Another Step Towards Frictionless Trade
Atomic Swaps and the future
The last two months have been extremely eventful in the crypto space. From SegWit being activated to the heated SegWit2X debate (Masen’s fully NO 2X son!). In the midst of everything, something very big happened. On September 22, Charlie Lee did the first off-chain (Lightning Network) BTC/LTC atomic swap. This is some-thing that can change the way all blockchain transactions are done in the future and I’m going to give a quick rundown of what Atomic Swaps are here:
What is an Atomic Swap?
Atomic swaps are an exchange between two separate coins that are on different blockchains (Ex: BTC and LTC) without the use of a middleman or exchange like Changelly or Coinbase.
Can I do it with any coin?
Any altcoin forked from Bitcoin is capable of doing any atomic swap, such as Litecoin, Ethereum, and BCash. They both must have:
2. Branched transaction scripts with signature checks
3. The same hash algorithm in both chains’ transaction scripts
What’s On-chain Atomic Swaps
An on-chain atomic swap is when an exchange between two coins is done publicly on the blockchain of the respective coins.
Is it safe?
Both parties are protected by hash-time locked contracts (HTLCs); this means that the receiver of the payment acknowledges the receipt by generating cryptographic proof before a certain deadline or else they lose funds and it’s returned to the original owner.
How does it work?
Picture this: Person A wants to trade 100 Litecoin for Person B’s 1 Bitcoin. What Person A will do is put their 100 Litecoin in a locked box. Person B will put their Bitcoin in a locked box with the same specifications as Person A. Next, Person A will send Person B a secret word/code that Person B will need to get the Litecoin. Now once Person B uses the secret word/code to get the Litecoin, Person A will instantly get their new Bitcoin.
What’s Off-Chain Atomic Swaps?
Off-chain swaps would be done on the Lightning Network ( LN), or any other similar second layer off-chain solution, ideally for smaller amounts and purchases. Doing an atomic swap on LN has all of the same benefits of doing a swap on the blockchain but with the added security of your transaction not being put on the public blockchain ledger. Once on LN, you can have multiple different payment channels to people all over the world and will not even need to know the person you are exchanging your currency with. Effectively, the Lightning Network will replace currency exchanges altogether.
With Atomic Swaps we are going to see a whole new era of transactions and payments across the blockchain. Users will no longer need to use Exchanges when switching their coins. This not only adds more security and convenience to the user by eliminating a 3rd party source, but will make exchanges compete for users; resulting in lower transaction fees and greater attention to the user’s needs. Atomic Swaps is another huge step for cryptocurrency and certainly a feature I’m excited to see soon
Special Thanks to Kev