What is Atomic Swap?

Atomic Swap

A cryptocurrency trade known as an atomic swap involves two different blockchains. Without the services of a neutral source, we carry out the swap between the two companies. The goal is to give cryptocurrency investors complete control by eliminating centralized facilitators like organized exchanges. The term “atomic” comes from the concept of an “atomic state,” in which there are no substates and just two possible outcomes. So this is a reference to the bitcoin transaction’s status: either it occurs or doesn’t.

Most blockchains and accounts that support atomic swaps use a consensus mechanism. Blockchains contain programs called “smart contracts” that run when specific criteria are satisfied. This situation requires that both parties accept the transaction before the timer expires. We prevent both parties from taking cryptocurrency from the other by using a software application in the transaction. Bridge atomic swaps are another name for atomic swaps.

  • A cryptocurrency transaction known as an “atomic swap” occurs when two parties want to swap tokens from various blockchains.
  • Atomic swaps can be helpful if you only get one cryptocurrency but can use someone else in a transaction.
  • Since we are continuously researching the method is continually and improved upon, specialized wallets or payment systems are required.

We can trade tokens from two separate blockchains between two parties via atomic swaps and automatic exchange contracts. This technique, also known as simultaneous cross-chain trading, eliminates the requirement for centralized third-party entities when carrying out trades. This approach, in a sense, protects the freedom of cryptocurrency users while enabling trustless transactions that do not require the users to know their counterparts and are free from counterparty concerns. Furthermore, atomic swaps are one of the only wholly decentralized trading methods because of their trustless, mentoring nature.

Article Outcomes

In this article, we will discuss the following:

  • History of Atomic Swap
  • How did Atomic Swap work?
  • Atomic Swap Process
  • Advantages and Disadvantages of Atomic Swap
  • Is Atomic Swap Expensive?
  • Atomic Swaps and Crypto Investing

History

Soon after altcoins, or cryptocurrencies other than Bitcoin, started to exist, the idea came to be. Some cryptocurrency owners were interested in transferring money between coins due to the emergence of altcoins. So when Decred and Litecoin completed an atomic swap in September 2017, this form of token transfer made its debut. Since then, swaps, startups, and decentralized exchanges have given consumers the same facility. For instance, Lightning Labs, a firm that carries out transactions on the Bitcoin public blockchain, has used the technology to carry some off swaps.

There are also specialized cryptocurrency devices that can cross-chain atomic swaps. For example, liquidity has created a wallet that can exchange Bitcoin, ETH, and other cryptocurrencies.

How did Atomic Swap work?

Atomic” is a word that refers to procedures that would either complete or not begin at all. In other words, an atomic swap has features that ensure both parties to a transaction satisfy all requirements before they can finalize the transaction. Smart contracts, which are conscience programs that maintain the conditions controlling the execution of a trade, are used to make this possible.

A Hashed Timelock Contract (HTLC), which serves as a two-way virtual safe, is explicitly used in atomic swaps. This contract employs an advanced computational complexity encryption technique known as a hash function, as its name suggests

Early in the history of the cryptocurrency business, they initially conceived the concept of exchanging two coins from separate blockchains. The earliest mention of it dates back to 2012, barely a few years after Bitcoin (CRYPTO: BTC), the very first cryptocurrency, debuted. The first atomic swap occurred in 2017 when Litecoin (CRYPTO: LTC) and Decred (CRYPTO: DCR).

But how can a transaction between strangers be trusted, particularly in the absence of a third party (such as a bank, exchange, payments network, etc.), to ensure that everyone is acting reasonably? The solution is cryptographically secure cryptography.

More On Atomic Swap Work

Additionally, it adds a deadline, which means canceling that transaction when one or both parties fail to keep their end of the contract within the allotted period.

For instance, the two sides might settle on a two-hour time limit for the atomic transfer. When two hours have passed, and not all of the trade conditions have been satisfied, the transaction will return the entered coins to their previous owners.

You must also know the HTLC’s requirement for two cryptographic or encoded keys. As follows:

  • We can only conclude Trades when both parties give cryptographic proofs¬†demonstrating that they have fulfilled their obligations under the transaction, thanks to the hash lock key.
  • The timelock key is intended as a safety feature to assist traders in establishing a timeframe for atomic swaps. The system ensures that traders get their money back when the swap isn’t finished for one reason or another before the deadline passes.

