What are Atomic Swaps?

14 Mar 2019

This is a guest post provided by Bisola Asolo from MyCryptopedia - Click here to visit MyCryptopedia.com

What Are Atomic Swaps?

Atomic swaps, or atomic cross-chain trading, is the exchange of one cryptocurrency for another cryptocurrency, without the need to trust a third-party. A relatively new piece of technology, atomic cross-chain trading looks to revolutionize the way in which users transact with each other.

For example, if Alice owned 5 Bitcoins but instead wanted 100 Litecoins, she would have to go through an exchange, i.e. a third-party. However, with atomic swaps, if Bob owned 100 Litecoins but instead wanted 5 Bitcoins, then Bob and Alice could make a trade. In order to prevent, for example, Alice accepting Bob’s 100 Litecoins but then failing to send over her 5 Bitcoins, atomic swaps utilizes what is known as hash time-locked contracts (HTLCs).

Hash time-locked contracts ensure that the atomic swap process is completely trustless by ensuring both fulfill the requirements of the trade. HTLCs require the recipient of a payment to acknowledge receiving payment prior to a deadline by generating a cryptographic proof of payment. If they don't, the recipient risks losing the right to the claim the payment, therefore returning the funds back to the sender.

Therefore, for a trade between Alice and Bob to take place, both must submit their transaction to their respective blockchains, Alice on the Bitcoin blockchain and Bob on the Litecoin blockchain. In order for Alice to claim the 100 Litecoins sent from Bob, she must produce a number that only she knows, used to generate a cryptographic hash, therefore providing proof of payment. Similarly, in order for Bob to claim the 5 Bitcoins that was sent from Alice, he must also provide the same number, that was used to generate the cryptographic hash.

Requirements of Atomic Swaps

As exciting as this technology is, there are some fundamental requirements for a cryptocurrency before it can successfully support atomic swaps. One such requirement is the implementation of the Lightning network.

If a hash time-locked contract can be thought of as linking two blockchains together, the lightning network can be thought of as linking payment channels together. That is, for Alice and Bob to transact with each other, they must be linked through payment channels. The lightning network allows for that.

In addition, for a transaction to occur between two different blockchains, it is necessary for both blockchains to share the same cryptographic hash function, such as SHA-256. This is to allow for the hash-time locked contract to function properly when it comes to the user providing the number that was generated via the hash function.

Where We Are Now

If recent news is anything to go by, the future of atomic cross-chain trading looks bright. Creator of Litecoin, Charlie Lee, successfully completed atomic swaps using Litecoin in exchange for Bitcoin, Vertcoin and Decred. With continued innovation, the desire is that the technology of atomic swaps will allow us to run decentralized exchanges that will be convenient for the average user. However, the caveat to the instances of success for atomic swaps is that all those swaps required local coin daemons.

This means that in order for the average user to perform an atomic swap between two cryptocurrencies, they would be required to download the blockchains of either currency. As you may have guessed, this process is not very practical for the average user. However, a successful atomic swap may have provided the solution to this problem.

The Komodo team, who themselves are currently attempting to build their own decentralized exchange called BarterDEX, ahead of the pack successfully completed an atomic swap using an Electrum server. This is important because the Electrum server allows a user to interact with a cryptocurrency without having to download the whole blockchain. This makes the prospect of a decentralized exchange all the more practical. 

To conclude, there are a plethora of decentralized exchanges that are utilizing this technology in-order to completely change the way we as users transact. Projects such as Blocknet, who are looking to create the internet of blockchains through the use of atomic swaps. Even the creation of semi-decentralized exchanges such as Lykke, who charge 0% commission on trades. It goes without saying that blockchain technology, but more specifically, atomic cross-chain trading, is a space to watch.

This is a guest post provided by Bisola Asolo from MyCryptopedia - Click here to visit MyCryptopedia.com


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