Due to the rapid evolution of cryptocurrency and its market, a wide range of tokens and blockchains are in existence, which is an exciting development for crypto enthusiasts.
But, where the development of individual tokens has outpaced the development of infrastructure, it can often be hard to directly exchange one type of token for another, without having to exchange to fiat currency first.
Methods for what is known as crypto swapping are gradually being tested and improved over time. But how do they work and what are the best examples and platforms for crypto swapping?
What is crypto swapping?
Crypto swapping is the process of exchanging two different types of cryptocurrency directly without having to exchange to fiat currency first. There are a variety of reasons why crypto holders may want to do this, such as making use of strong exchange rates or the desire to try out a new crypto token.
But, switching from crypto to fiat, and then fiat back into the desired crypto token, is a long and expensive process. It can require hours or days of waiting, high fees, and also make it hard to truly benefit from positive exchange rates, as they could have easily fluctuated before the transaction is fully processed.
Due to the decentralized nature of cryptocurrency and blockchain, many different types of cryptocurrency tokens have developed independently of each other, with no immediate method for trading directly between different tokens or blockchains. Because each blockchain exists in its own environment, connections can not be established between them through typical blockchain methods.
This has led to innovations in the crypto swapping space, and a variety of different methods to allow transfers and exchanges between different tokens.
What is involved in crypto swapping?
Due to the complexities of exchanging between tokens, crypto swapping will nearly always require a third-party platform or method. There is a variety available, and a number of differences exist between the various types of platforms, as explained below.
Nonetheless, all crypto swapping platforms will allow you to link your crypto wallet and exchange tokens you already hold with alternate desired tokens. The logistics of the exchange will often be managed by the platform, once you have inputted the various data to confirm your desired exchange.
Crypto swapping is especially important for gaining easy access to tokens with low market capitalization. While many mainstream crypto platforms will limit the number of coins they offer, crypto swapping can allow you to gain access to less popular coins. And where certain direct trading pairs aren’t available, certain platforms will work out the best exchange route for you, combining a series of necessary exchanges into one single process.
Examples of crypto swapping
There are several different types of crypto swapping. None of them are perfect, as they come with their own benefits and drawbacks, which any crypto enthusiast should know.
Centralized exchanges
As demand for crypto swapping has increased, so has the number of centralized exchanges that provide crypto users the opportunity to directly exchange their tokens. Different centralized exchanges try to compete with each other by offering the most possible number of trading pairs, which means each platform will hopefully offer a wide possibility of trades.
The drawback about using centralized exchanges is the complexity. Most centralized exchanges are most targeted at professional traders, meaning that trading processes and interfaces are not simple, and can prove incomprehensible for people without previous trading experience.
Centralized exchanges also require Know Your Customer (KYC) checks to gain access to the system. This means they store your personal information and identity documents, and share them with federal governments.
They are also known for having significant fees at various different parts of the swapping process. Often, these fees are not completely clear to new users, meaning the amount of crypto they receive following the exchange can be lower than expected.
Decentralized exchanges
Decentralized exchanges were originally created to overcome the problems associated with centralized exchanges, which they have successfully managed to some extent.
Funds are simply exchanged through individual wallets, meaning that they do not use the central server and are more widely accessible across the globe. They also require no verification, unlike centralized exchanges.
However, there are some drawbacks to decentralized exchanges. Because they are less popular than centralized exchanges, the liquidity of decentralized exchanges is often low, meaning it is often not possible to make trades of a large monetary value.
The number of tokens offered by decentralized exchanges is also much lower than the number offered by centralized exchanges. These tokens are also less common ones, and won’t be known to many beginner investors in crypto.
Over the counter exchanges
Over the counter exchanges (OTCs) are often integrated with centralized exchanges, but provide a simpler and more accessible interface. They are perhaps the easiest way for those who are not experts in crypto to crypto swap.
However, with OTCs the exchange still remains opaque, due to its reliance on centralized exchanges. This means that it is often hard to know the final exchange rate until you receive the new crypto token in your wallet.
OTCs also offer the worst rates of all exchanges because they add their own fees to every transaction. This means you’ll likely pay fees to the OTC as well as the centralized exchange.
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