Atomic Swap Process

Two token owner consent to swap their tokens for any agreed-upon sum is an atomic swap. The intelligent contract computer executes the exchange after determining that they both concurred. It releases a new block for the next transaction. Only when the transaction has been added to the blockchain and verified by the network nodes. There is no going back on the transaction. A different exchange transaction involving both parties is required if any party wants the tokens around.

Atomic swaps automate the transfer of tokens using hash timelock contracts (HTLC). HTLC is a moment smart contract between two parties that uses one cryptographic hash generated on each end, as the name suggests.

A cryptographic hash function transforms data with variable lengths, such as a user’s paper wallet and transaction history. It changes it into a corrected hexadecimal number. It refers to the generated number as the hash. HTLC stipulates a deadline by which both parties must confirm receiving payments. They cancel the main contract and return the money if one party doesn’t ensure the transaction within the allotted time. The chance that one participant will embrace the provided coins but also eliminates the rejects of the transfer of their currencies.

Example of a Process

Let’s say Jane and John want to exchange 1 BTC for an appropriate amount of Litecoins. She sends the transaction through a wallet that supports atomic swaps. A cryptographic hash function creates a hex value to secure the transaction during this process. At John’s end, and repeats the process. Both Jane and John use their encrypted numbers to unlock their separate funds. They have a set amount of time to complete this. Otherwise, the transfer won’t take place. The HTLC inside these blockchains then carries out the trade.

Advantages and Disadvantages of Atomic Swap

In an attempt to build more efficient financial modeling, atomic swaps are a significant advancement for the crypto industry. Technology-enabled participant transactions provide advantages, but atomic swaps aren’t necessarily the optimum exchange mechanism.

Advantages of Atomic Swap

  • The absence of a significant exchange can result in lower transaction fees.
  • So this speeds up Transaction time by eliminating intermediates.
  • There is no longer a requirement to conduct transactions using fiat money.
  • Atomic swaps enable greater interoperability across various blockchain networks.

Disadvantages of Atomic Swap

  • We Cannot use atomic swaps to trade all cryptocurrencies. Two cryptocurrencies must be predicated on blockchain networks and use the same cryptographic hashing method.
  • Atomic swaps need a few more steps than a centralized exchange, but the procedure is becoming simpler.
  • Atomic swaps do not enable cryptocurrency and fiat currency exchanges.
  • As with most aspects of digital currency, security and privacy concerns and threats could be an issue. While the existing atomic swap systems do not provide robust transaction privacy, develop recommendations for improvements.

Is Atomic Swap Expensive?

Atomic swaps are now available to the general public, although they do not yet incur fees, provided and include blockchain payments. Hash Timelock Contracts (HTLC), which impose the exchange when both sides agree, are used with cryptocurrency wallets to carry out the transaction. We can utilize very few decentralized exchanges and atomic switch wallet providers in a swap.

Atomic Swaps and Crypto Investing

Lower trading costs and quicker transaction times have long been priorities in trading and investing. On that front, atomic swaps also have a lot of potential for the crypto community. However, accessibility and affordability do not imply that a specific investment class is suitable for all investors.

Atomic swaps are a technology for emergencies. Since interconnection broadens a blockchain’s ecosystem, which is desirable, they are likely to continue to develop and be adopted by additional blockchains. So even though you actually use atomic swaps, your preferred blockchain will likely allow them in the near future if it doesn’t.

The bitcoin market is still in its infancy but is growing swiftly. However, there is controversy on how the value of cryptocurrencies can be precisely quantified like other assets. Although more businesses are experimenting, use cases for cryptocurrencies and blockchain technology are still part of the economy on a small scale. Because of this, whether to use atomic swaps or not, the currency of cryptocurrencies is quite unstable.

Consider these dangers when determining whether or not to include cryptocurrency in your diversified investment strategy. And if you’re just getting started, keep in mind to proceed as you get more knowledge of blockchain and cryptocurrency.

Conclusion

In 2013, Tier Nolan offered the first definition of an atomic swap. It is a cutting-edge method enabling different parties to exchange cryptocurrency immediately from their accounts. However, Tier Nolan considered cross-chain mentor trading far before that. P2PTradeX, a permissionless exchange protocol created by Daniel Larimer in 2012, is widely regarded as the first implementation of atomic swap technology. Security is one of the main benefits of nuclear swaps because it never compels users to give out or use their encryption information. Another advantage of this technology is that it eliminates the need for centralized exchanges, which lowers expenses significantly.

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