using the exchange, especially since they usually do not take any additional commission for this. However, many prefer to do this on their own for ideological reasons, since in the world of cryptocurrencies it is customary to rely minimally on intermediaries. In addition, in the case of a little-known coin, it may turn out that there is simply no suitable exchange offering such a service.

As you can see, replacing a token is a fairly simple procedure that does not require special knowledge. You just need to carefully and timely follow the instructions, and everything will be in order.

The risks

The main risk associated with a token swap is to skip the indicated period. Sometimes there is a backup procedure for this case, but you should not rely on it. But sooner or later, the moment will come when the effect of the old coin will be completely terminated, and it will become useless.

After that, it will stop trading on exchanges, be supported by wallets, and the services and decentralized offers associated with this token will no longer recognize it. Please note that there are no guarantees usual for us as usual Money issued by the government.

The store may refuse to accept the American dollar, issued in 1850, because the seller has never seen such a bill and suspects a fake. But technically it is still a currency, and formally it can be deposited into a bank account, proving first that it is genuine. But in the world of cryptocurrencies there is no central regulatory authority, and if something goes wrong, there will be no one to turn to. If the token exchange has passed, and you did not participate in it, there will be no workaround. We already said about another risk: if you do something wrong, there will be no controlling organization that could be addressed.

Each company that arranges for the replacement of tokens is interested in the fact that the holders of old coins successfully switch to a new token, so they carefully describe the procedure and are ready to provide the necessary support.

Nevertheless, extreme caution should be observed, since any mistake, for example, transferring funds to the wrong address, is irreversible, and can lead to a complete loss of coins, and no one can help you – with all desire.

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