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Savio Gomez

Fintech - Blockchain AI StartUp Advisor | Loan Aggregator | Capt | PhD | Auditor | Inspector

Token Swap! What does it mean today? And can it lead to #ShitCoin? 21 Oct 2018

Token Swap! What does it mean today? And can it lead to #ShitCoin?

DYOR, just thinking out aloud!

«Token Swap», the term originally used to mean token migration, i.e. the transfer of digital tokens from one blockchain onto another blockchain. This was primarily when projects use one blockchain to raise funds, such as the Ethereum network, and then want to transfer their tokens onto their own proprietary blockchain once the project’s mainnet was up and running.

But today, the word Token Swap has taken on the form of Token Exchanges between ICO’s. i.e. ICO (A) will exchange their respective tokens with ICO (B), via a contract that will specify price, exchange rate, transaction value, number of tokens to be exchanged, lockup periods, each ICO’s contact addresses, applicable escrow, tradability, vesting period, delivery process, leak off, disclaimers, damages and so on.

Let’s take two Token Swaps cases that I am very familiar with.

Case 1: One of the two ICO’s have their tokens on exchange
In this case if ICO (A) has its tokens listed on exchange(s), then ICO (A) will have the clear advantage when it comes to formulating the swap agreement.

One advantage is normally token value i.e. if ICO (A) is trading on exchange at X USD, the swap agreement value of ICO (A) token is going to be many times its trading value. In short ICO (A) basically gets ICO (B) tokens at a relative low price (and I mean LOW).

In most cases ICO (A) will lock its tokens till the date ICO (B) tokens actually hit exchange and there will be a very tight leak off clause when it comes to ICO (A)’s tokens; while not such an effective clause to protect ICO (B)’s tokens. In short, ICO (A) would normally have the ability to dump ICO (B)’s tokens much faster than what ICO (B) could do with ICO (A)’s tokens.

What does ICO (B) get form this? The answer is simple – The chance to move the ICO (B)’s total income ticker bar forward by the value of the swap. And of course the alleged publicity (and investments) that is expected to follow considering that ICO (A) “believes” in ICO (B).

Case 2: Both of the ICO’s don’t have their tokens on exchange.
Now in this case, ICO (A) and ICO (B) are somewhat on equal footing when it comes to the swap, though one of the ICO’s could have an advantage, perhaps the one that is closer to the end of its token sale or raised more funds or better prospects and so on.

So both ICO’S swap at agreed token prices (normally the final price with no discounts or as seen fit).

So what do both ICO’s gain from this? Well the answer unfortunately is that both ICO’s use this virtual income to drive their respective total income ticker bars forward by the value of the swap!

 

Let me touch some more on Case 2! 

Today in reality, the value of those tokens is only set by each respective ICO and market value will only be established when they hit exchange.

Unfortunate and virtual, I use these words aimed at a bigger issue, namely: 

(a)   Many ICO’s in token sale are happily swapping away with other ICO’s that are also in token sale. And those ICO’s are happily swapping away with other ICO’s that are also in token sale. And those ICO’s ..... well you get the picture .

(b)  Several ICO’ seem to think that it’s OK to solely use swaps to hit their softcap.

(c)   Many articles about ICO’s tell us that approximately 90% of ICO’s fail.

(d)  Most ICO’s in token sale are happy to pay out tokens galore for services, marketing, promotions, airdrops, bounty, advisors, etc etc.

(e) Poor existing market conditions in terms of securing funding for ICO's.

Now combine all these factors together (plus the others you come up with) and try to imagine the storm that is brewing! The level of token dilution, the dependence on the performance of other ICO’s to support own ICO, availability of funds to develop the product (beyond the MVP), need I go on?

When asked, many CEO’s have told me that they will use a good market maker to work it out; but I am fortunate enough to be a consultant to a market maker, with this massive level of dilution, it is doubtful that a market maker would be able to do much for the token on exchange. Some have said that with a liquidity pipeline it will be fine, well perhaps for a short while, but even that is not unlimited and do factor in the cost for a liquidity provider.

In the end, most swap agreements have an end clause such as “token exchangers will use all possible efforts, but will not guarantee, to create a market which manages native tokens. The exchangers shall understand that the liquidity of their native tokens may be lower than expected”.

So I guess its OK not to expect the unexpected then.

Perhaps ICO’s considering swaps should put a clause in the swap agreement limiting the number of swaps that can be performed by each ICO, delcarations of the max value of past / future swaps, taking into consideration the CAP’s and other pertient aspects. Not sure how one would be able to track this, but still it is something to consider if an ICO wants to protect its token and not end up becoming #Shitcoin.

DYOR, just thinking out aloud! 
 

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