Chapter 29: What are Atomic Swaps?
You’re probably familiar with the concept of swapping cryptocurrencies, but have you heard of Atomic Swaps? Although they sound like a cool superhero name or a science experiment, atomic swaps are actually a way to increase Blockchain interoperability. In this Crypto Fundamentals chapter, we’ll be exploring this interesting concept in depth.
The main idea of Blockchain technology is the decentralization of the financial system. This is why it is essential to transfer currencies, NFTs, or any other type of digital assets directly between people, without the intervention of a third party like banks and other financial authorities.
When Bitcoin was created, we could not imagine that there would exist as many distributed ledgers and Blockchains as there are today — each with its native cryptocurrency and serving a specific purpose, overall improving the whole transfer system.
The communication between these networks became the primary topic of the crypto sphere in the last couple of years because it is easier to stick together different Blockchains and functionalities rather than building them from zero every time.
Whole projects, like Polkadot, are working on networks’ interoperability to allow collaboration between them and the exchange of different cryptocurrencies on different networks. In addition to this, developers have found a way to facilitate the exchange of coins on other Blockchains — and this process is called Atomic Swap.
What are Atomic Swaps?
Atomic Swaps are a way to exchange one cryptocurrency with another, given that these two different coins normally run on separate Blockchains, like Bitcoin and Cardano. Of course, some might say this can be done on any exchange if the pair is available.
In this case, the user does not experience an utterly decentralized process, but Atomic Swap is available even for decentralized electronic wallets like MetaMask. This exchange relies on Smart Contracts and is done completely Peer-to-Peer.
Even though the idea itself is pretty old, Atomic Swaps became famous in 2017, when such a swap was made between Bitcoin and Litecoin.
How do Atomic Swaps work?
As previously established, Atomic Swaps are running on Smart Contracts and are created using Hash Timelock contracts (or HTCL). As we already know, Smart Contracts have a code that allows an automated transfer only if the principal amount was received.
Once written and put to work, these lines of code are entirely immutable, and they cannot be modified backward, so users can’t change their minds when it comes to transactions (the main benefit being the prevention of scams).
In addition, the type of HTCL contract blocks the transaction, and both parties’ verification is required for the exchange to be completed, making it highly secure.
Finally, the period is decided in the contract with an incorporated stopwatch that ensures the transaction’s completion — and if it is not executed, it automatically cancels itself.
How many types of Atomic Swaps exist?
There are two primary types of Atomic Swaps, depending on how exactly we will exchange that respective cryptocurrency pair. This exchange can be done on the Blockchain between two different cryptocurrencies that run on separate networks or outside of the Blockchain, on independent chains.
On the main Blockchain
These payment channels attached to the main Blockchain can exist using the Lightning Network’s help and technology. Suppose the currency exchange is done directly on one of the involved Blockchains. In that case, one chain is chosen for the transaction to be completed. It’s either Bitcoin or Cardano (using our example) — whereas the information is stored on both but continues on-chain on one network.
On a secondary Blockchain
On the other hand, if the exchange is done on secondary chains offered by Lightning, then no data is written on the main Blockchain because everything happens on a secondary layer. If the swap does not require block confirmations and extra space, everything works faster, and no fees are applied.
Why do we need Atomic Swaps?
Atomic Swaps are required to make the whole cryptocurrency space more malleable and interoperable, giving users new alternatives, depending on their needs. For all this, users need to extend their transfer preferences outside of only one Blockchain, offering everyone more efficiency, more time to allocate to other tasks, and fewer commissions.
With the help of these swaps, users will not be dependent on exchange applications if they do not desire this. Instead, they can do such operations from their electronic wallet efficiently, securely, and privately.
More choice in terms of pairs
Additionally, not every cryptocurrency platform has integrated every trading pair we wish for — well, the technology behind Atomic Swaps solves any of these issues.
Besides higher flexibility, efficiency, and unlimited alternatives, there is also immutable security thanks to Hashlock and Timelock contracts that offer users complete control over their transactions.
In addition, if delays, errors, or conflicts show up, the money is automatically reimbursed to every party, so funds are secured.
Considering all of this, Atomic Swaps are a nice option to have at hand when you’re considering swapping cryptocurrencies that exist on different Blockchains.
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