What does ‘Token Swap’ Mean?

The term "token swap" is similar to the financial term "currency swap," which is essentially a futures contract for exchanging one currency for another at a fixed price.

"Token swap" has two main meanings. Broadly, it refers to exchanging one cryptocurrency for another via a smart contract. Another meaning is exchanging a coin from one crypto project for the same coin but on a different blockchain — in this case, it's also called token migration.

This material is published for informational purposes only and does not constitute investment advice.

How do Token Swaps Work?

Token swaps can happen either within a single blockchain (on-chain) or between two blockchain networks (off-chain). In both cases, a smart contract — or even multiple smart contracts — is needed for the operation. Swaps can happen on centralized exchanges (CEX) or decentralized exchanges (DEX). Swaps also happen outside exchanges, like transferring tokens from the mainnet to a testnet. Even buying a specific token with ETH or USDT is technically a swap.

Essentially, it's an automated exchange at a fixed price at the time of the operation. The ability to perform this exchange automatically is the main advantage. Here are several possible ways this can happen:

A classic swap involves exchanging one cryptocurrency for another on a centralized exchange. To perform it, the user needs a verified account on the platform. During the operation, digital assets are under the control of the exchange. In return, the platform is responsible for the security of the transaction and protecting clients from fraud.

An atomic swap involves the instant exchange of one cryptocurrency for another without intermediaries, with coins transferred directly between blockchains. In 2013, a user known as Tier Nolan described the theoretical side of this process on a Bitcoin developer forum, but the technology only became widely used after 2017. Atomic swaps are carried out using smart contracts and Hashed Time-Locked Contracts (HTLC). The transaction can be secured by setting a time frame within which the deal must be closed.

Cross-chain bridges allow assets to be moved between different networks. This technology works for tokens of different standards, and some platforms handle transfers between blockchains using different underlying technologies and Layer-2 solutions.

Swaps on decentralized exchanges happen within a specific liquidity pool. Decentralized exchanges allow these operations without transferring assets directly to the exchange from the user's wallet. To simplify the exchange process, they use automated market makers (AMM) and liquidity pools. Sometimes wrapped tokens are used to simplify exchanges between blockchains. Some self-custodial wallet developers have integrated swap functionality, including the ability to route through DEXs.

There are certain drawbacks to DeFi swaps. First, if the liquidity pool for a given pair is shallow, slippage occurs, and part of the value is lost in the exchange. Second, if the token-swap smart contract has vulnerabilities, it can be exploited by attackers — the same applies to cross-chain bridges, which have repeatedly been targeted by hackers.

Token Migration

An important case where the term "token swap" is used is the migration of the same token from one blockchain to another, also called "token migration." The blockchain hosting a token usually changes when a project decides to move to a different blockchain, or to transfer its tokens from an external blockchain to one it operates itself. Most crypto projects set a specific window for token migration, requiring users to complete the operation within a certain timeframe. Failing to do so typically results in losing access to those tokens, since the old ones are usually burned after the deadline.

During the 2017 ICO boom, many crypto projects raised funds by issuing ERC-20 tokens on Ethereum. Some of these projects intended to build their own blockchains, and the process of transferring users' ICO tokens from Ethereum to the project's new blockchain became a standard case of token migration. Token migration can also happen for other reasons, such as moving tokens from one third-party blockchain to another.

It's worth distinguishing token migration from a blockchain hard fork, which is a related but different concept — a hard fork splits an existing network into two independent chains (rather than moving a token to an entirely different, pre-existing blockchain), and holders of the original asset typically receive a corresponding balance on the new chain automatically, without needing to actively migrate anything themselves. Ethereum Classic (ETC), which split off from Ethereum in 2016 following a community disagreement over how to respond to the DAO hack, is an example of this — a hard fork, not a token migration in the sense described above.

One of the largest token migration cases historically was Binance Coin (BNB). This exchange token launched in 2017 on Ethereum as an ERC-20 token, and Binance's own blockchain (Binance Chain, using the BEP-2 standard) launched in 2019. Binance completed the core migration process that same year, burning the ERC-20 BNB tokens and issuing an equivalent amount on Binance Chain. Since then, BNB has also become available on BNB Smart Chain (BEP-20), a separate but related network — so today's practical question for BNB holders is typically choosing between the BEP-2 and BEP-20 networks, rather than an unfinished migration away from Ethereum.

Other well-known projects that completed migrations from Ethereum to their own blockchains after their ICOs include Tron, EOS, and Crypto.com. The Ontology platform moved from the NEO blockchain to its own blockchain.

FAQ

Why are crypto swaps needed?

Swaps allow exchanging one token for another without first converting it to fiat. They're useful for anyone who needs to quickly exchange assets at a competitive rate or participate in another crypto project. With this kind of exchange, you can choose the amount of tokens to swap and complete the exchange nearly instantly.

What do you need for a token swap?

A wallet that supports the relevant platform, and enough of the token being swapped to cover the transaction plus fees. The platform itself determines the exchange rate. It's important to choose a platform with transparent terms and a solid reputation to minimize risk.

What are the risks of swaps?

High rate volatility, unexpected changes in fees, and the possibility of insufficient liquidity, which can prevent the swap from completing at a favorable price. Some platforms may also have security weaknesses, so it's important to use established, well-reviewed services.

How do you choose a good platform for a token swap?

Look for transparent terms, low fees, and a strong security track record. Pay attention to trading volume and liquidity to ensure a fair exchange rate. Review the platform's reputation and confirm it supports the specific tokens you need for the transaction.