Swap

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In the context of cryptocurrency, a swap refers to the direct exchange of one digital asset for another. This process allows users to trade, for example, Bitcoin for Ethereum, or one type of stablecoin for another, without needing to first convert their holdings into traditional fiat currency (like USD or EUR) as an intermediary step. Swaps are a fundamental feature of decentralized exchanges (DEXs) and many centralized cryptocurrency platforms.

Swaps can be facilitated through various mechanisms. On DEXs, they often occur via automated market makers (AMMs), which use liquidity pools – collections of tokens locked in smart contracts – to enable permissionless and automatic trading. Users contribute liquidity to these pools and earn fees in return. Centralized exchanges also offer swap functionalities, often with a user-friendly interface, though they operate under a central authority. The key advantage of swaps is the speed and convenience they offer for rebalancing a crypto portfolio, accessing different tokens, or participating in various DeFi protocols. The exchange rate for a swap is determined by the market supply and demand for the assets involved at the moment of the transaction.

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