What is Atomic Swap?
Atomic swaps, also known as atomic cross-chain trading, is a technology that allows the trader to trade two cryptocurrencies directly without involving any intermediary or trust fulfilling the idea of having programmable and decentralized currencies and exchanging the assets digitally over blockchain technology.
Explanation
- Sergio Demian Lerner, a developer created the first draft of a trustless exchange protocol in July 2012. But it is tier Nolan who is widely regarded as the developer of atomic swaps because, in May 2013, he provided a full account of a procedure for atomic swaps. This is when the research in this area took a step forward.
- The term atomic is a word that is derived from the field of computer science that here means either that the operation is conducted as programmed or the operation is not at all conducted.
- The term swapSwapSwaps in finance involve a contract between two or more parties that involves exchanging cash flows based on a predetermined notional principal amount, including interest rate swaps, the exchange of floating rate interest with a fixed rate of interest.read more means an act of exchanging one thing for another.
- With the help of atomic swaps, there would be no chance for manipulation, theft, or any sorts of human error. It is important to note that they do not work with formal currencies, they work only with cryptocurrencies.
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How does Atomic Swaps Work?
- It enables the parties included to trade directly from one wallet to another without any sort of a body acting as an agent or intermediary such as an exchange.
- In this entire process of swapping cryptocurrencies from peer to peer, the parties involved would have full control over their private keys.
- It uses the technology by the name hash timeLock Contracts which generates the cryptographic hash function that ensures hash locks and timelocks to be verified and acknowledged by both the parties.
Example of Atomic Swap
- Let us suppose there are two parties namely Tim and joy. Tim has bitcoins while joy has litecoins. While Tim wants litecoins, Joy wants bitcoins. Both of them decide to trade with the help of an atomic swap. Tim opens a contract and a hash is produced when Tim deposits the bitcoins to that contract.
- This hash works like a lock on a safe. Tim also generates value in the form of a data string that acts as a key to retrieve those funds from this so-called safe. He then sends it to Joy so that he can fulfill his side of the transaction of this contract.
- Joy follows the same steps by depositing his litecoins in the contract address using the same hash that Tim has used. In this way, both funds are locked to the same key. When Tim receives joy’s litecoins from his address, the key being used is revealed at the same time allowing Joy to retrieve bitcoins from Tim’s address.
Importance
- Atomic swaps are very important as they open up a horizon of possibilities allowing faster and simpler trading and also remove third parties like crypto exchanges between them which actually increase the possibility of hacks, transaction costs, or might increase the risks of mismanaging funds.
- If any of the parties to the contact as mentioned above in the example fail to confirm the transaction or fails to complete any action with the specified time frame, the transaction stands to be void and there would be no exchange happening between the parties which eliminated the counterparty risk.
Advantages
- It helps in attaining more liquidity in the crypto market because the peer to peer transactions directly from one’s wallet to another can be processed easily.
- There are no third parties involved in between which reduces the transaction costs and tediousness in settlement of transactions.
- The privacy is protected because of the existence of the private keys, encryption and has functions.
- It ensures both the parties to the contract fulfill their requirements of the trade so that either both the parties honor the contract or the contract itself is voided in its entirety.
Limitations
- The world of atomic swaps is not fully developed yet. That means, not all cryptocurrencies are made available for atomic swapping. Only bitcoins or litecoins are the names being heard predominantly as of now which makes it inevitable but to peg every transaction to be there in both cryptocurrencies again.
- Another major complaint would be that this technology requires knowledge and experience in blockchain and programming.
- The user interface is not user-friendly which makes it harder for laymen to adopt it with ease.
- Though it seems secure, there is still a possibility that the address may be compromised by attacks.
Conclusion
- Atomic swaps are hence, a revolution in the world of cryptocurrency transfer. Sergio Demian Lerner and Tier Nolan are responsible for the same. As discussed, there would be no third party involvement and hence only the parties involved in the swap are responsible for honoring the trade or otherwise.
- This smart chain technology uses cryptography, hash functions, and timelocks which ensure the swapping is secure and is done in a time frame but the user interface may not be adopted by novices.
- However advantageous it may seem, there is a long way to go, for, the mainstream adoption of atomic swaps requires more cryptocurrencies to be involved, rigorously tested software and much more research. The disadvantages may seem like small barricades over the advantages attached to it.
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