Atomic swaps: The most exciting Distributed Ledger Technology
In today’s digitally enabled world the term, technology plays an analytic role in delivering business outcomes. In this technological transformation, Centralized Exchanges is likely to be wiped off the market due to the countless number of centralized exchanges suffering hacks, abrupt shutdowns, and seizures; the centralized exchanges, popular today for traders, have proven to be a massive single point of failure for the digital currency. Hackers and thieves consistently target these exchanges. As a result, user-end security is put into risk.
Thus, we need decentralized solutions to cope up with these challenges and in response to this Atomic swaps are the most promising solution. The key to unlocking the potential of digital currency and allow us, the users, to instantly exchange currency peer-to-peer (P2P) at our terms and without the need for centralized exchanges to bring the transaction. Hence, before heading off to find out how Atomic Swap can bring better layout, let’s understand the basics of Atomic Swap.
What is an Atomic Swap?
So, besides the really cool name, atomic swap upbrings the ability for two users to exchange digital currency from different blockchains anonymously which is processed immediately after each user agrees to terms and uses private keys to sign a copy of the transaction. This mode of exchange is performed instantly, with no transaction fees and eliminates the need for a centralized party or exchange service to complete the transfer on behalf of the buyer/seller.
Thus, a user holding Bitcoin is allowed to exchange with another user for NEO, as an example.
Further, with the activation of Segwit, atomic swaps are now available for BTC and LTC.
The impact on Exchanges
DEX’s inability to quickly execute trades outside of the blockchain has put its existence under risk; as a result, a large number of DEX platforms has been shut-off since the year 2011. Recounting over this, some of the DEX platforms claimed to be possessing this capability were observed to be either hiding behind centralized back-end systems (like Shapeshift) or released centralized exchanges with a promise of ‘future development’ of a DEX (KuCoin is one of the examples). The host of ERC20 token projects that have been released are also limited in scope to ERC20 token exchanges only as well (like EtherDelta).
These drawbacks associated with DEXs have resulted in very poor adoption and limited trading volume over its platforms. When given the option of instant (or near instant) trades, there really has been no feasible option because the rate at which the coin values changes, traders are uncertain about its near future, thus, purchasing a coin with naturally low trading volume is dangerous. Provided users and traders adapt to P2P exchanges, liquidity is guaranteed and never reliant upon a central exchange — we eliminate the need of any middle man and begin exchanging P2P, decentralized, just as our digital was designed to be done so. Protocols and DEX projects are coming and fast. Many, however, still depend upon the central exchanges or charge fees so we must pay close attention to how their protocol works (Loopring is an excellent example of such).
Beyond this, numerous running projects are likely to win in the long-term as these open sourced projects allow us, the users, to not only utilize their platform but also provide the flexibility for others to create and design their own UX/UI’s, this is how decentralization works. Thus these projects with no centralized platform or entity to track down, the protocol (once released) will be and will always be a part; provided the blockchain exists. That is the brilliance DEX’s with atomic swap/superconducting transactions that are, in fact, the future of all digital currency trading.
Hence, with the introduction and successful atomic swap/superconducting transactions, the game is about to change and DEX’s will thereby dominate the future of all digital asset trading and very soon the Centralized exchanges will become a thing of the past if decentralized exchange technologies like Atomic Swaps are anything to go by. Further, there is also a need to eliminate centralized exchanges because of their vulnerability to seizures, hacks and unexpected shutdowns.
How do Atomic Swaps work?
Atomic Swaps, which is popularly known as the Atomic cross-chain trading, is the direct trade of one digital currency for another digital currency without the need of any intermediary third party. Atomic Swaps employs Hash Time-locked Contracts (HTLCs) to facilitate a trade which is basically a form of smart contract that acts like a puzzle having a secret key that has to be provided, by a solver, before a certain time has elapsed. If the key is not provided, then the reward goes back to the initiator of the contract. Therefore HTLCs essentially requires the recipient of the payment to generate a digital graphic proof of payment as a way of acknowledging receiving the payment before the deadline. Hence, if the recipient fails to be acknowledged in time, the funds go back to the sender. This whole process is done automatically.
To understand it further, let’s consider an example, there is Bob who owns 10 Bitcoins and wants to trade for 200 Litecoins. And there is Lilly who has 200 Litecoins and wants to trade for 10 Bitcoins. Bob will have to submit his transaction on the Bitcoin blockchain. And Lilly will submit her transaction on the Litecoin blockchain. Now if Bob wants to take the 200 Litecoins Lilly sent, he will have to provide proof of payment, which is a number only known to him. The number acts as a key, which was used to generate a digital graphic hash. Lilly will also have to provide the same key, so as to claim the 10 Bitcoins provided by Bob.
Why do we need Atomic Swaps?
Now for digital currency to successfully support Atomic Swaps, there are some fundamental requirements needed, which include the Lightning network. The lightning network allows payment channels to link together. Using the above example of Bob and Lilly, for their transaction to take place, they had to be linked through payment channels. And the Lightning network allows for such linkage.
Also, a transaction between two different Blockchains will require both Blockchains to share a similar digital graphic hash function, like SHA-256, these both digitals being traded are required to be compatible with time lock contracts. Since Atomic Swaps are the best alternative to traditional centralized exchanges. They possess the following properties which make it considerable
Atomic Swaps eliminate the dependability over the third-party exchanges, which are vulnerable to failures and are way too expensive. Such failures include hacking, for example, the EtherDelta hack which was an unrecoverable loss of a huge sum of money.
Further, at times, it has been observed that there has been a sudden disappearance of exchanges with people’s funds, due to hacking or technical issues or just deliberate. Either way, as long as users have no access over their funds, then it becomes a risky and costly venture. And Atomic Swaps aim to give complete access of user funds back to the users.
Now since Atomic Swaps eliminates the need for any third-party exchange when it comes to transactions, the cost is reduced. Without third-party exchanges reliance, there are no fees to be accumulated for services rendered. Thus, users can save on cash that would have never been possible to be saved as it gets spent on paying for centralized exchanges services.
Require no Regulations
Another good thing about Atomic Swaps is its decentralized nature, which eliminates the need for regulations that always accompany centralized exchanges. Because none of the person or authority is given authority to control the transactions, there are no regulations need in this format of exchange. Further, the essence of digital currency, decentralization, which leads to immutability, therefore no government interference through regulations.
Users love to have a quicker mode of exchange, which is another feature being considered to the Atomic swaps that introduce an efficient and fast way of trading through wallet-to-wallet transaction methodology. Users get to transact directly with one another without relying upon any third parties. Therefore a buyer can send tokens directly to a seller and get the exchanged tokens in a short span of time.
Summing up to these aspects, it is acceptable that Atomic Swaps is successfully replacing the DEX formats and enjoying massive success. They are especially considering that the creator of Litecoin, Charlie Lee, has successfully completed Atomic Swaps using Litecoin in exchange for Bitcoin. But the success of Atomic Swaps is constrained in that, for the Atomic Swaps to happen between two digital coins a user will be required to download the blockchains of either digital coin. Hence, Atomic Swaps is the future technology that will disrupt the digital world, eliminating the need of the third party to conduct exchanges any more. Henceforth, users will be able to transact directly, wallet-to-wallet, without the fear of the vulnerabilities of centralized exchanges, thereby, individuals will not be allowed to anonymously trade without the fear of their privacy being interfered with.
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