Key Takeaways
Blockchain technology and cryptocurrencies have transformed the financial sector, providing new avenues for trading and investing.
One of the standout features of this technology is the ability to swap assets across different blockchains. Also known as cross-chain swapping, this method is rapidly gaining popularity as users seek to maximise diverse blockchain systems’ benefits and unique attributes.
Let’s discuss how to proceed with cross-chain swapping, types of swap, and many more.
Cross-chain swaps enable users to transfer assets between different blockchains directly, bypassing the need for centralised exchanges. This process improves blockchain interoperability by allowing seamless communication and transactions across diverse blockchain networks.
A user can exchange Bitcoin on its blockchain for Ethereum on the Ethereum blockchain without using a middleman. This removes the need to rely on centralised exchanges, which can be risky because of potential hacks, errors, or regulations.
The three common cross-chain swap types are:
Cross-chain exchanges (CCEs) enable users to exchange cryptocurrencies across multiple networks, but they function in a custodial manner. This implies that the exchange holds users’ digital assets during the swapping process to offer simplicity and speed while temporarily requiring users to trust the exchange with their assets.
This approach leverages smart contracts to enable token swaps between separate blockchain systems without relying on intermediaries or central authorities. It allows users to exchange tokens across different blockchains directly.
This cross-chain swap method utilises a specialised Smart-Order-Routing Engine that taps into the liquidity of both centralised and decentralised exchanges. By comparing prices across various platforms, it finds the most favourable deals for each swap, offering users improved pricing and reduced fees.
To understand how the cross-chain swap works, you need to understand the following technology it uses:
Here is a step-by-step explanation of how a cross-chain swap works:
| Parameters | Cross Swap | Cross Bridges |
| Process | To perform a cross-chain swap, lock your tokens on the original blockchain, mint-wrapped tokens on the target blockchain, and use a native decentralised exchange to acquire the desired digital asset. | Bridges typically lock the original tokens on one blockchain and mint equivalent tokens on another or the reverse. |
| Trust | Although centralised exchanges offer cross-chain swaps, they add friction and require custodial services, temporarily relinquishing control of your assets. | With bridges, you need to trust the security of the bridge’s underlying implementation. |
| Security | Chainlink Proof of Reserve improves swap security by supplying solid collateralisation information and addressing the issue of uncollateralised mints. | Bridge security is contingent upon the integrity of the underlying implementation. |
| Use Case | Cross Swaps are set to become a key element of a connected, cross-chain ecosystem. | Bridges serve as an alternative route, with several ways to execute cross-network trades effectively. |
| Limitations | Cross Swaps require users to specify both the asset they want to exchange and the digital asset they aim to receive. | Bridges are limited to creating and destroying tokens across different blockchains to facilitate cross-chain swaps. |
Understand slippage before placing your trade. It refers to the difference between the expected price of a swap and the price at which it is executed. Familiarise yourself with acceptable slippage rates and set slippage tolerance to minimise unexpected losses.
Cross-chain swapping is a great tool for spreading out your investments, trying new blockchain systems, or making transactions easier. As this technology improves, you will probably see even more exciting developments and possibilities in cross-chain transactions.
To learn more about such crypto investment options or invest in cryptocurrencies, visit Mudrex.
Leading crypto swap platforms are Verse DEX, ThorSwap, and Stargate Finance. Additionally, Binance Convert, Bybit Convert, and ChangeNOW stand out for their unique features, competitive fees, and extensive asset support.
Yes, you can do so using cross-chain bridges or decentralised exchanges. These tools facilitate the movement of tokens from one blockchain to another by converting them into a compatible format and reintroducing them to the target chain.
Because of blockchain technology’s decentralised and trustless characteristics, cross-chain swaps are irreversible after completion. Still, if your crypto wallet is compatible with both the source and destination blockchain protocols, you may transfer your crypto back to its original blockchain.
In India, swapping cryptocurrencies triggers taxation. You will face a 30% capital gains tax, an additional 4% cess on gains, and a 1% Tax Deducted at Source (TDS).
Interoperability Protocols are frameworks that enable smooth communication between different blockchains. They support cross-chain messaging to transfer data and tokens between blockchains. This capability is crucial for building cross-chain dApps).
