Token Swaps: What Are They, How They Work & Why They’re Happening Now

So, your token is being sent to a new blockchain…

Far from an elaborate crypto scam, the decision to carry out this process, known as a “token migration” or “token swap,” has become increasingly popular among blockchain projects. Notably, two of the top 25 cryptocurrencies trading globally – Tron and EOS – are in the midst of such a transition, and at least two more top 30 tokens are expected to soon follow suit.

With millions – even billions – of dollars worth of tokens involved in each migration, the stakes are high. But despite this, the blockchain industry remains largely uninformed on token migrations and their implications. In a sampling of experts, CoinDesk found that even industry leaders were sometimes unable to answer basic questions about the process.

Nonetheless, much about token migrations can be discerned from those pioneering the shifts. For those who have undergone such transitions, they often represent a difficult but necessary step in realizing their project’s vision.

For Shawn Wilkinson, founder of decentralized storage startup Storj, which started its token migration in 2017, the rewards simply outweighed the risks.

He told CoinDesk:

“The idea is that you just need to rip the band aid off and be on a set of tracks that isn’t going to go off a cliff.”

But why would a project need to complete a token migration in the first place?

Often, the shifts are carried out by projects that begin by using the ethereum blockchain to raise money and distribute their tokens. The tokens distributed at this phase typically act as “placeholders” for those that will eventually be used when the project is live.

One benefit of this strategy is that traders don’t have to lock up this capital. Rather, they’re able to exchange these placeholder tokens on exchanges while they develop their technologies.

Therefore, a “token migration” has come to describe the process by which token holders’ balances are transmitted from their ethereum wallets to a given project’s new compatible wallets. After the switch, tokens have effectively “moved” from one blockchain to another.

However, it’s important to note that token migrations are not exclusively linked to live blockchain launches, and also take place when projects merely shift from one protocol to another.

For example, Storj’s token migration was prompted by its decision to move from a bitcoin-based protocol to ethereum due to scalability issues.

“We became increasingly aware that if we didn’t do [the token migration], the consequences would be pretty big,” Wilkinson said.

How do they work?

For users and investors, the degree of their involvement in the token migration process varies – typically according to where they store their tokens.

For those who store their tokens on exchanges, it is unlikely that they will have to take any steps to participate in the migration. Major exchange Binance, for example, says it handles “all technical requirements” of the process for the EOS, Tron, ICON and Ontology migrations.

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 explained. “It’s really as simple as that.” […]

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