What is an atomic swap: Atomic Swap: Definition, How It Works With Cryptocurrency Trade

What is an atomic swap

What is an atomic swap

This, unfortunately, limits the number of cryptocurrencies that you can use for Atomic Swaps. The cryptocurrencies must also have specialized programming functionalities. For example, there are a total of three conditions each cryptocurrency must meet. Due to the conditions each cryptocurrency needs for Atomic Swap, you can’t use Atomic Swap for every cryptocurrency just yet. We have already mentioned that Atomic Swaps can take place either on blockchain or outside of the blockchain. The Atomic Swaps that takes place on the blockchain are called on-chain, and those that take place outside of the blockchain are called off-chain.

Centralized exchanges are operated by individuals who are bound to make mistakes or even abscond with funds, such as with the unfortunate QuadrigaCX affair. In other cases, developers unintentionally alter key network parameters, leading to a permanent locking of user funds. Atomic swaps may sound like an advanced concept, but they are proving to be incredibly useful for trading cryptocurrencies.

Cross-chain bridge is a term for software that enables the transfer of cryptocurrency or blockchain assets between blockchain networks. Special wallets or exchange services are needed to conduct an atomic swap because the technique is still being developed and refined. Or more simply, for blockchains to talk to each other and agree on truth, as they relate to transactions, so that different technology can co-operate.

The contract will auto-generate a unique cryptographic key that’s needed to access the funds. Based on this key, the smart contract also generates an encrypted (or “hashed”) version of the key, which Bob then sends to Alice. Much like how you’d never put diesel gasoline in a conventional engine, attempts to send crypto to an incompatible blockchain can result in disaster, including lost funds. For example, you can’t send Bitcoin to an Ethereum address, and vice versa. To safely execute a trade across blockchains requires an atomic swap, a peer-to-peer method of exchanging cryptocurrencies between two different blockchains without the need for any third-party involvement.

One such requirement is the implementation of the Lightning network. Atomic swaps, also known as atomic cross-chain trading, offer a way to swap cryptocurrencies peer-to-peer from different blockchains directly without the requirement for a third party, such as an exchange. Atomic swaps are automated smart contracts that provide a secure transaction by preventing a party from stealing another’s assets. Image generated by Jasper ArtAn atomic swap is the definition of a dream come true, specifically for crypto traders or users within the blockchain community. Swapping, on the other hand, allows users to seamlessly transfer one cryptocurrency for an equal amount in value of another.

This once required selling one token for fiat, then purchasing the second with the fiat. It was an expensive and inefficient method to jump between coins, but it was the norm until the innovation of token swaps. Now that we understand a little more about how atomic swaps work, let’s take a closer look at the benefits of atomic swap trading. These swaps are called “atomic” because either the trade is successfully completed and each trader receives the other one’s funds, or nothing happens and both traders simply keep the funds they started with. Atomic swaps are made wallet-to-wallet, in a fully peer-to-peer manner.

Key Takeaways

There are more than 200 centralized exchanges that allow traders or investors to buy, sell, and trade cryptocurrencies. This means, for cryptocurrency exchange or swap, you don’t need any centralized intermediaries. You can execute the atomic swap between two different blockchains with different native coins or implement it off-chain.

Within the hash, a swap can only occur by generating and revealing transaction-specific data such as private keys or their representations. Moreover, the two locks prevent either party from duping the other. Furthermore, exchanges have differing costs related to deposits, trading and withdrawals. Therefore, atomic swaps are able to guard traders against these rather high operational costs.

You also need to make sure that both cryptocurrencies can also initiate hashed timelock contracts . Lightning Network is the prime example of second layer solution for off-chain atomic swaps. Hashed Timelock Contracts are a type of smart contracts that are basically used to eliminate counterparty risk.

What is an atomic swap

This smart contract ensures that both wallets receive their crypto within a specified time. As of 2017, cryptocurrencies could only be traded and bought through platforms such as Coinbase, Kraken, Coinsquare, and more. Trade execution was anonymous, and not peer-to-peer until an atomic swap between litecoin and bitcoin was announced.

Why Cross-Chain bridges are superior to Atomic Swaps

The real beauty is, this exchange/trade between involved parties can happen in a trustless manner without depending on a third party or an escrow manager plus there is no default risk on either side. Atomic swaps include built-in functions requiring both participants to fulfill certain predetermined steps before a transaction can be finalized. Atomic swaps utilize something called Hashed Timelock Contracts which impose certain trading conditions and a time constraint mandating they also must be completed within a set time. Ahead we’ll dive into how to swap cryptocurrency, including some key features and benefits. Once Taker has paid the DEX fee, the atomic swap has officially begun. Maker observes the fee payment and initiates the second step of the swap.

