All You Need to Know About Token Swaps

What is a Token Swap?

A token swap is a process by which one cryptocurrency is exchanged for another at a predetermined rate. Unlike selling one coin to buy another, a token swap is the replacement of one coin for another, so it means that you are required to exchange the old coin for the new one, or you will lose value.

A token swap is not a simple rebranding, as that can happen without the participation of anyone holding the coin. With a rebranding, tokens might change names or have their ticker symbol switched to something else, but with a token swap, the underlying blockchain that supports the token is being changed entirely, and holders are compelled to take some kind of action.

Sometimes, if you are holding the tokens on an exchange that is assisting with the token swap, they will take care of the token swap for you. However, since it’s advisable to hold your own tokens in a wallet you control, you should be aware of how to handle a token swap, so that you can manage the process yourself. It’s not difficult at all, but it does require your attention so that you don’t find yourself holding an old coin that isn’t worth anything anymore.

Why Do Token Swaps Happen?

The creation of blockchains and tokens have given companies and groups the ability to take in investment or sell services through a token of their own design, giving them many more options and more control than traditional methods of issuing shares.

However, the process of building the foundations of one’s own blockchain, called a “mainnet,” can itself be a process requiring investment. This creates a sort of chicken and egg problem for aspiring blockchain companies. They want to issue tokens to fund the creation of their blockchain, but they also need to build their blockchain to have tokens to issue.

The way through this conundrum is to create a token on an existing blockchain. Through an extension of smart contract functionality, some blockchains have the ability to create a second layer on top of their own native token. In this way, organizations can have their own token on someone else’s blockchain, to raise funds while they build their own blockchain.

The most famous blockchain for creating custom tokens is Ethereum, which created what’s known as the ERC-20 standard. ERC stands for “Ethereum Request for Comment,” and it’s an internal system for proposing upgrades to the Ethereum blockchain. 20 is simply the number of the specific proposal that made token issuance possible.

Although almost any blockchain capable of smart contracts could potentially be used to build tokens, depending on how that blockchain is governed, ERC-20 tokens are by far the most common. It was the ERC-20 standard that led to the explosion of new coins after it was implemented in November 2017.

Token Migration, Atomic Swaps, and Token Swaps – What’s the Difference?

A “token migration” is simply another term for a token swap. You may also see the terms “coin swap” and “coin migration.”

However, an atomic swap is an entirely different thing. An atomic swap is when someone buys a coin on one blockchain with a coin from another blockchain without having to go through any kind of exchange service. In other words, atomic swaps are about buying and selling tokens, as happens every day.

They are called atomic swaps because atoms are conceptually indivisible, and an atomic trade is an all or nothing affair. A successful atomic swap means buyer and seller get the transaction exactly as they both agreed to, or the transaction doesn’t happen at all.

A token migration isn’t buying one token for another at market rates. It is the complete replacement of a token by a new token that does not exist until the swap has taken place. If people are talking about atomic swaps, they are talking about another way to buy and sell. If people are talking about a token swap, they are talking about a system upgrade or change.

How Do You Swap Your Tokens?

Token swaps might have slight differences in process, so make sure you read any and all instructions provided to you for your particular token. But there are generalities you can familiarize yourself with to get a sense of how it works.

First, whether you let an exchange handle it for you or you do it yourself, you should be aware that in advance of the token swap, trading on the current token will often be halted so as to not confuse the process with any trades that might be in progress. Also, as some coins have mechanisms for coin creation and distribution in the form of block rewards, air drops, or other offerings, those will also be halted.

So you need to be aware that it’s not just a matter of the deadline for when the token occurs – different exchanges may take action to prepare at slightly different times in advance.

You can often opt for an exchange to handle the swap for you. In this case, you simply put your tokens on the participating exchange. They hold it in a wallet for you, and when the swap happens, they will create a new wallet for within your user account on that exchange, and then transfer new tokens into it. The wallet with the old tokens will be destroyed. Once trading begins on the new token, you can withdraw them to your own wallet or trade them, or whatever you usually do with your tokens. Simple as that!

If you want to handle the swap yourself, then it’s largely the same. Generally speaking, the people who issued the coin you are currently holding will issue a wallet or online site that you either download or register with, respectively. In either case, you will see an account with 2 wallets, one for the old coin and one for the new. You will be prompted to transfer your old token to a specific address. When you do, you should soon see the wallet for the new account be credited.

