You may have heard of a “token swap” or a “token migration,” which is the process that took place for a few blockchain projects in the past — most notably Tron and EOS. Today, we are going to demystify it by sharing 5 things you should know about token swaps. So, without further ado, here’s what we’ve got…
1. What are token swaps?
Token swaps involve one token/cryptocurrency being moved from one blockchain to another. That is why this process is also called “token migration,” because it is being migrated from one network to the other. More on the reasoning behind token swaps in a minute.
First, we have to add that this isn’t a benign process with some token swaps/migrations involving millions or even billions dollars worth of tokens. So the stakes are high, and therefore – it is important to understand the basics.
Which leads us to the next point…
2. How token swaps work?
As far as users/investors/token holders are concerned there is little they need to do. Except if they store their tokens in wallets (as opposed to exchanges); then, they will have to follow a procedure that is defined by the token issuer.
Specifically, they must undergo token registration, also referred to as “mapping,” in order to send their tokens from the previous blockchain to the new network.
This process entails generating a project-specific key and sending tokens to it from the key address where the tokens were initially stored after purchase, prior to the mainnet launch — for example, that could’ve been an ethereum key.
It is a must to perform these steps as many projects implement cut-off periods by which users must swap their tokens. After that deadline, users’ holding may be “frozen” and inaccessible — so make sure to do this in a timely manner.
3. Why token swaps exist?
Typically, token swaps are carried out by projects that began by using the ethereum blockchain to raise money and distribute their tokens. The tokens distributed at this (initial) phase act as “placeholders” for those that will eventually be used when the project is live.
Companies take this route to more easily raise capital to develop their projects. On the other hand, investors also get to benefit from having a tradable asset in the form of ERC20-based tokens (prior to the mainnet launch).
Therefore, at some later point when the network is ready, the company initiates the migration from (typically) ethereum to its own blockchain.
Alternatively, some projects have decided to move their tokens from one network because of other issues. For instance, Storj’s token migration was prompted by its decision to move from a bitcoin-based protocol to ethereum due to scalability issues.
4. Do exchanges help users?
San Francisco-based exchange Kraken also aims to reduce the difficulty of the process.
“We pause funding ahead of the transition, swap all the old coins for new and when we resume funding, all the old balances are for the new coins,” Kraken co-founder and CEO Jesse Powell told CoinDesk. “It’s really as simple as that.”
But again, exchanges can provide little help if users store their tokens in wallets.
5. Are there any risks involved in token swaps?
Sure there are, though exchanges are putting in an extra effort to make for smooth transitions (from one blockchain to the other). Also, savvy project team members make sure to keep in touch with their communities to address what is arguably the biggest issue: a lack of awareness amongst token holders.
A token migration is not a “trustless” process and something could go wrong. That being said, we must add that we haven’t caught any major fraud involving a token swap. And we think that speaks a volume.