Today, we are thrilled to announce another key milestone for Arwen and the industry. Arwen now supports instant layer-2 atomic swaps from Ethereum into Bitcoin, Litecoin and Bitcoin Cash! This public launch is the testnet of each of these blockchains. In a few weeks we will have a production mainnet launch, allowing trading on centralized Ethereum markets, starting with our partner exchange KuCoin, a top global exchange.
We’re building the standard for secure settlement.
Centralized exchanges play a vital role in enabling highly-liquid crypto markets and matching counterparties, yet they also act as custodian and settlement agent. Traditional markets don’t intermingle custody with trading and the same must ultimately be true in crypto markets.
But why stop there? Why rely on another centralized settlement party with a single point of failure? Arwen solves this by using the traded coin’s native blockchain to back and secure your trades. Our new standard of secure settlement eliminates the risks associated with centralized exchanges.
From a technology perspective DEXs offer better security than centralized exchanges, but they simply don’t offer the levels of liquidity for investors to sustainably trade at scale. We empower investors to securely and rapidly trade on centralized order books, without requiring investors cede custody of their coins to the exchange. Because Arwen does not require coins to be deposited at he exchange, Arwen eliminates the risk of of hacks, withdrawal lag, exit scams, or any other risk associated with centralized custody.
We believe that the industry will realize its full potential when one can trade without counterparty risk, using the blockchain as an efficient and trustless settlement agent.
We have not introduced a new blockchain, a new token, a new oracle, a new pegged sidechain, or a new trusted third party.
Our approach uses each coin’s native blockchain to secure trading. In other words, if you believe that ether has value, you must believe in the security of the Ethereum blockchain. If you believe bitcoin has value, you must believe in the security of the Bitcoin blockchain.
With Arwen, the Ethereum blockchain secures the trading of ether, and the Bitcoin blockchain secures the trading of bitcoin. We make no additional trust assumptions. We don’t introduce pegged side-chains, new tokens, new blockchains, or new trusted oracles. We just use the blockchain itself to secure trading and settlement. There’s no need to trust an exchange.
Avoiding a dystopian blockchain future
There’s a future in the cryptocurrency world where everyone stores their digital assets in the same centralized trusted party, and the movement of digital assets move between parties is done by “journal entries” on a private database that is maintained by that centralized trusted party. In this dystopian blockchain future, we ultimately treat digital assets the same way we treat stock certificates, or gold, or fiat currency, or corn — by ceding control of these assets to a centralized entity that is just like the DTCC or the CST.
The whole point of a blockchain is to be a public, secure, digital ledger. If we can’t use that ledger to move assets around (which is the whole purpose of a ledger) then why did we invent blockchains in the first place?
At Arwen, we are using the blockchain to its full potential to secure settlement, and eliminate the risk of exchange hacks.
Why is Ethereum on Arwen a big deal?
Bitcoin and Ethereum have seen more adoption and utility than any other blockchain to date.
From a technology perspective, Bitcoin and Ethereum are famously incompatible. They have different transaction models (UTXO for Bitcoin, accounts for Ethereum). They have different smart contract functionalities (Bitcoin Script, Solidity/EVM for Ethereum). They have different developer communities, different peer-to-peer networks, different block arrival times, and different consensus algorithms.
This famous incompatibility explains why so few protocols support both Bitcoin and Ethereum. But Arwen can support both, because our protocol is specifically designed to support trading across blockchains. (See our whitepaper for more technology details!)
We don’t need pegging
Thus far, most solutions have resorted to a “pegging” approach as a way to translate from one incompatible blockchain to another. But these systems require a trusted party or set of parties (e.g. the Liquid network,) or introduce a new layer of “pegging risk”.
For example, consider exchanging BTC (real bitcoin on the Bitcoin blockchain) to BTC.B (a token on Binance Chain that is “pegged” 1:1 to bitcoin in the same way that Tether (USDT) is “pegged” to US Dollars). Pegging risk happens when you go to convert your BTC.B to real BTC, and you find that the party that you’ve asked to do the conversion is insolvent (or just refuses to give you BTC in exchange for your BTC.B). This can happen even when the party that issued the peg is not deliberately malicious; in fact, pegging risk also includes the risk that the party that issued the peg loses access to the BTC in a hack, bug, or unexpected event.
Today we are proud to announce that Arwen natively supports trades between Ethereum, Bitcoin, Bitcoin Cash and Litecoin. We do this without any pegged sidechain. Instead, we are trustlessly trading the native asset into the native blockchain using our custom designed Arwen Trading Protocol.
We do it all at layer two
A layer-two blockchain protocol uses the blockchain as a root of trust, but does not require every computation and action to be executed on the blockchain. This delivers speed and scalability, because the blockchain does not need to confirm every action taken by the protocol. (Blockchain confirmations can be slow! On Bitcoin, it takes 10 minutes on average to confirm a block.) This also delivers security, because the blockchain is backing every action made by the protocol.
Bottom line: this means that Arwen trades of Ether into Bitcoin, Litecoin, or Bitcoin Cash are fast enough to support trading on centralized exchanges. In the case of RFQ orders, they are instant.
Instant and atomic swaps
An atomic swap is a higher standard of security than the “second send’’ approach, used by ShapeShift, Changelly, and OTC desks.
In a “second send”, the user performing a trade takes on all the counterparty risk. For example, consider a “second-send” trade of 1 BTC for 55 ETH by user Alice with a counterparty. Alice must first transfer her 1 BTC to the counterparty, and then wait for the counterparty to send her back 55 ETH. The problem with “second send’’ is that a compromised or malicious counterparty can always cheat Alice, by accepting her 1 BTC but then refusing to send over the 55 ETH.
By contrast, an atomic swap is a “simultaneous send”. In an atomic swap of 1 BTC for 55 ETH, it is cryptographically guaranteed that: (1) if Alice transfers her 1 BTC to the counterparty, even a compromised or malicious counterparty cannot stop Alice from claiming her 55 ETH, and (2) if the counterparty transfers its 55 ETH to Alice, Alice cannot stop the counterparty from claiming its 1 BTC, even if Alice is compromised or malicious.
In other words, an atomic swap eliminates counterparty risk!
Stop reading, go try it!
You can try it right now, on testnet, by following the instructions on this user guide. Watch this space for a subsequent announcement of our launch of mainnet ETH trading on KuCoin’s orderbook.
KuCoin CEO Michael Gan said:
“Happy to work with Arwen to introduce the first layer2 atomic swaps service between BTC, BCH, LTC, and ETH. It is now live on testnet and will come to KuCoin mainnet soon. A small step for KuCoin and Arwen, and a big step for the industry!”
We’re excited to be building a new standard for secure trading at centralized crypto exchanges. By using underlying blockchains as settlement agents, we’re one step closer to unlocking the full potential of cryptocurrencies and unleashing their value to a larger global audience of investors.
Stay tuned for more exciting announcements from our team!