While the 2 processes are essentially the same, there are a few reasons why the manual method carries a little more risk. One is that the wallets and sites created by the token issuers are often newly created, or created specifically for this task, so it may be an unfamiliar interface, and it may not work as described or designed.

Also, the process described here is the broadest outline, there may be specific option boxes to tick or other requirements that might create a little confusion. Lastly, if somehow you make a mistake, there will be no recourse. If you let an exchange handle the swap, if something goes wrong you might be able to appeal to them for help.

Generally speaking, an exchange is the easier option, and there do not appear to be any special fees charged by exchanges over and above the normal fees that come with transferring your coins on and off. The main reason many people seem to opt to do it themselves is ideological, with many in the cryptocurrency world preferring to not have to rely on third parties whenever possible. Also, depending on the size and popularity of the coin, it could happen that there are no participating exchanges offering to do the swap for you.

In any case, as you can see, a token swap is nothing that requires any specialist knowledge or should concern you too much. So long as you take action in the specified time and carefully walk through each step, you should find it a very manageable process.

Are There Risks You Should Be Aware Of?

The primary risk of a token swap is missing the deadline. Sometimes there are fallback methods offered to help people who missed the swap day, but you shouldn’t rely on that. Ultimately, after a certain point, there will come a time when the old coin will be deprecated entirely, and it becomes worthless. Exchanges will delist the old token, wallets will stop supporting it, and services and dapps associated with that token will no longer recognize it.

Take note that this is different from government-issued fiat money, or company-issued stocks, which have laws and regulations about their use and distribution. A store might balk at accepting a US dollar printed in 1850 because it looks different enough that they might be skeptical that it’s real, but, technically, it is still currency, and you could exchange it for a modern bill at a bank, so long as they verified it was legitimately a US dollar.

Like so much in the world of crypto, though, there is no governing body that you can appeal to if things go wrong. If a token swap happens and you didn’t participate, you will have no recourse.

In addition to the deadline, another risk is handling the process, because, again, if you don’t do it right, there is no overarching organization that you can appeal to. Every company doing a token swap wants holders to successfully transfer over to the new token. So leading up to and during the process they are highly motivated to make the procedure well known, and you should be able to find support and answers to your questions.

In the end, though, you should take care to handle each step carefully, because transferring your coins to the wrong address or other mishaps might cause you to lose coins in such a way that no one can help you, even if they want to.

Token Swaps Happening in 2018

As the time of writing, 3 tokens, ICON, TRON, and EOS have all recently successfully token swapped. Token swaps often require the cryptocurrency to have achieved a basis of critical milestones, and as anyone who works in software knows, deadlines and timing can be highly variable. For this reason, it’s hard to establish a calendar of tokens heading toward a token swap more than a couple months in advance.

Ontology is currently undergoing a token swap with a fairly generous time frame, giving investors until October 1 to complete a process of “mapping” existing tokens to the new ONT mainnet token. “Mapping” is their term for the process by which an Ontology mainnet-compatible wallet will match your current tokens for the new tokens.

The wallet will largely handle the “mapping” for you, so the term should not be taken to mean there is much different from any other swapping process. The details about the Ontology swap, if you are a holder, can be found here, with links to instructions and help.

VeChain is intending to do a token swap in the middle of July. Their new mainnet is called VeChainThor, and they are changing the name of their token from VEN to VET. You can find details about how to swap your coins, with a list of exchanges that will do it for you, as well as instructions on how to do it yourself, here.

Summary

A token swap is a simple but critical process that affects the value of your holdings. You absolutely need to be aware of if your token is intending to do a token swap some time in the future, under what circumstances, and how it will be handled.

As with all cryptocurrency purchases, you should research the particulars, including the roadmap and milestones. Not all tokens intend on doing a swap, and if that is the case, you should know that for sure. If they are intending on it, you will want to make sure you’re a member of the relevant community groups or announcement mailing lists to make sure you stay informed as much in advance as possible.

Often, a token swap is a good thing, as it means that the token initiating a swap has hit their goals sufficiently to warrant proceeding. So, while it may require care on your part, the fact that you have to go through the process should be taken as a sign of growing potential for your investment.

Related: Everything You Need to Know About Cryptocurrency Airdrops