Atomic Swaps & Etomic Swaps, Explained in Plain English
A simplified walk-through of Atomic & Etomic Swaps and why they matter…for the non-tech-savvy blockchain enthusiast and cryptocurrency investor
If you follow cryptocurrency news, you’ve no doubt seen “Atomic Swap” being tossed and tagged about. Maybe you’ve even invested or traded on related news, promises, or projects purporting Atomic Swap capabilities.
What Exactly is an Atomic Swap?
It’s quite simple: an Atomic Swap is a trade of one cryptocurrency directly for another, between the two parties wallets..without the use of any intermediary party, token, or exchange.
For example, let’s say Bob wants Bitcoin in exchange for his Litecoin. Sally has Bitcoin and wants to buy some Litecoin. And let’s assume these two don’t know each other so this is a trust-less relationship…and for all intents and purposes, anonymous.
When Bob and Sally perform an Atomic Swap, they each receive their desired token at an agreed upon price, directly between their wallets. The end result: Bob sends Sally Litecoin and receives Bitcoin in his Bitcoin wallet. Sally receives Bob’s Litecoin direct from his LTC wallet into her LTC wallet.
The trade is completed, instantly and securely, between these two trust-less parties and their appropriate wallets. And this simple person-to-person exchange is accomplished without the need of any intermediary wallet, exchange, token or 3rd party. They are in total control and ownership of their private keys the whole time and the only time their money moves is during the actual trade directly out of/into the designated wallets.
Wallet-to-Wallet Trading by Komodo
Because Atomic Swap is wallet-to-wallet, all that’s required is for you to have a wallet for each token you intend to trade as well as some sort of app to perform the coding and commands for this magical feat.
Enter the Dragon
The leader in the dark arts of Atomic Swaps is the development team who brought us BitcoinDark, now redeveloped as Komodo Platform (KMD). These guys have been so busy developing world-class blockchain dApps (Decentralized Applications) they’ve nearly gone unnoticed…until last summer when they announced dICOs and a fully functioning DEX (Decentralized Exchange), a tool they developed specifically capable of performing Atomic Swaps.
A dev team who actually completes projects?? You must be mad!
The Komodo developers have created a powerful dApp called BarterDEX, which allows anyone to perform Atomic Swaps of virtually any bitcoin-based token. It is essentially a DEX and Atomic Swapping tool all wrapped into one, with an advanced, intuitive exchange-like graphical interface.
An AtomicSwap-Enabled DEX
There are important differentiating factors between what can be considered a DEX versus an Atomic Swap application, most importantly as I pointed out before is that an Atomic Swap means there is no “middleman”, it’s wallet-to-wallet trading. BarterDEX gives users the power of both types of applications by creating an Atomic Swap dapp that also comes packaged with all the features you’d expect from a DEX..allowing order books, order placing and management, order history between all the running dApps, charting provided within the GUI, and many other exchange features not even offered by the most advanced centralized exchanges.
The Game Changer
Because an Atomic Swap needs some specialized instructions and code to be carried out, BarterDEX handles this complexity “under the hood”, allowing an easy and familiar user experience through the GUI. Users running BarterDEX are connected to one another, each making up a part of this decentralized exchange network. In this way users have connectivity with one another and within the GUI can interact much the same as using a centralized exchange (order books, graphs, etc)…albeit completely decentralized and each user entirely in control of, and owning, their own wallet, orders, etc.
When a user closes their BarterDEX dApp, they are off the “network”…because your dapp is acting as a node in this decentralized network, ultimately you are your own exchange when you run BarterDEX and when you’re done, you can shut down your exchange at will.
Besides the correct commands and coding to perform a swap, the other piece of the puzzle for Bob and Sally to solve is having a wallet for each token they want to dabble in.
BarterDEX gives users two options: Native or Electrum Server, for each token they want to work with. For example, when a user first sets up BarterDEX they can either generate a new KMD wallet or import an existing one. Next, they would choose the coins they want to work with and select either Native or Electrum Server for each. If the user chooses Native, BarterDEX will look at their local system for the natively running wallet…for example if the user has Bitcoin wallet running locally. They can then see their balance and do trades from that wallet directly on BarterDEX.
Since Bob didn’t have BTC, let’s assume he has not yet set up a BTC wallet. And let’s assume Sally already has both an LTC and BTC wallet.
In a scenario like this, perhaps Bob would want to import his locally running Litecoin wallet (Native) and use Electrum Servers for Bitcoin (since he isn’t running a BTC wallet locally), which in turn generates for him a BTC wallet that he now owns, without the need to install it locally.
