Atomic Swaps: Step-by-Step Beginner's Guide
One of the main goals of cryptocurrencies is decentralization. These digital coins purportedly enable peer-to-peer (P2P) transactions without intermediaries. However, most users rely on centralized exchanges (CEXs) for trading cryptocurrencies. A CEX works as an intermediary that assists in completing a crypto trade.
In contrast, an atomic swap represents a truly P2P method for trading cryptocurrencies. This development can enable the decentralization that cryptocurrencies have aimed to achieve for several years. If you are not familiar with this concept, you will find everything you need to understand atomic swaps in this article.
What Are Atomic Swaps?
An atomic swap is an exchange of cryptocurrencies from different blockchains. This type of cross-chain swap happens between two entities without an intermediary. With this method, token holders have complete control of the operation. The word “atomic” was borrowed from the term “atomic state,” where no substates exist. In this case, the term connotes a process that would either finalize or not initiate at all. Because of their trustless and P2P nature, atomic swaps are truly decentralized trading techniques.
History of Crypto Atomic Swaps
Sergio Demian Lerner described the necessary techniques to perform atomic swaps in 2012. Although the idea sparked interest, some of the needed processes were not completely available at the time. In 2013, Tier Nolan developed a more robust procedure for initiating atomic swaps. The Decred team finally completed an atomic swap between the Decred (DCR) and Litecoin (LTC) cryptocurrencies four years later. It was the first functional implementation of an atomic swap. A few days later, Charlie Lee (founder of Litecoin) announced that another atomic swap was completed for a Litecoin to Bitcoin exchange.
An Overview of How Atomic Swap Works
At the core of an atomic swap is a smart contract. This smart contract sees that the token owners agree to the trade and enforce the transaction's success conditions. Once the smart contract is executed, the blockchain records the transaction. The swap cannot be reversed at this point. If the parties want their original tokens back, they must agree to another transaction.
The said smart contract is powered by a Hash Timelock Contract (HTLC). The HTLC generates cryptographic keys for each side. Also, it introduces a time constraint known as a Timelock Key, which reverses the transaction if, within a predefined time, one of the parties does not fulfill their side of the swap. The said cryptographic keys are known as Hashlock Keys.
A hashlock key locks the coins or tokens with a secret key. Only the swap initiator can access this key. After verifying the initiator’s deposit, the hashlock key is revealed to the second party to unlock the said deposit. Both parties must submit their corresponding cryptographic proof of their deposits to complete the swap. In layman’s terms, the HTLC serves as a two-way virtual safe.
Why Is It Important to Use Atomic Swaps?
Atomic swaps give crypto investors and traders much more control over their holdings. Usually, a CEX provides a wallet for each user to transact cryptocurrencies. But users do not control the private keys of such “hot wallets.” In this way, centralized exchanges force users to hand over the control of their exchanges. Atomic swaps prevent such situations by enabling truly decentralized crypto exchanges, handing all the control to crypto investors. They also mitigate investor risk and reduce trading fees.
Conclusion
Although most cryptocurrencies aim to reduce intermediaries in transactions, the trading of these digital assets is far from being decentralized in most cases. However, efforts to develop functional decentralized exchanges (DEXs) will allow users to trade crypto in an entirely P2P manner. Atomic swaps are some of the most promising methods to trade cryptocurrencies in a decentralized way, giving back investors complete control over their digital assets.
FAQ
Is an Atomic Swap Expensive?
Currently, atomic swaps do not cost anything except for blockchain fees. Hence, they are usually cheaper than transactions performed on a CEX, particularly cross-chain swaps. However, this technology is relatively new. Although the theoretical foundations of atomic swaps were laid several years ago, they are not mainstream crypto transactions yet. There are many technicalities involved that most people would prefer to avoid. So, if you want to perform cross-chain swaps more easily at competitive rates, LetsExchange.io is the best option. Our platform supports more than 370 digital coins and tokens from different blockchains.
Is an Atomic Swap a Scam or Legit?
If performed as described above, an atomic swap is legit and safe.
Who Can Use Atomic Swaps?
Any cryptocurrency holder controlling their private key can initiate an atomic swap.
Disclaimer
Please keep in mind that the above information is based exclusively on our observations and is provided for informational purposes only. It doesn’t constitute any kind of financial advice nor represents an official forecast. Cryptocurrency is a highly volatile asset, and you are investing in it at your own risk.
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