The invention of Bitcoin have opened the world of financial trading to the public and it’s clear that the appetite is there, with crypto trading volumes growing more than tenfold between April 2020 and April 2021. In fact, some traditional financial services companies are even hiring more employees to deal with the rush.
Swaps were previously so complex that they were used almost exclusively by large financial institutions. But now, thanks to cryptocurrency, this is no longer the case.
Cryptocurrency swaps
The word ‘swap’ actually has two distinct meanings:
first is a migration of tokens to a different blockchain, and
second is a simple exchange of digital assets. We’ll be focusing on the latter.
Why do swap tokens?
Simply put, to take advantage of new opportunities. Different coins have different characteristics in terms of stability, transaction fees, different speeds, functions, integrations, and are vital for the development of the ecosystem. Swaps give people the opportunity to get in on a project while it’s still cheap, and the team behind the applications benefit from selling their tokens for more established coins.
Pitfalls?
Wallet addresses are long so making a mistake is pretty easy. If you send money to the wrong place, there’s little to no recourse. In a swap, there is naturally more scope for wrongdoing – who should send their money first?
P2P Swap Button
Centralized exchanges
The beneficial characteristics of centralized exchanges are that they are easy to use, have high liquidity, and provide at least some recourse if something goes wrong because they offer customer service. Many of them require KYC from their customers because they strive to be regulated, which is necessary because they provide a bridge between fiat and crypto, and fiat institutions won’t deal with decentralized bodies. The fact that centralized exchanges are custodial, meaning that they hold customer funds, is attractive to many users who prefer to delegate responsibility of private key storage to a trusted organization.
On an ideological level, cryptocurrency was invented to give people full control over their finances. Centralized exchanges try to offer the best of both worlds, but the hacks and manipulation provide a good case study in why Bitcoin was born in the first place.
Decentralized exchanges (DEX)
They allow you to access market liquidity without any KYC obligations and without having to entrust your money and personal data to a centrally-run organization. They’re more secure than centralized exchanges because they don’t hold customer private keys, and they tend to have a wider selection of tokens available to trade.
OTC third parties
These are used more for large scale swaps, where it might be difficult to find a counterparty on an exchange. They thus allow you to avoid slippage, and, perhaps more importantly, let you choose who you swap with. However, they are opaque by design, as they are designed to support swaps without affecting market price. And they require you to surrender custody of your assets.
Confliction
The nature of cryptocurrency is that the owner of a private key is the owner of the asset, and if you surrender that key, the asset effectively is no longer yours. Yet, the alternative to trusting an exchange with your private key is allowing an exchange to change the price of your assets as they see fit. So what is the solution?
Kirobo’s P2P safe swap
Kirobo’s solution is to remove the swap from the public venue, allowing users to set their own token prices. This means that users will consistently make more money from swaps because the trade is executed without risk of market manipulation.
Kirobo’s authentication mechanism passcode-protects transactions, requiring the initiator to create and share a passcode with the second party, and that allows the first party to cancel and retrieve funds before the trade is executed. The exchange itself is actioned simultaneously by a smart contract.
