Atomic swaps are swap of cryptocurrency between two entities who would like to exchange tokens from different blockchains.
Atomic swaps are useful when you have just one cryptocurrency, but want to utilize another one in transactions.
Exchange services or wallets that are specially designed are required to carry out an atomic swap since the process is still being refined and developed.
What is Atomic Swap?
An atomic swap is the exchange of cryptocurrency from different blockchains. The swap is carried out between two organizations without third entity’s involvement. The goal is to eliminate central intermediaries, such as regulated exchanges and allow token owners complete control.
The word “atomic” is derived from “atomic state” in which there are no substates It either occurs or it doesn’t, and there’s no other option. This is referring to the condition that a cryptocurrency transactions takes place. it is either happening or not.
The majority of atomic swap enabled blockchains and wallets utilize smart contracts. Smart contracts are software programs inside blockchains that run in the event that certain requirements are fulfilled. In this instance it is the case that both parties agree to the transaction before the timer expires. By using a smart contract, the trade will prevent one person from taking a currency from another.
Atomic swaps can also be referred to as cross-chain nuclear swaps.
Understanding Atomic Swaps
Each cryptocurrency is backed by a blockchain that is that is designed to only accept transactions that involve specific tokens. For instance, Bitcoin (BTC) has an underlying blockchain, while ETH (ether) also has a second. It is not possible to exchange BTC as well as ETH without first converting them to fiat currency and then purchasing another.
A different method can be to switch between different currencies and exchange several times until you get the currency you desire. Atomic swaps permit you to trade tokens from various blockchains within a single transaction.
Decentralized exchanges can execute the atomic swaps you need. Decentralized exchange (DEX) is not governed by a central authority to regulate it. It’s an exchange platform that where you can trade with no any third-party. There are also cross-chain swap companies, where you deposit your digital assets to another wallet, then conduct the swap, then transfer the funds back to.
Atomic swaps depend on both parties to prove by encryption of the key and acceptance by both parties via the key encryption.
History of Atomic Swaps
The concept was conceived shortly after altcoins–cryptocurrencies other than Bitcoin–materialized. The rise of altcoins was a sign that the owners of cryptocurrency became interested in transferring capital between different coins. This kind of swap first became popular in September 2017 when an exchange atomically of Decred as well as Litecoin was conducted.1
Since then, both startups and decentralized exchanges have incorporated swaps and provided users with the same option. For instance, Lightning Labs, a company that makes use of the lightning network of Bitcoin to process transactions, has carried out swaps off-chain using the technology.2
A variety of cryptocurrency wallets have been created that can take advantage of cross-chain atomic swaps. Liquality has come up with a wallet which will allow swaps of Bitcoin, ETH, and more.3
Atomic Swap Process
When you conduct an atomic swap 2 token holders agree to swap their tokens for a value they decide on. The smart contract software detects that they have both consented to the swap, and it can execute the exchange for the two of them. This transaction gets recorded on the blockchain and verified by the network nodes and the next block is created for a new transaction.
The transaction is not reverseable. The parties must both agree for a new transaction for the exchange of tokens should they want them to be returned.
Atomic swaps make use of Hash Timelock Contracts (HTLC) to facilitate the exchange of tokens. The name suggests that HTLC is an intelligent contract that is time-bound between two parties, which generates one cryptographic hash for each side of the.
An algorithm known as a cryptographic hash used to convert information of variable length like an individual’s wallet address or transactions information. It transforms it into the form of a hexadecimal numbers with a predetermined length. The general rule is that the number generated is referred to as the hash.
HTLC is a requirement that all parties confirm the receipt of funds within a specific timeframe. If one party is unable to acknowledge that the transfer was received within this stipulated time then the entire transaction is void and the funds are returned. This removes the risk of counterparty, or the possibility that one party may not accept the coin offered but refuse to transfer their currency.
As an example let’s say Jane wishes change 1 BTC to an equivalent amount of Litecoin John. The transaction is submitted through an atomic swap-capable account. An algorithm for cryptographic hashing creates the hex key to decrypt the transaction at this point. This process is repeated after John’s death.
Each of Jane and John both unlock their respective accounts with their encrypted number. They must do this within a certain timeframe otherwise, the transfer will not be completed. It is the HTLC in the Blockchains performs the transaction.
Is an Atomic Swap Expensive?
The ability of the mainstream to conduct the atomic swap is something new however, they aren’t able to charge fees unless there’s blockchain-related fees.
How Do You Do an Atomic Swap?
This is accomplished by with cryptocurrency wallets and Hash Time Lock Contracts (HTLC) which are used to ensure that the swap is carried out in the event that both parties are willing to the exchange. In actuality there are only some Atomic swap wallet providers as well as decentralized exchanges that could be utilized in swap.
What Are Cross-chain Atomic Swaps?
Cross-chain atomic swaps refer to cryptocurrency trading or exchanges between different cryptocurrencies which use different blockchains.
This is a new technology which has been developed in the blockchain community. It is a big achievement as it could mean that there will be more decentralized exchanges in the future. Atomic swaps can help to eliminate the need for centralized exchanges because they are better and more efficient.