This is a complete guide to what is a Crypto Swap and other methods of exchanging cryptocurrencies in 2023.
In this article you'll learn:
What is a Crypto Swap
The difference between swaps and trades
The 4 main types of token exchange
What to choose between CEX, DEX, Cross-chain Bridges and Atomic swaps
Let's dive in.
Content
What is a crypto swap?
A token swap takes place when a user wants to exchange one cryptocurrency for another without the need for an intermediary or a centralized authority.
Swaps are typically facilitated by decentralized exchanges (DEXs) that run on blockchain technology.
In a token swap, the user's funds are swapped directly with the other party's funds, with the exchange being executed via smart contracts on the blockchain.
This eliminates the need for a central authority to process the transaction and allows for faster, cheaper, and more secure exchanges.
Crypto swaps can be used to trade a wide range of cryptocurrencies, and they offer users more control over their funds than traditional centralized exchanges.
Difference between Crypto Swap vs Trade
To understand how a crypto swap works we need to understand the differences between a swap and a trade.
As I already mentioned, a swap is an exchange of assets between two parties at a market price.
Examples of swaps are the first purchase of crypto on a CEX, or a swap ruled by a smart contract.
Trade is more advanced, it allows you to add more variables to your exchange, like the price that you want to sell/buy the asset for, the time at which you want to perform the exchange, and so on.
They have performed thanks to a centralized entity with a more complex infrastructure, although some DEXs are starting to implement more advanced options.
Examples of trades are a market order, a limit order, and so on.
How does Crypto Swapping work?
Now that we know the difference between swap and trade we can move on.
There are four main types of token exchange used for cryptocurrencies:
1. Exchange through Centralized Exchanges
Centralized exchanges are online exchange platforms on which you can buy and sell cryptocurrencies, they act as a middleman between traders and charge fees for each trade.
On CEXs users are not directly exchanging their assets, because the CEX maintain control of the funds.
Users receive IOUs (I Owe You) that can be exchanged only at the time of withdrawal.
IOUs are informal document acknowledgements representing the debt one party owes to another.
A centralized exchange is mainly chosen because it provides high liquidity and more complex options for trades, like futures.
Key features and drawbacks of CEXs
More user-friendly than other solutions;
They maintain custody of your cryptocurrencies;
A large number of trading pairs;
Low fees;
Have huge liquidity;
No slippage;
Completely centralized.
Examples of Centralized Exchanges are Binance, Coinbase, Huobi and Kraken.
2. Exchange through Decentralized Exchanges
Decentralized exchanges have no central authority and are regulated by Smart contracts. They allow users to exchange tokens in a peer-to-peer way, cutting out the middleman.
They are mainly decentralized, although there will be always a centralized entity in this kind of infrastructure.
DEXs are the best options for users that want to maintain control of their funds and privacy and want to access different financial instruments, like staking.
Key features and drawbacks of DEXs
They have a less user-friendly experience;
Limited trading pairs;
Lower liquidity compared to CEXs;
Moderate slippage;
Almost Decentralized.
Examples of Decentralized Exchanges are Uniswap, Pancakeswap and 1Inch.
3. Swap through Cross-chain bridges
Cross-chain bridges allow users to swap tokens from different blockchains. They are a useful method for moving assets or data from one network to another.
Bridges are usually used to create a synthetic version of a native asset with a wrapped version of it, for example, BTC and WBTC, that should maintain the same value (I say should because de-pegging is trending lately).
Key features and drawbacks of Cross-Chain Bridges
A minimal number of tokens available to swap;
Low liquidity;
High slippage;
Some centralized components.
If you want some examples have a look at The top 9 cross-chain bridges in 2023.
4. Swap through Atomic swaps
An atomic swap is a peer-to-peer swap between two parties that wants to swap tokens from different blockchains, without the need for a third party, like a CEX.
The transaction is created on the spot with a smart contract and has a limited amount of time to be fulfilled by both parties, otherwise, it will be cancelled.
This time feature can be used thanks to the Hash Timelock Contract Technology (HTCL).
Both parties need to use a data string as a key to unlock the deposit and proceed with the swap.
Key features and drawbacks of Atomic Swaps
Fully decentralized;
Increased security thanks to HTCL;
Privacy issues;
Lack of centralization.
An example of an Atomic Swaps platform is Atomex.
How to choose the best method for swapping your tokens
Choosing the method of swapping or exchanging your cryptocurrencies is not an easy task.
If you are a seasoned trader and not afraid of more complex Web 3 applications, you can try any Decentralized solution.
If you struggle with blockchain technology and want a more intuitive interface to interact with, a CEX is probably the best for you.
Liquidity plays an important role in swaps since a highly liquid market means less volatility. Centralized exchanges are preferred for more stable trading.
Risk is always behind the corner in the blockchain industry, and no place is 100% safe. Although Centralized solutions are usually safer than Decentralized ones.
Here is a recap of the differences between DEX, CEX and swaps.
| DEXs | CEXs | Swap/AtomicSwap |
|---|---|---|---|
Verification | KYC required | Partial verification may be required | No verification required |
Security | Medium/High | Medium | Medium/Low |
Liquidity | Very High | Medium/High | Low |
Risk | Low | Medium/High | Medium/High |
Fees | Medium/Low | Medium/High | Medium/High |
User Experience | Good | Medium | Poor |
Regulation | Under regulations | No regulations | No regulation |
Conclusion
In the end, is just a matter of personal knowledge and taste on how you want to move your digital assets through blockchains.
Remember to always Do Your Own Research.
Hopefully, I covered the basic notions to let you choose the best way to act.
