What is a token swap?

What would you think if your tokens were being sent to a new blockchain? You might think something fraudulent was going on, but that’s not the case. The decision to carry out this process, known as a “token migration” or “token swap,” has become increasingly popular among blockchain projects.

Tron and EOS are two examples of projects undergoing a token swap, and according to Coindesk there are 30 more projects lined up to do the same. Yet few people, even experts in the blockchain industry understand what is at stake here.

For Shawn Wilkinson, founder of decentralised storage startup Storj, who went through the process in 2017, the rewards outweighed the risks. He said: “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.”

Why do a token swap?

Often, the token migrations are carried out by projects that begin by using the ethereum blockchain for an ICO. The tokens distributed during the ICO typically act as “placeholders” for those that will eventually be used when the project is live. Also, they’re able to exchange these placeholder tokens on exchanges while they develop their technologies.

So, a token migration describes moving token holders’ assets from the ICO’s ethereum wallet to the project’s own token-compatible wallet.

But not all token swaps are for that purpose. Sometimes, as in the case of Storj, it’s because the founders want simply need to use another blockchain because of scalability issues. Storj moved from bitcoin to ethereum for just that reason.

It isn’t always a simple process though. Perhaps the most significant risk associated with token migrations is that they are not “trustless” processes. Users must place their trust in a project’s management team to implement the migration, and because token swaps are quite new, there is no blueprint for the safest and most efficient way to execute them.

Storj’s Wilkinson outlined how his company tackled the issue: “You have to make a bunch of correct assumptions to get it just right. What I found that worked for us is, we knew where we wanted to go, and we had to have a healthy bit of communication with our community to get them on board with the concept.”

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