Cross-chain swap for true peer-to-peer crypto token trading
Cross-chain swap is a decentralized mechanism for swapping or exchanging tokens of two different blockchains without an escrow or middleman. It is the true peer-to-peer method of trading crypto tokens. To understand the details of cross-chain swaps, read on.
Why are Cross-chain swaps needed?
Cryptocurrencies are now mainstream, not just as a trading commodity but also because it fuels the Defi solutions, dApps and a range of enterprise-grade blockchain transactions. But a crypto coin, popularly referred to as a token, has an isolated existence. These tokens either have their independent blockchains, or they are created to run on popular and larger chains like Ethereum or BSC. Thereby, we have the concept of native tokens, which means a token belongs to a particular blockchain. Trading tokens directly from one blockchain to the other is improbable due to the technological differences between the chains.
Basically, crypto tokens function within siloed decentralized systems, limiting the whole essence of decentralization. Because if someone wishes to use a non-native token in a particular blockchain platform, be it a dApp or a Defi system, he has to exchange the non-native tokens with native tokens with the aid of an escrow or middleman. So, the exchange of tokens does involve an intermediary, while the whole idea of decentralization is to do away with intermediaries.
However, a Cross-chain swap, also known as an atomic swap, bridges different blockchains’ siloed ecosystems for peer-to-peer token trading. It allows two people with completely different coins to swap their tokens without using centralized exchanges or involving a guaranteer to act as an escrow. Cross-chain swaps facilitate easy and transparent trading of tokens across different blockchains without using an intermediary party.
How Do Cross-Chain Swaps Work?
Cross-chain swaps are performed using special smart contracts, called Hash Time-Locked Contract (HTLC). The HTLC smart contract connects two different chains, and when certain conditions are met, the smart contract executes an automatic exchange of tokens between the connected chains.
The backend process is complicated, but at the front end, users can execute a cross-chain swap pretty simply. Two persons, willing to exchange their assets, submit their tokens to a Hash Time-Locked Contract. Then both the participants exchange the hash keys, proving each other that they have deposited the right amount. As per the contract conditions, the transaction gets executed if the deposits are made within a specified time. If not, the deposits are returned.
The HTLC contract uses the following two cryptographically encrypted keys:
- Hashlock key: This key ensures that the token swap is executed only when both parties submit their cryptographic proofs for coin depositions on their sides of the transaction.
- Timelock key: This key functions as a safety mechanism by allowing traders to set a deadline for their cross-chain swaps. If the swap is not completed for one reason or other, the timelock key ensures that deposited coins are returned to traders before the deadline elapses.
The Final Words
As the Defi market is maturing, the demand for cross-chain swap functionality is growing. Users are now exploring new Defi -oriented markets, and with that, their interest in non-native tokens has increased. Though centralized exchanges have facilitated token swaps for a long time, it is an obsolete option for the tedious processes involving registration, KYC, and fees. On the contrary, cross-chain swap is a quick, cost-effective and decentralized technique of token swapping.