Token swap refers to the direct exchange of a certain amount of one cryptocurrency token for another between users facilitated by a special exchange service.
What Is a Token Swap?
Token swap refers to the direct exchange of a certain amount of one cryptocurrency token for another between users facilitated by a special exchange service. It can also be defined as the migration of a cryptocurrency token built on top of one blockchain platform to a different blockchain.
There are many exchange services on the market that allow users to buy and sell cryptocurrencies for traditional currencies or for other cryptos. However, due to the limited liquidity and number of trading pairs on each exchange, users that want to trade directly between two crypto tokens are sometimes unable to do so.
This is especially true for the less popular tokens, as they are often only available on a small number of exchanges. Instead of direct trade, users are forced to include the intermediate step of converting into and out of fiat money or one of the most popular cryptocurrencies, such as BTC or ETH.
However, some exchange services target this issue specifically by aggregating multiple other exchanges and sourcing liquidity from them. The end result is that users are able to swap between two cryptocurrencies directly without the inconvenience and double fees associated with conducting a trade in two steps.
In addition to serving their direct purpose — as decentralized digital money — some cryptocurrencies, like ETH, allow users to launch other crypto tokens on top of their blockchains. These second-layer tokens can “piggyback” off the underlying platforms and enjoy some of their security and popularity without having to spend time and resources on growing their own ecosystem from the ground up. However, in some cases, the platform a token is built upon may become inadequate for its current needs. For example, developers might build their token on Ethereum’s blockchain to leverage its large user base during the initial coin offering, but then decide that they need different underlying parameters for the actual product launch. In such cases, a token swap is possible, wherein the developers migrate their token from one blockchain base to another, while maintaining all address balances.