Bitcoin & Litecoin

The sudden rise of crypto exchanges and the interest of ordinary people in crypto trading also makes the industry heaven for scammers. Many fake exchanges appeared online in the last few years, made money, and disappeared overnight. To start with, the current process of cryptocurrency exchange is often complex as well as time-consuming. This is often considered as one of the primary hindrances that stop crypto going mainstream.

For instance, suppose Jane wants to convert 1 BTC to an equivalent number of Litecoins with John. She submits the transaction through an atomic swap-capable wallet. A cryptographic hash function generates a hex number to encrypt the transaction during this process. Atomic swaps use Hash Timelock Contracts to automate the exchange of tokens. As its name denotes, HTLC is a time-bound smart contract between parties that involves generating one cryptographic hash on each end. Since on-chain atomic swaps were first proposed back in 2013 it’s been an incredibly tough journey to get to the first real world transaction.

It was also Komodo that took the first serious steps to bring Atomic Swaps to mainstream use. In 2017, they developed the first GUI for a fully Atomic Swap crypto trading marketplace, called BarterDEX. Need to create an account, validate or confirm your transaction, depositing coins, withdrawal processing, and other steps take time. However, with Atomic Swaps, you can just trade directly with the cryptocurrencies you have.

Atomic swaps make digital asset trading as secure as it can possibly be. The basic idea is that Bob and Alice can send each other funds that are locked by the hash of a predetermined secret code. Bob publicly reveals the secret code to collect Alice’s funds, which allows Alice to also see the secret code and use it to collect Bob’s funds. If Bob doesn’t collect Alice’s funds, then Alice can never spend Bob’s funds. In this case, the locktime set by the CLTV command would expire and both Bob and Alice would get their money back. With easier, faster, and cheaper way to exchange cryptocurrencies, investors have an opportunity to diversify their investments.

In doing so, Molly unlocks the safe that has her funds while also revealing this key to Steve. So now that Steve has this key, he can sign off on the transaction for Molly’s contract address and retrieve his 1 BTC, and everyone’s happy. The transaction fee that the Taker pays is meant to deter them from spamming the network with false transactions. On Komodo, the transaction fee is about 1/777th of the order amount. The first party unlocks the trade capital deposited by the second party with a secret passcode used to deposit the initial trade capital.

Once Mark has deposited the cryptocurrency, Lara can use the currency by “unlocking” the transaction with the special key obtained from her initial deposit. Since each individual’s situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein. Both Jane and John unlock their respective funds using their encrypted numbers.

Atomic Swap is an up-and-coming technology that offers a lot of benefits for crypto investors who want to diversify their coins. The technology has clear benefits over the exchanges as a low cost, faster, and secure alternative. “It is the process of peer-to-peer exchange of two cryptocurrencies between two parties, without using any third-party service like crypto exchange. Atomic swaps are hence a revolution in the world of cryptocurrency transfer.

Atomic Swaps: Smart Contracts to Bless Crypto Traders

If the exchange gets hacked and funds are comprised, there is little recourse for the users who have had their coins and tokens stolen. One of the most popular Atomic Swap blockchains is Bitcoin Swap, also known as BCA. It is a SegWit enabled Bitcoin fork that features hybrid consensus and on-chain atomic swap option. It uses the same procedure that we discussed in how do atomic swaps work section.

In this case, the conditions are that each party agrees to the transaction before a timer runs out. Using a smart contract in the trade prevents either party from stealing a cryptocurrency from the other. Of course, the safest way to store digital assets is in a non-custodial wallet that’s never sent or received a transaction (a “cold” wallet). Atomic swap is a cryptocurrency term used to explain cryptocurrencies exchange without the services of an escrow manager, a third party, or the fear of a breach of trust from either parties. As a technological innovation, atomic swaps do not need payment of exchange and/or trading fees involved, this reduces the hacks exchanges bring about.

First Atomic Swap

Today, atomic swaps offer the potential to change how cryptocurrencies are traded and exchanged. Cryptocurrency exchange platforms, like those mentioned above, do not allow users and investors to exercise complete control over their wallets. All things considered, if you currently want to swap cryptocurrencies, it is a cumbersome endeavor. In any case, you need to log in to a cryptocurrency exchange, where the first issue may arise regarding the two cryptocurrencies you want to swap. Cryptocurrencies have fixed trading pairs which means that the pair of cryptocurrencies you want to trade against each other may not be available. There is also the potential for exchange downtimes and volume loss on top of barriers.