Custodial vs. Non-Custodial Swaps
Last updated
Last updated
NFT Protocol's latest v3 contract allows swap creators to choose between creating custodial and non-custodial swaps.
With both custodial and non-custodial swaps, swap creators must sign all necessary token approval transactions required to give NFT Protocol permission to transfer assets on their behalf.
From that point a custodial swap differs in that it requires that the swap creator's assets be transferred to NFT Protocol to be held in decentralized escrow. Once in the protocol's contract, assets can only leave the contract if:
The swap is canceled by the address which created it. In this case the assets are returned to the address which created the swap.
The conditions for swap execution are met by a counterparty. In this case the assets are transferred to the counterparty and the specified assets from the counterparty are transferred to the swap creator.
Non-custodial swaps on the other hand allow swap creators to retain custody of their assets when creating a swap. The assets involved in creating the swap can only be transferred to a swap taker who's met the specified conditions for taking the swap using the token approvals the swap creator granted NFT Protocol when creating the swap. Note that native currency (ETH) involved in creating a swap does not function via token approvals and is thus ALWAYS required to be transferred to NFT Protocol to be held in custody when creating a swap. If users wish to retain custody of native currency when creating non-custodial swaps they must use the wrapped ERC-20 version. Swaps created on NFT.org are non-custodial by default. Users may elect to create a custodial swap via the ADVANCED drop down menu on the NEW SWAP page.
There are several benefits to creating non-custodial swaps. Non-custodial swaps require approximately 15-30% less gas to create than custodial swaps, depending on the specific type and quantity of assets involved in the swap. Retaining custody of assets also allows users to list them on other non-custodial marketplaces and protocols and to continue to garner any holders benefits that may be associated with holding the assets.
The downside to non-custodial swaps is perhaps the largest advantage to custodial swaps and that is swap integrity. Because a non-custodial swap allows users to retain custody of their assets, users can continue to transfer the assets involved in a non-custodial swap to other wallets or sell them on other marketplaces. NFT.org is built to identify when the assets involved in a non-custodial swap are no longer in the swap creator's wallet, but it is still possible that a swap taker will see a non-custodial swap on NFT.org and only find out that the maker no longer has the assets involved in the swap upon trying to take the swap. Such scenarios can be disappointing for buyers. Because custodial swaps require that NFT Protocol holds the assets involved in decentralized escrow, buyers can be confident that if they are seeing a custodial swap on NFT.org that the assets are present and that the swap can be taken.
