Discover the critical role of token swaps in the crypto ecosystem, and learn the differences between token swaps and migrations in this article.
TL;DR:
- Token swaps involve exchanging one cryptocurrency for another, usually within the same blockchain. This can be done on centralized or decentralized exchanges.
- Cross-chain token swaps may occur between two different blockchains and are facilitated by blockchain bridges.
- Unlike token swaps which can be carried out by individuals, token migrations are typically done on the project level, and refers to the process of “moving” a project's tokens from one blockchain to another, usually due to benefits offered on the new blockchain.
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Difference Between Token Migration and Token Swap
The cryptocurrency industry has come a long way since Bitcoin’s debut in 2009. Starting with the ICO boom of 2017 to decentralized finance (DeFi), non-fungible tokens (NFTs) and decentralized autonomous organizations (DAOs), the nascent sector has welcomed a number of innovations.
Amid the growing adoption of cryptocurrencies, one service that has undoubtedly played a crucial role in building the ecosystem is token swap. Although different from token migration, it is not uncommon for crypto participants to use both terms interchangeably. However, a token swap is technically different from a token migration.
In this article, we will explore the difference between token swaps and migration.
What Is a Token Swap?
Otherwise known as a “coin swap,” a token swap is the process of exchanging one token for another token. For example, when you deposit USDT on adecentralizedexchange (DEX) and getETHin return, you are conducting a token swap.
Token swaps usually happen within the same blockchain. However, there may be instances where they happen between two different blockchains. This is known as cross-chain token swaps.
A cross-chain token swap happens when you move your tokens from one blockchain to another. This is usually facilitated via blockchain bridges, which lock a token on one blockchain while minting a wrapped version of the token on another.
For example, if you want to spend your ETH on the BNB Smart Chain (BSC), you can use the Binance bridge to lock up your Ether on the Ethereum network while you receive wrapped Ether (wETH) tokens on BSC. The same process can be used to unwrap your wETH to receive your ETH back on the Ethereum blockchain.
In the case of regular token swaps, which happen on the same blockchain, you are essentially selling a token that you already own and buying an equivalent value of another token. Both regular and cross-chain token swaps can be done through a centralized or decentralized exchange, with each type offering pros and cons.
What Is Token Migration?
While a token swap essentially involves exchanging one existing token for another, token migration refers to the process of “moving” tokens from one blockchain to another. It is worth mentioning that in token migration, the replacement token typically begins to exist based on the execution of the swap.
A token migration usually occurs when a project decides to switch to a different blockchain platform, usually due to the benefits that the new blockchain offers, such as faster transaction speeds or lower fees. In this process, the old tokens on the original blockchain are burned or locked up, and new tokens are created on the new blockchain. Holders of the old tokens are required to migrate their tokens to the new blockchain to receive the new tokens.
Unlike token swaps, which can be performed by an individual holder, a token migration is typically conducted at a project level. For instance, it is possible to swap your ETH to AVAX using a CEX. However, it is not possible for you, as an individual, to migrate your tokens from the Ethereum blockchain to Avalanche. At best, you can use a cross-chain bridge to wrap your tokens, which is still a token swap.
Why Are Token Swaps Important?
To put things in perspective, there are more than 23,000 cryptocurrencies listed on CoinMarketCap today. While some are not active anymore — there are also many that have a thriving ecosystem and active users.
Besides being “in for the tech,” one of the main reasons why people get involved in the crypto market is speculation with the anticipation of future returns.
Let’s assume you are 100% certain that the price of the hypothetical token “XYZ” will surge to $100,000 by tomorrow. Chances are that you will liquidate your position in other cryptocurrencies to buy more “XYZ”. Similarly, you’d probably rush to sell all your “ABC” tokens if news breaks that the project is a scam and the founders have absconded.
While these are extreme examples, there are a number of reasons why investors choose to swap their tokens. For one, they may strongly believe in the future of the project and want to gain exposure to that particular token. Or, they may need to react quickly to negative news about a particular token in their portfolio.
Given the volatile and dynamic nature of the cryptocurrency market, swapping tokens allow investors to take advantage of the most attractive opportunities. Token swapping allows investors to quickly trade their current token for another.
Why Do Projects Conduct Token Migration?
It is not usual for blockchain projects to migrate from one blockchain to another. As a matter of fact, this was a common practice between 2018 and 2020.
During the Initial Coin Offering (ICO) boom of late 2017 and early 2018, thousands of cryptocurrency projects were launched on the Ethereum network, adopting its ERC-20 token standard. ICO is a fundraising mechanism used by crypto startups. During an ICO, a new cryptocurrency is created and sold to investors in exchange for existing cryptocurrencies like Bitcoin or Ethereum, or even fiat currency like USD.
In most cases, these crypto startups promise investors that the issued tokens will have a future use case within their own native blockchain. As a result, these tokens are transferred, aka “migrated,” from a blockchain like Ethereum to their own chains upon completion. Think of it as living in a rented apartment temporarily until you save up enough money to buy a house.
Examples of Token Migration
A number of prominent projects like TRON, BNB and CRO have conducted mainnet swaps and token migrations in the past, moving from the Ethereum chain to their own native blockchains. More recently, internet-of-things protocol Helium successfully migrated its IOT token to the Solana blockchain, with the goal of making it cheaper and faster to operate on Helium.
How To Perform a Token Swap
There are generally four ways to conduct a token swap depending on the type. Regular swaps can be done using centralized exchanges like Binance and Coinbase, decentralized exchanges like Uniswap and PancakeSwap, or directly within wallet apps like MetaMask and Phantom.
Cross-chain token swaps, on the other hand, require blockchain bridges. Some popular examples are Celer cBridge, AnySwap, Cross-Chain Bridge, Multichain, Portal Token Bridge (formerly Wormhole), Synapse, Hop Protocol, Stargate Finance and more.
How To Perform a Token Migration
Remember that a token migration cannot be conducted at an individual level. This decision needs to first come from the developers of the project, and they will decide how the token migration process should go. There are several ways this can play out.
You may be required to handle the token migration process by yourself if you self-custody the tokens. This doesn’t necessarily mean that you need to have any background in tech. User experience in the crypto space has improved significantly over the past few years and migrating a self-held token can be as easy as just a few clicks. Most projects will create tools to assist holders with the migration process. Other projects may decide to take a snapshot of the wallets of token holders and automatically airdrop the replacement tokens on the succeeding chain. This approach does not require any active participation from token holders.
Alternatively, if your tokens are held on a centralized exchange, there is a high probability that the exchange will handle the token migration process on your behalf.
Conclusion
Although it may be used interchangeably, a token swap is quite different from a token migration. While a token swap involves selling or locking up one asset to purchase another asset, token migration is the transfer of tokens from one blockchain to another. Furthermore, token swaps are conducted at an individual level while migrations are carried out at a project level.
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