What are Token Swaps?

Token swaps refer to the exchange of one cryptocurrency token for another, typically executed via centralized exchanges (CEXs), over-the-counter (OTC) desks, or decentralized exchanges (DEXs). Unlike traditional financial swaps, these involve the actual transfer of digital assets, not cash flow obligations.

Types of Token Swaps

Note: A DeFi index token represents a weighted basket of multiple DeFi assets (e.g., UNI, AAVE, MKR, COMP). These tokens are designed to track the performance of the decentralized finance sector, allowing investors to gain diversified exposure through a single instrument.

Commonly Traded Tokens

DeFi Tokens

• UNI (Uniswap): Governance token of Uniswap, a leading decentralized exchange (DEX) using an automated market maker (AMM) model.
• AAVE (Aave): Governance and utility token for Aave, a decentralized lending and borrowing protocol.
• MKR (MakerDAO): Governance token for the MakerDAO protocol, which issues the DAI stablecoin and manages its collateralized debt positions.
• COMP (Compound): Governance token for Compound, a DeFi lending and borrowing protocol that allows users to earn interest or take out loans.
• CRV (Curve): Governance token for Curve Finance, a DEX optimized for low-slippage swaps between similar-value assets (especially stablecoins).
• SNX (Synthetix): Governance and collateral token for Synthetix, a protocol for issuing synthetic assets that track the price of real-world and crypto assets.
• LDO (Lido): Governance token for Lido Finance, a liquid staking platform that allows users to stake ETH and other tokens while retaining liquidity.
• YFI (Yearn Finance): Governance token of Yearn Finance, a yield aggregator protocol that automatically allocates capital to optimize yield farming strategies.

Stablecoins

• USDT (Tether): A fiat-backed stablecoin issued by Tether Ltd, pegged to the U.S. dollar and widely used across crypto markets for trading and settlements.
• USDC (USD Coin): A fiat-backed stablecoin issued by Circle (and formerly co-managed with Coinbase), fully collateralized with USD reserves and subject to regular attestations.
• DAI (MakerDAO): A decentralized, overcollateralized stablecoin issued by the MakerDAO protocol, backed by crypto assets such as ETH and stETH via smart contracts.
• TUSD (TrueUSD): A fiat-backed stablecoin issued by TrustToken, with real-time attestations of its U.S. dollar reserves held in regulated banks.
• FRAX (Frax Finance): A hybrid stablecoin partially backed by collateral and partially algorithmic, originally designed to maintain a soft USD peg with dynamic reserve ratios.
• GUSD (Gemini Dollar): A fully backed stablecoin issued by Gemini Trust Company, a regulated U.S. exchange, with 1 : 1 reserves and monthly audits.

Layer 1 (L1) and Layer 2 (L2) Tokens

Layer 1 (L1) refers to the base blockchain protocol—such as Ethereum, Solana, or Bitcoin—on which transactions are directly settled. These networks are responsible for consensus, security, and execution of smart contracts.

Layer 2 (L2) refers to protocols built on top of Layer 1 chains to improve scalability and reduce transaction costs, often using techniques like rollups or sidechains while inheriting the security of the base layer.

Layer 1 Tokens

• ETH (Ethereum): Native token of the Ethereum blockchain, used for paying gas fees and securing the network via proof-of-stake.
• BTC (Wrapped Bitcoin / WBTC): Tokenized version of Bitcoin on Ethereum; used in DeFi to represent BTC with ERC-20 compatibility.
• SOL (Solana): Native token of the Solana blockchain, used for transaction fees and staking in a high-throughput L1 environment.
• AVAX (Avalanche): Native token of Avalanche, a smart contract platform with multiple interoperable blockchains and fast finality.
• BNB (BNB Chain): Token originally created by Binance, now used to pay gas on the BNB Smart Chain and Binance’s ecosystem.
• ADA (Cardano): Native token of Cardano, used for staking and transaction settlement on this research-driven proof-of-stake L1.

Layer 2 Tokens

• MATIC (Polygon): Native token of the Polygon network, an Ethereum L2 scaling solution that uses sidechains and zk-rollups to reduce fees and latency.
• ARB (Arbitrum): Governance token for the Arbitrum L2 rollup network on Ethereum, focused on fast, low-cost smart contract execution.
• OP (Optimism): Governance token for the Optimism L2 rollup, which uses optimistic rollup technology to scale Ethereum with minimal trust assumptions.

These tokens represent the most actively traded assets across both centralized and decentralized platforms and are often paired with stablecoins or each other for liquidity provision.

Market Structures

Centralized Exchange (CEX)

• Order-driven via Central Limit Order Book (CLOB).
• Liquidity, custody, and pricing handled by the exchange.

Over-the-Counter (OTC)

• Bilateral RFQ-based trading.
• Suited for block-size execution with custom pricing and delayed settlement.

Decentralized Exchange (DEX)

• Peer-to-peer trading using Automated Market Makers (AMMs) or order books on-chain.
• Examples: Uniswap, Curve, 1inch, dYdX.

AMM Swap Pricing (e.g. Uniswap v2)

Uses the constant product formula:

Where:

• ( x ) and ( y ) are the reserves of tokens A and B.
• ( k ) is constant.

Amount of token B received for token A:

Includes a fee factor ( f ), typically 0.3%:

Example: DEX Swap

• Input: 10 ETH to USDC
• Reserves: ETH = 1,000; USDC = 3,000,000
• Fee = 0.3%

Compute USDC received:

Crypto Derivatives: Swap and Futures Markets

Common Instruments

Perpetual Swap Pricing

Perps use a funding rate ( F ) to converge price to spot. Let:

• ( P_{\text{perp}} ): Price of the perpetual
• ( P_{\text{spot}} ): Spot price
• ( F > 0 ): Longs pay shorts

Funding payment per interval:

Use Cases

Regulatory Considerations

Summary Table