What is a token swap?

Token swaps have two possible definitions:

1. The direct exchange of some amount of one cryptocurrency token for another which is facilitated by a crypto exchange platform.

2. The migration of a token from one blockchain to another, and the associated coin swapping of such a move.

The Long Explanation

Definition 1: Token Exchange

The first definition of token swaps involves the exchange of one token for another. This is a process most crypto traders are aware of, with trading pairs present on most exchanges. 

Although it is certainly possible to first convert your token into fiat before buying a new token with the same fiat value, this process is time-consuming and cost-inefficient. Token swaps, thus, cut out the extra work by providing you a one-step gateway for converting your tokens.

A token swap, for instance, could involve the exchange of ETH for BTC. Because this swap is popular amongst traders, finding crypto exchanges with this trading pair is fairly easy. The real challenge for crypto-to-crypto exchanges is found among less popular trading pairs. 

Swapping ETH to AVAX on Pancake Swap

For instance, try imagining a swap of, say, TOWN tokens for NEAR tokens. You’d likely find few or no exchanges that enable such a direct swap. Instead, you’d have to convert your TOWN tokens to USDT or ETH first, before exchanging your ETH tokens for NEAR tokens. This requires both extra fees and time.

To eliminate this inconvenience, some exchange services source and aggregate liquidity from multiple other exchanges. This allows them provide token swaps for even unpopular trading pairs, and eliminate the extra fees and inconvenience of two-step trading.

Pancake Swap is a common exchange service.

Definition 2: Mainnet Swap

Most blockchains today serve more than one purpose. The Ethereum blockchain, for instance, is used for the creation and execution of smart contracts, with ETH serving as the native token for the platform. But blockchains may also serve as hosts for other non-native tokens.

Blockchains like ETH and BSC allow other users launch their own crypto tokens on top of their blockchains. These tokens, known as “second-layer tokens”, eliminate the time and resource spent building their own blockchain, while enjoying the security and popularity of the host blockchain.

Over time, though, the blockchain on which a token is built may no longer fit the desires of the project creators. For instance, a token built on the ETH network may decide the network’s transaction fees and slow transaction speed make it an inadequate platform to proceed with.

Project developers can, thus, decide to move their tokens from one blockchain network to another. The project developer cited above could, for example, choose to move their project from the ETH blockchain to the NEO blockchain, while maintaining all address balances.

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