As the blockchain industry grows, and businesses mature in the wake of successful ICOs, many projects are conducting token swaps to allow holders to exchange their current tokens for updated versions. This can be for a variety of reasons—a mainnet migration, a change to the underlying smart contracts, or to increase the the token supply (similar to stock splits in traditional markets).

We believe this is a positive trend for the industry, expanding options for users and strengthening the capabilities of crypto projects, but migrations like these are not without risks. If done improperly, token swaps can cause a slew of problems for both companies and token holders alike. At IDEX, this topic is close to our hearts, as we have experienced many token swaps—both good and bad.

In this post, we want to share a little of what we have learned to help guide projects that may need to conduct a token swap of their own in the future.

Tip #1: Indefinite Token Swaps Minimize Risk

The most common reason token swaps run into problems is that companies set narrow time windows for their users to exchange their tokens. It is easy for people to miss or overlook a notification for any number of reasons — they could be sick, on vacation, or just busy — and end up missing the window. The result is a lot of angry people left with now-worthless tokens. It is virtually guaranteed that if the issuer conducts its swap in this way, someone will miss it.

To avoid this situation, we recommend using smart contracts that allow token swaps to continue indefinitely. That way, holders of the old tokens who miss the announcement can still take part at any time in the future and their existing tokens do not become worthless.

An additional benefit of this method is that the smart contract will collect and burn old tokens, removing them from circulation. When both new and old tokens are allowed to circulate simultaneously it offers scammers a golden opportunity to continue to sell the old token to customers who are unaware they are buying a now-defunct token. An indefinite swap ensures the total token supply is always constant and that users in possession of the old token will always be eligible to upgrade it to the new version.

Tip #2: Conduct Airdrops with Caution

Token swaps conducted via airdrop present unique challenges since they generally require that users’ tokens be held either in a personal wallet or certain exchanges during a selected “snapshot.”

If users are properly prepared for the snapshot, then an airdrop provides a simple, automatic redemption process for users. However, a stated previously, it is virtually guaranteed that not all users will be properly prepared for this short window of opportunity.

This applies to exchanges as well—if a project does not provide exchanges with ample warning of an upcoming token airdrop, the exchange may not be able coordinate the proper procedures to accommodate the swap. With IDEX, for example, all deposits are associated with the IDEX contract address when viewed via a blockexplorer such as Etherscan. However, if projects send the airdrop token directly to the contract then they are locked within our smart contract forever and burned; not even the managers of the exchange can access them. Often we learn of such situations after the fact when token holders demand their tokens but we cannot retrieve them.

At IDEX, we do our best to help as much as possible in these situations, but once the swap has occurred it is often too late. Solutions to poorly executed swaps often take time and resources, and in some cases an entirely new token has to be created in order for everyone to receive the tokens they are due. This ultimately hurts everyone involved: the project, the community, and the exchange.

Tip #3: Communication is Key

No matter how the token swap is executed, providing adequate time and clear instructions is the key to its success. Projects need to engage with both their customers and exchanges well in advance of a swap to minimize the risk of oversight and to establish proper procedures. We cannot stress the importance of this enough. With plenty of time, clear instructions, and open communications with the exchanges trading your token, the risk of error is sharply reduced.

As the blockchain space continues to mature, these swaps are likely to become more frequent and to affect larger and larger groups of people. As a result, their success is going to be crucial for the future of the blockchain space.

~The Aurora (IDEX) Team