Let’s take a look at one of the late big inventions of crypto blockchains that can really simplify procedures for all crypto users.
We will start with a simple definition: it is a smart contract technology that enables the exchange of one cryptocurrency for another without using centralized intermediaries, such as exchanges.
Atomic swaps can happen straightforwardly between blockchains of various cryptos, or they can be directed off-chain, away from the fundamental blockchain. They initially became a force to be reckoned with in September 2017, when an atomic swap between Decred and Litecoin was performed.
From that point forward, different new businesses and decentralized exchanges have permitted clients a similar service. For instance, Lightning Labs, a startup that utilizes BTC lightning network for transactions, has performed off-network swaps utilizing the invention.
Many altcoins and DEXes (decentralized exchanges) have already joined the party.
Atomic Swaps Explanation
As it happens today, the procedure for exchanging cryptos is tedious and complex. This is because of a few reasons. For instance, the divided idea of the present crypto ecosystem presents a few difficulties to average investors.
Not all digital currency exchanges bolster all coins. All things considered, an investor wishing to trade one coin for another that isn’t bolstered on the present exchange may need to relocate funds or make a few transactions between a few exchanges to achieve the objective. There is additionally a related counterparty risk if the investor wishes to trade the coins with another merchant.
Atomic swaps take care of this issue using Hash Timelock Contracts (HTLC). As its name means, HTLC is a smart contract between parties that generates cryptographic hash work, which can be confirmed between them.
Atomic swaps require the two sides of the deal to recognize receipt of assets inside a predetermined time span utilizing a cryptographic hash work. In the event that one of the included parties fails to affirm the transaction in the given time period, the whole exchange is voided, and funds are not traded. The last activity helps evacuate counterparty hazard.
Here is an example:
Let us assume Bernard wishes to exchange over 10 BTC into ETH with Julie. Bernard starts the transaction in the bitcoin’s blockchain. During this procedure, Bernard produces a number for a cryptographic hash to encrypt the transaction. Julie does the same with the equivalent of ETH in the Ethereum blockchain.
Both Bernard and Julie unlock their funds utilizing their separate numbers. They need to do this inside a predefined time period or else the transaction won’t occur.
Atomic swaps can likewise be utilized offline with the help of a lightning network.
In this first part of our article, you found out what Atomic Swaps are and how to explain it to a friend easily. A follow-up article that sheds light on their pros and cons is coming to you next week.
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