The future of the cryptocurrency landscape
Every trade starts with the deposit of your cryptocurrency into an exchange wallet. Even if you trade quickly, your funds will be in possession of a centralized third-party for some time. Most people trust these exchanges, but there are bad examples out there.
“One of the world’s biggest bitcoin exchanges has been hacked”, Business Insider
Incidents like this are not new in the cryptocurrency space. They are a big reason why people lose trust in cryptocurrencies and hesitate to invest.
In general, blockchain’s biggest advantage is that there’s no need for a middleman. In other words, it’s strength is trust or trading “trustless”. There should be no third party as an exchange, which removes those advantages. Fortunately, there is already a solution for this issue…
The solution everyone is looking for is called atomic swaps. By atomic swaps, or so-called, atomic cross-chain trading, one will be able to trade trustless with another one without the need of a middleman. To achieve that atomic swaps are making use of three principles:
- Payment Channel
You can think of a payment channel as some kind of deposit box that will be filled by the participating trader. Both sides of the trade will submit the tradeable funds into that payment channel. They can proceed almost unlimited transactions as long as the payment channel is open. But at the end, they need to agree on an outcoming of the trade. The benefit of this procedure is that, as a result, only two transactions will be posted to the blockchain.
Multi-signature is another principle of atomic swaps. Both participants have to authorize the trade with their signature (key) before it is to the blockchain. If one is missing, the trade won’t happen.
- Time Locks
The third principle is called time locks. You may notice the funds have been submitted to the payment channel, but what if one participant denies to give his signature for the authorization? What if he wants to blackmail the other one? Will the funds be locked in the payment channel? Of course not. Time locks will make sure that the funds will be sent back to both participants if the trade didn’t happen within a given timeframe.
Furthermore, atomic swaps can take place on-chain or off-chain. The lightning network in example is providing off-chain atomic swaps. The downside for off-chain swaps is, that those need a third-party again. In this case the lightning network. On the other hand, trading on the lightning network is fast and an overall performance boost for the blockchain. Therefore off-chain trades can be used for small amounts, for which it doesn’t matter if they belong to a third-party for a short period.
On-chain trades will make sense for bigger investments, which need more security and do not necessarily need to be posted instantly.
As you can see, atomic swaps will shape the future landscape of cryptocurrencies. I can only dream of the way we all will be trading in a few years. What if in the future assets will be tokenized and trading these tokens will become an essential part of our all life’s? Can you imagine the possibilities? I’m amazed and can’t wait for the future.
I want to finish this article, which a few suggestions. To be honest, I was thinking back and forth if I should name any coin here. I’m just trying to produce quality content and be informative, but on the other hand, I think calling a few suits this article very well to give you an idea of your own further research. So here’s a short list of coins, you could analyze.
The cryptocurrency silver has accomplished an atomic-swap with the Bitcoin blockchain.
- TenX (PAY Token)
TenX is working on an open-source network, called COMIT, which will connect today’s blockchains to one big whole. Atomic-swaps will be not only able from chain to chain, but also to tertiary chains. This is possible due to a routing mechanism, somehow similar to the internet, which connects nodes.
The Komodo platform enables atomic-swaps with an additional security layer.
Enjoy your further research :)