Problem & market scenario
PROBLEM & MARKET SCENARIO
As it occurs today, the process for exchanging cryptocurrencies is time-consuming and complex. This is due to several reasons for example, the fragmented nature of today’s cryptocurrency ecosystem that presents several challenges to traders.
Moreover, not all cryptocurrency exchanges support all coins. As such, traders wishing to exchange their coin for another one that is not supported on the current exchange may need to migrate their account or make several conversions between intermediate coins to accomplish their goals. There is also an associated counterparty risk if a trader wishes to exchange its coins with another trader. There are several other complications in the current crypto-assets exchange ecosystem such as:
Complicated Interface & Tedious Registration Process
An unprepared user may easily get lost in the abundance of indicators, graphs, orders, and other elements. On some platforms, the verification process is pretty difficult and it may take days, weeks, or even months for a new user to receive their account verification.
Lack of Accessibility
On one side, where most of the decentralised finance aggregators prefer to carry only ERC20 or BSC tokens, the other multi-chain aggregators are custodial and not decentralised. Hence, the investors have limited access to the trading pairs of crypto-assets.
Unsecured Wallets to Store Crypto Assets
It is impossible to access crypto assets if the investors misplace or forget the private key. A public key (that is used to receive crypto assets) can be recovered using a private key. To avoid the risk of forgetting keys and lose all crypto assets, investors generally use hot wallets.
Hot wallets are digital cryptocurrency wallets that have been around ever since the inception of Bitcoin. Such wallets have proved to be the most vulnerable wallets in the world. All of the digital wallets store security keys and codes in their online servers, which are extremely vulnerable to hacker attacks, scamming attempts, and other ill intent-driven actions. Sure, most of the high-profile hot wallet offering sites and companies have major security measures put in place, but all it takes is the smallest loophole for all the investors’ savings to be gone forever.
High Trade Fees & Other Hidden Charges
To make a simple transaction and exchange one cryptocurrency for the other, traders have to pay at every step of their journey, from the deposit to the final withdrawal. Although centralised exchanges usually explicitly declare their conditions, their opaque nature leaves a lot of room for manipulations. Thus, traders are always uncertain about the sum they receive in their wallets at the end.
Issues Faced During Token Swap
As the crypto market evolves, new projects appear with their blockchains and tokens aiming to achieve some specific goals. Some of them target beating Ethereum and offer developers improved scalability, little to no fees, and other perks. Others are created to be used only within decentralised applications.
Eventually, this incredible diversity of options leads to a need for exchanging one crypto for another – just as an exchange is done for Dollars, Euro, and Yen.
The world of cryptocurrencies is tricky. When bitcoins are sent from one address to another, the traders need to be careful. A single error and funds are lost with no chance of recovery. The same happens if the trader tries to send Bitcoin to an Ethereum address or vice versa.
As each of these blockchains operates in its universe, there is no easy way to establish connections between them. Some projects work on resolving this problem of interoperability but all of them target developers rather than end-users, leaving the latest ones in frustration.
There are many exchange services on the market that allow users to buy and sell cryptocurrencies for traditional currencies or other cryptos. However, due to the limited liquidity and number of trading pairs on each exchange, users that want to trade directly between two crypto tokens are sometimes unable to do so.
This is especially true for the less popular tokens because they are often only available on a small number of exchanges. Instead of direct trade, users are forced to include the intermediate step of converting into and out of fiat money or one of the most popular cryptocurrencies, such as BTC or ETH.
OPPORTUNITY FOR TOKEN SWAPS
According to July’s Cryptocurrency Derivatives Exchange Industry Report from the blockchain research company - Tokeninsight, the trading volume of the cryptocurrency derivatives market for the second quarter of 2020 was $2.159 trillion, based on data from 42 exchanges. This represents an increase of 2.57% from the previous quarter and a massive year-on-year increase of 165.56 percent from the second quarter of 2019, thus indicating just how astronomical the growth in crypto-derivatives has been over the last year. And the market just keeps on growing.
Therefore, the market for cryptocurrency derivatives which has exploded in recent years is expected to drive the demand for token swaps. Token swaps can refer to one of two things:
-Direct exchange of a certain amount of one cryptocurrency token for another between users facilitated by a special exchange service.
-Migration of a cryptocurrency token built on top of one blockchain platform to a different blockchain.
Drivers of Token Swaps
Such decisions of the traders are driven by the following factors:
•Traders make quite a profit by trading cryptocurrencies since they can change in price very quickly.
•So, the traders who can time the market correctly, are earning quite a lot by swapping their crypto at the right moment.
•Not all traders like those quick price changes though.
•Diversification is usually seen as a pretty good weapon against risk.
•Having a bit of many different cryptocurrencies helps such traders reduce the impact of price drops.
•Certain crypto assets support staking, meaning traders gain more crypto without any further action being required on their side.
1. https://internationalbanker.com/brokerage/crypto-derivatives-are-on-the-rise/ 2. https://coinmarketcap.com/?page=50