How do token swaps work in your Web3 wallet?
Summary: Swapping allows you to exchange one crypto asset for another directly within your Web3 wallet. In this article, we explain what a swap is, how slippage works, and why prices may differ from what you see in your Bitvavo account.
When using a Web3 wallet, you can swap one crypto asset directly for another asset on a network of your choosing. This is done through a built-in router that finds the best available liquidity for your transaction. Understanding how swaps work helps you make better decisions and avoid unexpected outcomes when trading assets on-chain.
What is a swap?
A swap is the process of exchanging one crypto asset for another directly on a blockchain.
Instead of using a traditional order book, swaps are executed through liquidity pools. These pools contain pairs of assets provided by other users. When you perform a swap, you trade against the assets in the pool.
This means:
- There is no direct buyer or seller.
- The price is determined by the available liquidity in the pool.
- The transaction is executed on-chain.
This can explain why the prices sometimes differ from the Bitvavo platform. In addition, factors such as slippage and network fees can influence the outcome of a swap. As a result, the price you receive when swapping on-chain may not match the price shown in the wallet at the same moment.
What fees do you pay for swapping?
When you swap crypto, you may pay the following fees:
- Service fee: A fee for using an external party (LI.FI) to carry out the swap, plus a fee for Vavo Web3 Ltd.
- Network fee: A fee paid to the blockchain network to process your transaction. This can change depending on network activity.
In addition to these fees, there are also factors that can influence the final swap price:
- Slippage: The difference between the expected price and the actual execution price due to market movements or limited liquidity.
- Price impact: The effect your swap size has on the market price, especially in less liquid pools.
While slippage and price impact are not explicit fees, they can affect the final amount you receive and are therefore important to consider.
What should you consider before swapping?
Before confirming a swap, it is important to review the details of your transaction:
- Bitvavo selects the router with the best return. But you are free to choose a different router if it is available.
- Check the estimated amount you will receive.
- Check the router time.
- Be aware of the fees; the fee for a swap consists of a gas fee and service fees.
Conclusion
Swapping in a Web3 wallet allows you to exchange assets directly on the blockchain. Prices are determined differently than on centralized platforms, and factors such as slippage and liquidity play an important role.
By understanding how swaps work, you can make more informed decisions.
FAQ
Why did I receive less crypto than expected after a swap?
This can happen due to slippage or limited liquidity in the pool. Price changes during the transaction can affect the final amount you receive.
Can my swap fail?
Yes, a swap can fail if the price changes too much or if there is insufficient liquidity. In that case, the transaction will not be completed.
Why is my swap price different from what I expected?
Slippage refers to the difference between the price you see when initiating a swap and the final price at which it is executed. This happens because prices in DeFi can change quickly, depending on market conditions and liquidity. As a result, the amount you receive may differ slightly from what you initially expected. More information about slippage and how prices are determined can be found here.
Why is the price different from what I see on Bitvavo?
Web3 swaps use liquidity pools instead of an order book. Prices are based on available liquidity and can differ from centralized platforms like Bitvavo.
Do I need to pay fees when swapping?
Yes, swaps include gas fees and service fees for processing the transaction on the blockchain. These fees vary depending on the network and its activity.
What is LI.FI?
LI.FI is a routing service that finds the best way to swap or bridge your crypto. You can think of it as a search engine for swaps. It checks many exchanges, bridges, and other routing services at the same time to find the most efficient route for your transaction.
Instead of using a single exchange or bridge, it scans multiple decentralized exchanges and bridges in real time to determine the most efficient route based on price, speed, and availability.
LI.FI is non-custodial, meaning it never holds your funds and transactions are executed directly from your wallet via smart contracts.
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