How does the token exchange work

What is a token swap? Explanation and examples

Every now and then, crypto companies may announce an upcoming one Token swap at. But what does that mean for the customer? What happens with 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 generally exchanged for another. But this is not about buying a new token in exchange for another, as in the case of an exchange transaction. It is also not a rebranding. Because in this case the token would be the same and would only have a new name.

The token swap is often associated with a move to a new blockchain or other technical changes. The tokens must then be exchanged for another within a specified period. The exchange usually takes place in one 1: 1 ratio. However, it doesn't always have to be that way. The decision rests with the developer and the company. But why do crypto companies make token swaps and what is their purpose?

Examples and reasons for token swaps

In the past year, many crypto projects opted for token migration. A token swap can have very different reasons. The most common include:

  1. Natural process of further development: The decentralized storage solution Storj already completed the token swap in 2017. The company realized that the Bitcoin blockchain no longer met the necessary requirements. Storj needed more scalability and therefore decided to switch to the Ethereum blockchain.
  2. Move to own mainnet: Many crypto projects are planning their own blockchain in the long term. However, you start with an already established blockchain, such as Ethereum (What is Ethereum?). In this way, they can raise the necessary funds and put their tokens into circulation. When the project has established itself and your own mainnet is ready, you can then easily switch to your own blockchain. This is how the well-known crypto companies Tron and EOS proceeded in 2018. Today they are Ethereum's biggest competitors. The exchange platform Binance ended its mainnet swap in April 2019.

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How does the token swap work?

The process of the token swap can be very different and depends heavily on the respective company and its plans. How the token holder must behave in each individual case also depends on where they keep their tokens. In the case of an exchange, the customer usually does not have to intervene, as the exchange takes care of everything. In the case of a conventional wallet, outside of an exchange, the intervention of the owner is absolutely necessary.

Each crypto company issues its own detailed instructions on what to do in this case. The main features of the process, however, are very similar:

  • The crypto company issues a wallet or website that the user has to download or register on.
  • Then 2 wallet addresses are shown to him. One is for the old tokens and one for the new ones.
  • The user is requested to send all old tokens in his possession to the respective wallet address. As soon as these have arrived there, he will receive the corresponding amount in new tokens on 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 are some potential sources of error and risks. Those who keep their tokens in a wallet and are therefore responsible for the migration themselves may have to be careful not to miss the blocking period. Tokens that have not been migrated are no longer compatible at some point. Neither wallets nor applications will accept the old tokens. For the customer, this means that their cryptocurrency is worthless and lost forever.

Many companies try so-called even after the deadline Fallback periods to allow the latecomers to move, but these are only valid for a certain period of time. Token holders should therefore try in their own interest not to overstrain these deadlines. It should also be noted that measures are often taken before the actual swap that can affect trading with the old tokens. Block rewards, airdrops or trading on exchanges can be suspended. The token holder should find out about these points in good time.

When migrating to a new wallet, the user must also ensure that the wallet addresses are entered correctly. Otherwise the tokens are irretrievably lost. And as is usual in the crypto space, there is no higher regulatory authority or administration that the user could turn to in this case. However, if the user observes the deadlines and follows the instructions provided by the crypto company in detail, then a token swap is generally a safe matter.