What is Token Swapping?

By Julia Cook
Published Feb 22, 2023 and updated Mar 9th, 2023

Token swapping refers to the process of transferring digital assets from one blockchain to another blockchain.

Token swapping entails the transfer of tokens between two parties and between two different blockchains. These swaps are usually facilitated by a third-party site such as a cryptocurrency exchange platform or crypto wallet. 

The main purpose of token swapping is to allow users to exchange tokens without needing the intermediary step of exchanging their cryptocurrency for fiat and then exchanging that fiat for the cryptocurrency that they want. This is how it used to be done, and those extra steps would cost the user extra money for exchange and gas fees. Therefore, token swapping simplifies the process and also saves the participants both time and money.

Another benefit is that cryptocurrency exchange platforms typically offered exchange pairing for more popular cryptocurrencies, but there were not always trade pairs available for less popular tokens. Decentralized finance (DeFi) platforms recognized this difficulty and so began proving services that would enable users to enter the amount of the token that they wanted to exchange for which other token and then enable them to be swapped automatically for only a single service fee. Some platforms, such as wallets, will even allow for free token swapping for tokens built on the same blockchain, although the blockchain itself may still charge a transaction fee in the form of gas.

Token swaps can also occur on a much larger scale when a blockchain-based project chooses to switch blockchains and therefore need to convert all of their existing tokens onto the new blockchain, such as when NFT creators Yoots and DeGods decided to transfer all of their work from Solana to Ethereum in December 2022. This is necessary for their native token to be compatible with the new network, otherwise, their platform’s economy will be unable to function. In this case, the swap might also be referred to as a ‘token migration,’ since the token is migrating to another blockchain.

Another type of token swap occurs when a blockchain platform is built on top of an existing blockchain platform, such as often occurs on the Ethereum blockchain. In that case, developers raise money for their platform by offering to exchange utility tokens for Ether during their initial coin offering (ICO.) These tokens are usually either ERC-721 or ERC-20 tokens. Investors will purchase these tokens in the hope that the project will come to fruition and that they will either be able to utilize them in-app, as would be the case with ERC-721 non-fungible tokens (NFTs) used in gaming dApps and other platforms, or for native-currency (ERC-20) tokens used for staking, voting or other in-app purposes.

Therefore, there are three main types of token swaps:

  • Peer-to-peer: Individuals swap tokens directly between blockchains.
  • Token migration: Entire blockchain projects and all of the native tokens are transferred from one blockchain to another.
  • Developer-to-investor: Developer-to-investor swapping includes token swapping for crowd-funding purposes, as with ICOs.