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Mechanisms Of Token Swaps

19:31 12/10/2018

The process of token migration depends on the way digital assets are stored. So, before investing in cryptocurrency, you need to decide where you are going to hold your coins — on a crypto exchange account or in your personal crypto wallet. Both methods have their advantages and disadvantages. Let’s talk about them.

 

It the previous article, we figured out that a token swap is the process of replacing old tokens (it may be ICO tokens) with new ones. Token swaps should not be confused with atomic swaps (purchase of tokens without a third party) or digital asset rebranding. Rebranding doesn’t imply the participation of holders in the process, it involves a change in the form, not in the content. A token swap always means switching to another blockchain or a protocol.

 

Token swaps on crypto exchanges

 

It is more convenient to store tokens on an exchange during a token swap. In this case, the migration will take place virtually without the participation of the investor. After investing in cryptocurrency and placing your tokens in the exchange wallet, you just need to stop any transactions with them. At a certain time, the exchange will create a wallet with new tokens, which can be used after the migration process is finished. The wallet with old tokens will no longer be available.

Only those exchanges that have an agreement with the issuing company are allowed to conduct an automatic token swap. The company announces in advance the list of exchanges on which it will be possible to swap coins and a swap date.

 

However, since crypto exchanges store customers' assets centrally, there is always the risk that the platform will be hacked and all users' funds will be stolen. Thus, many investors prefer executing a token swap manually for security reasons, despite the obvious convenience of the automatic migration.

 

Token swaps without crypto exchanges

 

In order to swap tokens in a manual mode, you are to send old tokens to a specific address. The company conducting the swap, announces in advance how, when and where to transfer assets. There are two options:

 

  • All ICO tokens are sent to the wallet specified by the company, after which the fact of the transfer is confirmed with a signature. You have to send it via email.
  • A token swap requires the installation of special software and the creation of a new wallet that will receive new tokens after the swap. In order to confirm that tokens are yours, you need to send a transaction to the wallet specified by the company.

 

Tokens will be replaced after a while. The company itself sets the exchange rate of cryptocurrency, most often tokens are exchanged in a 1:1 ratio. However, there are exceptions. A token swap may be accompanied by an increase in investments in order not to lose investors' loyalty.

There is nothing difficult in a manual token swap. But it is crucial to do it within time limits specified by the company. This means you should carefully track the company’s news. Otherwise, there is a risk of losing everything, which is the biggest disadvantage of a manual token swap. However, the benefits are worthy of investing money in a promising project, knowing that in the future the company intends to swap tokens.

 

For companies, the main problem is the lack of a clear algorithm when organizing a token swap. The project team independently determines the migration mechanisms, and the process is always complicated and expensive. But a successful token swap can be beneficial for both parties. Besides, by executing a token swap the company makes it clear that its project is reliable and is ready to move forward.

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