Every now and then, crypto companies announce an upcoming token swap. But what does this mean for the customer? What happens during the swap, how does it work exactly and what should be considered? Everything important about the topic and why the swaps are sometimes necessary can be found here.
What is a token swap?
In a token swap, one cryptocurrency is exchanged for another in very general terms. But it does not involve buying a new token in exchange for another, as in the case of an exchange transaction. It is also not a rebranding. Because in that case, the token would be the same and just have a new name.
Often, the token swap is associated with a move to a new blockchain or other technical changes. The token must then be exchanged for another one within a specified period. The exchange usually takes place at a ratio of 1:1, but this does not always have to be the case. The decision is up to the developer and the company. But why do crypto companies do token swaps and what purpose do they serve?
Examples and reasons for token swaps
In the past year, many crypto projects have opted for token migration. At the same time, a token swap can have very different reasons. Among the most common are:
- Natural process of evolution: decentralized storage solution Storj completed token swap back in 2017. The company realized that the Bitcoin blockchain no longer met the necessary requirements. Storj needed more scalability, so it decided to switch to the Ethereum blockchain.
- Move to own mainnet: Many crypto projects plan to have their own blockchain in the long term. However, they first start with an already established blockchain, such as Ethereum (What is Ethereum?). This way, they can raise the necessary funding and get their tokens in circulation. Once the project is established and their own mainnet is ready, they can then conveniently switch to their own blockchain. This is how the well-known crypto companies Tron and EOS went about it in 2018. Today, they are Ethereum’s biggest competitors. Exchange platform Binance ended its mainnet swap in April 2019.
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How does the token swap work?
The token swap process can be very different and depends heavily on the specific company and its plans. How the token holder must behave in each case also depends on where they store their tokens. With an exchange, the customer usually does not have to intervene, as the exchange takes care of everything. With a conventional wallet, outside of an exchange, the holder’s intervention is necessary.
Each crypto company issues its own detailed instructions on what to do in this case. However, the basic outlines are very similar in the process:
- The crypto company issues a wallet or website that the user must download or register on.
- Then shown 2 wallet addresses. One is for the old tokens and one is for the new ones.
- The user is prompted to send all the old tokens in his possession to the respective wallet address. As soon as they arrive there, he receives the corresponding amount in new tokens credited to the other wallet.
- The company then gradually destroys the old tokens.
What are the risks and what do users need to be aware of?
Depending on the type of token swap, there may be some potential sources of error and risks. Those who store their tokens in a wallet and are thus responsible for the migration themselves may have to be careful not to miss the lock-up period. Tokens that have not been migrated will eventually no longer be compatible. Neither wallets nor applications will accept the old tokens. For the customer, this means that his cryptocurrency is worthless and lost forever.
Although many companies try to grant so-called fallback periods even after the deadline has passed so that latecomers can also make the move, these also only apply for a certain period. Token holders should therefore try not to overuse these deadlines in their own interest. It should also be noted that measures are often taken before the actual swap that may affect trading of the old tokens. For example, block rewards, airdrops or even trading on exchanges can be suspended. The token holder should inform himself about these points in time.
When migrating to a new wallet, the user must also make sure to enter the wallet addresses correctly. Otherwise, the tokens will be irretrievably lost. And as usual in the crypto space, there is no overarching regulatory authority or administration that the user can turn to in the case. However, if the user observes the deadlines and follows the instructions provided by the crypto company to the letter, then a token swap is generally a safe affair.
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