Alternatively, of course, he could also have all the wallets he will be interacting with running locally and just choose Native for each he adds into BarterDEX…allowing the dApp to connect locally to all the wallets.
Locally running wallets may not be the right answer for everyone however. The idea of using electrum servers simplifies and speeds up the process in BarterDEX for users who may just be trading in and out of various coins, like you would on a central exchange, without wanting to hodl in a wallet. But the major advantage over centralized solutions, even in the case of quick day trades, is that when using BarterDEX your funds are on wallets generated within BarterDEX for which you can actually backup the private keys and which you own. They are not owned by anyone else, anywhere else.
And as the saying goes, “if you don’t own the keys, you don’t own the coins.”
Happening Now: AtomicSwaps
At the time of this writing, Komodo’s BarterDEX, has been used to perform more than 70,000 Atomic Swaps by real-world users (see a live running total here) of various tokens on public chains as well as thousands of other swaps within test environments. Komodo Platform is the only project which has completed such an outstanding task in development of Atomic Swapping, and they are just getting started.
With the addition of Decentralized ICOs or dICOs, Komodo is disrupting the Crowdsale model, providing a platform for other projects to build upon utilizing the built-in privacy and anonymity features inherent within their blockchain, fast tx times within their ecosystem, Smart Contracts (coming soon) and a dPoW model which gives all new projects Bitcoin-level security.
Komodo’s most recent and very exciting development however, is Etomic Swapping…performing swaps between Bitcoin-based tokens and Ethereum-based tokens, which I’ll discuss in just a moment.
Why Atomic Swap?
Before we get to Etomic Swaps (Ethereum-Bitcoin Trades) I first want to outline some of the primary reasons the very concept of Atomic Swapping is important and why it matters to investors, users and the future of cryptocurrency, by looking at some of the key problems being solved.
Atomic Swaps solves the problem of jeopardizing your funds when you use a 3rd party exchange or any exchange for which you don’t hold the private key. Even with decentralized exchanges such as EtherDelta, you must deposit your funds into the Smart Contract in order to trade…your funds must leave your wallet. This is risky and costly. (The EtherDelta Hack)
Another glaring problem investors and traders come up against time and again on centralized exchanges, is the problem of “Wallet maintenance” or disabled withdrawals. Most users speculate these are deliberate attempts at protecting their cashflow. Regardless, once your funds are on an exchange, they are not under your control and for all intents and purposes are not your funds during that time.
Those of us who’ve been around for a couple years have witnessed a couple exchanges vanishing, taking funds with them. Whether deliberate, hacked, or technical issues (data corruption etc), the risk is real and prevalent.
We all cringe when we hear any talk of regulation in the news; we jump to our crypto price tickers and watch the blood bath ensue as the markets all fall with Bitcoin. One of the most important problems being addressed with Atomic Swaps directly impacts the cryptocurrency industry’s resistance to regulation.
One of the most important features of cryptocurrency is its decentralized, unregulated, “the people’s money” nature. The benefits associated with holding value that is beyond regulation and government control.
With centralization comes regulation. As we’ve seen with many events over the course of the past few years, centralized exchanges are consistently and effectively targeted, impacting investors, traders, and even developers and projects.
Decentralizing trading of tokens, removes these targets from the equation for investors and traders alike. Wallet-to-Wallet trading is also in true form following the principles and philosophy upon which Bitcoin was originally founded. And for good reason, as we see how deviation from the basic principle of decentralization of all things, impacts the industry.
Atomic Swapping eliminates several steps and the time/confirmations required to complete those steps. Centralized exchanges require upwards of 50 confirmations for a transaction to be cleared for trading. Attempts at decentralized exchanges often have a backlog of transactions waiting to be broadcast, often failing, running out of gas, etc. Even centralized exchanges are no stranger to backlogs or catastrophic server failures or events causing delays and errors, lost transactions, etc.
With Atomic Swaps, you simply trade immediately from your wallet. No sending your funds anywhere but the actual buyer while receiving your new exchanged token directly from them in return. Instant wallet-to-wallet trading.
As I mentioned, there are no intermediaries…including no intermediary tokens with Atomic Swaps. If I want to exchange LTC for GRS (Groestlcoin) for example on a traditional exchange, I’d first have to fulfill an order to sell my LTC for BTC. Then I’d go over to the GRS screen and buy GRS using the BTC. Not only is this time consuming and costly, it’s additional steps that Atomic Swapping removes. These sorts of complications are often easy to get used to, you keep track of what exchanges have which pairings, etc. But if the complications can be removed and the benefit is a cleaner, less error-prone, faster transaction…it’s a no-brainer to those of us who’ve been trading for a while.
