What Is Crypto Swap?
Crypto swap is a process that involves swapping a cryptocurrency token or coin for another without the need for any crypto-to-fiat exchange through a crypto swap platform. Such a process enhances security via the elimination of third-party participants. Moreover, individuals carry out this process to pay lower fees and save time.
Sometimes, selecting crypto swap services is required to cover a transaction’s fee that one can only pay using the native coin of a certain blockchain. Other times, traders choose such services, hoping to make the most of an impending move in the cryptocurrency market. Note that participating in specific protocols, like decentralized finance (DeFi), is only possible through certain blockchains.
Table of Contents
- What Is Crypto Swap?
- How Does Crypto Swap Work?
- Process Steps
- Examples
- Advantages And Disadvantages
- Crypto Swap vs. Crypto Exchange
- Crypto Swap vs. Crypto Trade
- Frequently Asked Questions (FAQs)
- Recommended Articles
- Crypto swap refers to the process of directly exchanging a cryptocurrency with another without the involvement of any crypto-to-fiat exchange. Individuals choose to swap their coins or tokens to save time and pay lower fees.
- A cryptocurrency exchange offers a platform for the buying and selling of crypto assets. That said, crypto swapping takes place between two parties only.
- Some disadvantages of cryptocurrency swaps are the lack of a governing body and privacy concerns.
- Crypto users carry out swaps immediately, while trades are usually carried out at certain price levels or when a specific scenario arises.
How Does Crypto Swap Work?
Crypto swap refers to a procedure that involves conveniently exchanging a cryptocurrency asset for its same value in another token or coin. This process makes it more convenient for individuals to participate in projects they want to support. However, lower transaction cost and faster transactions are two noteworthy reasons why people opt for this process.
Individuals carry out this procedure and acquire a token they want through crypto swap platforms, such as Shapeshift, Changelly, Airswap, Changenow, and Swapy. This process is essential to procure coins having low market capitalization.
For example, when cryptocurrency exchanges give a chance to restrict lesser-known tokens or coins’ trading pairs, this procedure allows individuals to access their desired cryptocurrency conveniently.
Note that the end-to-end process and timeline typically vary based on the choice of crypto swap platform. In other words, while the swapping process may involve only a few steps on a platform, the procedure may take a lot of time and involve various steps on another.
Individuals or organizations may avail of crypto swap services to make profits in the following ways:
- Margin Swapping: This involves users targeting acquiring higher value from the subsequent coin swaps. In this case, market volatility has a significant impact. Value differences resulting from volatility in the cryptocurrency market enable users to earn significant profits from different, calculated crypto swaps.
- Swapping And Holding: Individuals can acquire lesser-known tokens or coins at a bargain price. In this case, the strategy or trick is to spot a cryptocurrency that has a project with a lot of potential. As the project’s popularity increases, the token’s value concurrently surges, generating gains upon selling or swapping.
Process Steps
Generally, this process involves the following steps:
- Download the application of the cryptocurrency swap service provider
- Enter the necessary details, such as the email ID and password, to open the account.
- Verify the account and complete the setup.
- Finish identity verification to access the swap feature.
- Fund the wallet to begin swapping cryptocurrencies.
- Select the swap option and choose the assets that need to be swapped.
- Enter the swapping amount
- Review the swap details before confirming the crypto swap.
Examples
Let us look at a few crypto swap examples to understand the concept better.
Example #1
Suppose David, a cryptocurrency user, wanted to swap 10 Ethereum coins in his portfolio for Bitcoin coins. So, he downloaded the mobile-based application of a crypto swap platform to carry out an exchange. Considering that the price of Bitcoin coins was significantly higher than Ethereum, David received 0.4 BTC in exchange for his Ethereum coins.
Example #2
In June 2023, Binance tweeted that it will swap 750 million tether-tron token pairs in total for tether-ether to maintain the liquidity of the stablecoin. The announcement of the crypto swap took place because of the company’s renewed regulatory scrutiny. This move will help Binance mitigate some of the impacts of recent blows, for example, the lawsuit filed against it by the Securities and Exchange Commission (SEC).
Advantages And Disadvantages
Let us look at the benefits and limitations of swapping cryptocurrency.
Advantages
- Swapping allows crypto users to diversify their cryptocurrency portfolio by exchanging one crypto token for another. It enables users to control their risk exposure and make the most of the investment opportunities in the market.
- The swaps contribute to the market’s overall efficiency by ensuring the crypto tokens are exchangeable, without problem, and tradable.
- Swaps play an important role in improving the interoperability among unique blockchain networks.
- Swaps can play a crucial role in dealing with security vulnerabilities or issues in the code of a blockchain undertaking.
- One could earn significant profits by swapping cryptocurrency tokens.
- Swapping escalates accessibility and market participation by helping crypto users not to depend on traditional intermediaries.
Disadvantages
The disadvantages of this process are as follows:
- There may be privacy concerns as the swaps are public.
- Individuals could lose their cryptocurrency if any problem occurs with the protocol facilitating the swap.
- Since a governing body is not there, one could face issues with a trade.
- Slippage and market volatility may lead to losses from the swap.
Crypto Swap vs Crypto Exchange
The differences between cryptocurrency swaps and cryptocurrency exchanges are as follows:
- Crypto swapping occurs between two parties. On the other hand, a crypto exchange facilitates crypto trades.
- Usually, the platforms providing cryptocurrency swaps are decentralized. That said, cryptocurrency exchanges are centralized.
- Cryptocurrency swap platforms impose a lower transaction fee than cryptocurrency exchanges as there is no third-party involvement in the case of the former.
Crypto Swap vs Crypto Trade
The concepts of crypto trade and swap can be confusing for persons new to the cryptocurrency world. So, let us find out how they differ.
| Crypto Swap | Crypto Trade |
|---|---|
| This process involves exchanging one cryptocurrency for another. | It involves buying or selling crypto assets. In this case, no exchange is involved. |
| Typically, swaps are for immediate transactions. In other words, crypto users generally execute swaps instantly. | Trades are for specific times, market conditions, or prices. In other words, traders set buy or sell orders for a particular price, market scenario, or time. |
Frequently Asked Questions (FAQs)
1. Are crypto swaps taxable?
Yes, the swapping of cryptocurrencies is a taxable event in the cryptocurrency world. The Internal Revenue Service considers this process a type of bartering. This means both parties must mention their respective losses and gains on their taxes. That said, one must note that only one party needs to report the transaction.
2. What is slippage in a crypto swap?
Slippage in the world of cryptocurrency refers to the amount lost or gained owing to market fluctuations at the time of executing an order. In other words, this term is used to describe the difference between what has taken place and what has actually occurred.
3. Is crypto swap traceable?
Yes, individuals must remember that swapping cryptocurrency tokens or coins via different cryptocurrency swap platforms is traceable. Moreover, it is vital to note that besides tracing transactions, law enforcement officials can even find out who is carrying out this process.
Recommended Articles
This has been a guide to what is Crypto Swap. We compare it with crypto exchange & trade, explain its process steps, examples, advantages & disadvantages. You can learn more about it from the following articles –
- Flash Swap
- Atomic Swaps
- Flash Loan
