In the world of cryptocurrency, there is a strong focus on how different ecosystems seemingly compete with one another. It always appears to be Bitcoin against the rest of the markets. With atomic swaps, the situation will completely change rather quickly. The objective of atomic swaps is to create interoperability between altcoins and Bitcoin.
Atomic swap is a peer-to-peer exchange of cryptocurrencies from one party to another, without going through a third party service like a crypto exchange. During this entire process, the users have full control and ownership of their private keys.
Atomic Swaps Will transform how we use Cryptocurrency
It is safe to say there is a growing need for ways to convert Bitcoin into altcoins and vice versa. Right now this process can only be done through services, such as exchanges. Luckily, it appears a technological solution is just waiting around the corner.
The innate inability to make transactions across different chains without using a third party, or centralized solutions, is considered one of the biggest problems in the blockchain industry. Simply making a transaction from person A to person B and vice versa seems like the most intuitive solution, but then person B could simply refuse to do their part of the job, leaving person A stranded.
This is where atomic cross-chain swaps come into play: they make sure that the third party is not needed and the swap is done at the same time, eliminating the possibility of malicious acting.
The concept of atomic swaps is not all that new as it was first introduced back in 2013. It has taken some time until cryptocurrency developers found a way to make this concept a reality.
Another interesting thing to note about atomic swaps:
- They can either be directly executed between separate blockchains with different native coins
- Or, they can also be executed via off-chain channels that are offshoots of the main blockchain.
How Does Atomic Swaps Work?
Take a look at the image above . Let’s see what is going on here.
- Alice has some BTC and Bob has some LTC. They want to swap the coins with each other.
- The two of them then open up a payment channel. The instigator of this swap (let’s say Alice) then creates a contract address.
- He contract address is like a multi-lock safe that takes care of both of their funds
- By creating the address, Alice deposits her BTC and produces a value as well.
- The value acts as the key while the hash generated from it will pretty much act like a lock for the safe
- Upon doing this, Alice then sends the hash to Bob.
- Bob generates a contract address using the hash that has been given to him by Alice
- Bob sends his LTC to this contract address
- Only Alice can unlock the Litecoin in this address because she has the value which generates that particular hash.
- Alice can get her LTC by signing a transaction for Bob’s contract address and Bob can retrieve the BTC by signing a transaction for Alice contract address
- However, until now, Bob doesn’t know the value that generates the hash. So, how exactly is he going to unlock the address?
- When Alice signs Bob’s contract address with the value, she unlocks the address and reveals the value to Bob as well.
- Bob, now knowing the value, signs off the transaction for Alice’s address and retrieves his BTC
So, to summarize the process.
Alice creates the value and generates its Hash which is used to create the contracts address and deposit the BTC here. She then sends the Hash to Bob. Bob, then generates the contract address through the hash and sends his LTC there. In order to get her hands on the LTC, Alice will have to unlock the address by using her value. Upon unlocking and getting her coins, the value of the key is given to Bob. Bob then uses the value to get his coins. Sounds like rocket science? It really is not.
Advantages of Atomic Swap
- Interoperability between the different assets is a huge problem right now in cryptocurrencies. Atomic swaps are going to bring users of all these different coins together to help them interact with each other.
- Atomic swap makes the crypto ecosystem more “currency agnostic”. Because people with different crypto holdings will now be able to interact with each other, it is pretty likely that people will be more open to diversifying their holdings instead of just depending on a few coins.
- Atomic Swap will open the doors to trustless and fee-less decentralized exchanges.
- Direct wallet-to-wallet trading epitomizes decentralization in its purest form. Exchanges are constantly targeted for regulation purposes which makes the whole trading process increasingly centralized.
- Since atomic swap directly connects two wallets to each other, it removes all the steps and confirmations required by centralized exchanges. It is a faster option.
- One of the best features of cross swap is the removal of intermediary tokens. Eg. if you have LTC and want to buy ADA in a normal exchange, you will have to sell your LTC for BTC and then buy your ADA tokens. Via atomic swaps, you can get this trade done in one go.
- Exchange usually levy a lot of fees and charges, especially when you are trying to withdraw your coins back to your wallet. Some exchanges also have pretty questionable fee-structures. Atomic swaps reduce the transaction costs to a fraction of the existing costs.