Atomic Swaps – what are they and how do they work?

What are we talking about today?

Atomic swaps are automatic exchange contracts that allow two parties to trade tokens from two different blockchain networks. For example, you can exchange Bitcoin for Ethereum without the need for an intermediary like a centralized exchange, and without having to transfer Bitcoin to Ethereum, everything is simply done automatically for you. Atomic swaps are useful if you only have one cryptocurrency but need another for a transaction and don’t want to use a centralized exchange. Likewise, atomic swaps are considered by many crypto enthusiasts to be one of the few truly decentralized trading methods, as they eliminate the need for a third party. In this blog, we will explain in detail what atomic swaps are, how they work, and where they are used.

Source: cointelegraph

What are atomic swaps?

The concept of atomic swaps dates back to 2013. , when computer scientist Tier Nolan first proposed the idea. He presented the basic principles of cross-trading on the Bitcointalk forum, presenting the initial ideas of using cryptographic protocols to enable secure, direct and decentralized exchange of cryptocurrencies. The technology of atomic swaps came to life in 2017. , when Charlie Lee, the founder of Litecoin , announced on Twitter that he “performed a cross atomic swap with LTC/BTC” and exchanged 10 Litecoin for 0.1167 Bitcoin. Since then, many decentralized exchange platforms have been using the technology to trade cryptocurrencies. Today, there are numerous platforms that enable atomic swaps, such as AtomicDEX, Lightning Network, LNSwap and Liquality. These platforms use smart contracts, which are programs within the blockchain that are triggered when certain conditions are met. Specifically, atomic swaps use a Hashed Timelock Contract (HTLC), which functions as a two-way virtual safe. As its name suggests, this contract uses a sophisticated mathematically based encryption mechanism called a hash function. It also introduces a time limit so that transactions are canceled when none of the parties involved in the exchange fulfill their side of the deal within a predefined time limit. All this allows atomic swaps to exchange cryptocurrencies in a truly decentralized manner, without intermediaries, and in an extremely secure manner.

Source: cointelegraph

How atomic swaps work

As we have already said, atomic swaps use technology that enables the rapid exchange of two different cryptocurrencies, which work on different blockchain networks. Such a process (also known as cross-chain trading) is based on smart contracts, which are programs within the blockchain that are triggered when certain conditions are met. In this case, the conditions are that both parties agree to the transaction before the time expires. Using a smart contract in trading prevents one party from stealing cryptocurrency from another. Atomic swaps use hash timelock contracts (HTLC), which are a type of smart contract that “locks” a transaction and requires confirmation from both parties for the exchange to take place. A contract created using HTLC technology includes two security features:

  • HashLock: technology allows the contract to be locked with a special key that can only be accessed by the person who deposited their cryptocurrency. Deposited cryptocurrency can only be unlocked with a special key (ie unique data).
  • TimeLock: the mechanism ensures that the transaction takes place within a certain time frame and returns the funds to the depositor if it is not completed. It secures the transaction through time limits. Even if one’s cryptocurrency is deposited and the trade is not completed immediately, they are assured that the funds are safe and will be returned.

This is how it works in practice:

Let’s assume that Lara and Marko want to exchange cryptocurrencies using atomic swap. Lara deposits her cryptocurrency into an HTLC address, which functions as a virtual safe and can only be unlocked with a special key that she can access. Marko then creates his HTLC contract and deposits his cryptocurrency on it, using the same hash he got from Lara. Lara can unlock Mark’s HTLC contract with her key and claim his cryptocurrency. Once she does, Mark can see her key on the blockchain and use it to unlock her HTLC contract and claim her cryptocurrency. If the exchange is not completed within the specified time, the HTLC contracts are canceled and the funds are returned to the depositors. In this way, it is ensured that both parties get their money back if the transaction is not executed, and during the execution of the transaction you have access to the money only if you have fulfilled the required conditions.

Source: cointelegraph

Where are atomic swaps applied?

Atomic swaps have the potential to revolutionize various sectors of the crypto ecosystem. We have singled out some of the most important examples of application for you, and they are the following:

  • Decentralized exchanges: Atomic swaps allow the creation of decentralized exchanges where users can trade cryptocurrencies directly without relying on centralized intermediaries.
  • Tokenization of real assets: Atomic swaps can facilitate the exchange of tokenized real assets, such as real estate, art or gold, on different blockchain networks. This enables greater liquidity, transparency and accessibility of the asset market.
  • Inter-blockchain communication: Atomic swaps can enable better communication and cooperation between different blockchain networks, which could lead to the creation of an interoperable and scalable crypto world where the fact that you use one blockchain does not prevent you from using the benefits of other blockchains.

According to some estimates, the volume of atomic swaps has been growing for a long time and reaches hundreds of millions of dollars per day on some platforms. However, accurate information on the total annual volume of atomic swaps is difficult to obtain, because not all transactions are publicly visible or easily recognizable. However, atomic swaps can be expected to become more popular and widespread as technology develops and improves.

Source: cointelegraph

Conclusion

We have explained what atomic swaps are, what is the technical background behind them, and some of the areas where it is applied. We believe that from all of the above together, we can conclude that atomic swaps will continue to grow in popularity given that their field of application is increasing day by day, and the technology behind them is improving at the same time. We hope you enjoyed today’s blog, and if you have any questions, you can always contact us on our social networks ( Twitter , Instagram ).