The last I’ll mention in this article, is the very obvious issue of fees and cost. Many new traders learn the hard way, after stressing out over getting their Ether or Bitcoin into an exchange to buy an Alt-coin, that when they go to withdraw that Alt back to their wallet, the exchange is imposing a hefty fee.
In some cases, usually the higher risk exchanges, this fee can be upwards of 10% and often the exchange will not adjust the fee as the market price drives up, meaning a 10 coin fee that was $1 yesterday, may suddenly be $100 today.
This is not to mention fees and some of the very questionable fee-structures imposed by many exchanges for performing trades.
Problem Solving and Innovation
Komodo Platform continues to demonstrate just how focused they are on solving, innovating and creating useful working dApps and this is evidenced by their Github commit history over the past year alone. They are currently ranked #1 within the Cryptocurrency industry for updates, fixes, and new releases of dApps.
What About Swapping Ethereum and ERC20 Tokens?
Now that you have an understanding of Atomic Swaps, which involves Bitcoin based tokens, let’s talk Ethereum and Etomic Swaps.
What if Bob wants to buy ETH or another ERC20 Token such as BAT or OMG using his LTC, or his newly acquired BTC? Because of the underlying protocols involved with ERC20 and how significantly different Ethereum is from Bitcoin, a normal Atomic Swap is not the right approach.
And up until very recently there were no alternatives besides trading using a 3rd party service or exchange. Even users who simply wanted to exchange one ERC20 Token for another ERC20 Token, both tokens living within Ethereum, were out of luck. This is because Ethereum-based DEXs such as EtherDelta are developed using a Smart Contract and require traders to deposit funds in, exchange them for ETH, exchange for the new desired ERC20 and then withdraw…this process costing time, fees, risk and complicated steps…within an inherently volatile system.
Things Are Just Very Different
The primary reason for the gap between Bitcoin based and Ethereum based tokens is very simple: Ethereum is not built or based on Bitcoin and Ethereum tokens are Smart Contracts, coded in Solidity.
Most Alt-coins have a very similar approach to their blockchain and the protocols used for the token, allowing relative programmatic ease for developers to get these blockchains to “talk” to each other in a trade, the way Komodo devs have programmed BarterDEX to do.
So the underlying protocols for the ERC20 standard pose a challenge that doesn’t allow for very simple 1-to-1 trades like we see with Atomic Swapping. There is the very real need for an intermediary…and in order to make this AtomicSwap-Friendly, it needs to be an intermediary that is within the control and ownership of the parties involved…not a 3rd party.
A Bridge Between Ethereum and Bitcoin (Cross-Chain Trading)
To bridge the divide between these very different technologies (Ethereum and Bitcoin or Bitcoin-based chains) ETOMIC was developed and is now in use within BarterDEX. ETOMIC is a purely utility token, a decentralized intermediary which the user owns and controls…acting as a “bridge” between the Ethereum blockchain and any other Bitcoin-based blockchain (including Bitcoin itself).
This means, using BarterDEX which now utilizes ETOMIC, Bob can buy OMG or BAT or any ERC20 Token (and ETH itself of course) using his Litecoin or Bitcoin. Bob is happy and the crypto-community has been innovated even further, to allow exactly the sort of decentralized solutions it was meant to promote.
In the Etomic Swap, both parties are always in control and retain ownership over their funds, their orders, the entire process until the order is fulfilled and they then receive their funds traded. They are still participating in a truly decentralized Atomic Swap transaction.
Joining the “AtomicSwap-Enabled” Revolution
Blockchain technology is at its core decentralized. While I use centralized exchanges like I’m sure many of you do, the future is moving toward decentralization of all things and DEXs have evolved along nicely to this point.
But what we are seeing now with Komodo’s BarterDEX is a revolutionary new approach to trading, that just makes sense and seems like it should have been this way from day 1: The AtomicSwap-Enabled DEX.
With the recent innovations by the Komodo team in cross-chain trading using ETOMIC-Swaps, that approach is becoming more usable, applicable and moving toward mass adoption much faster than we may have anticipated.
If you’d like to get a first hand look, check out the dApp and start playing around with the features. Installing and using BarterDEX is relatively simple and easy.
UPDATE: I’m now working for Utrum.io, the revolutionary curating platform for crypto-investments and analyses, and we are using Atomic Swap technology to do our crowdsale.
You can do your own atomic swap using our OOT token and get OOT at a fixed “ICO” price at the same time :) by following the video I created walking through the process using BarterDex: https://youtu.be/JN6KAyaSWq8
See you on on the DEX!