What is atomic swap?

Atomic swaps is a technology that supports the rapid exchange of two cryptocurrencies running on different blockchain networks. This transaction process (also known as atomic cross-chain transactions) is based on smart contracts, allowing users to exchange desired tokens directly from their crypto wallets. Therefore, atomic swaps are essentially cross-chain peer-to-peer transactions.

Although the technology is an innovation, the concept of cross-chain transactions has been attracting attention for many years. In 2013, Tier Nolan first described the atomic swap protocol in detail. However, Daniel Larimer proposed a decentralized exchange protocol called P2PTradeX in 2012, which some people believe is the prototype of atomic exchange.

Over the next few years, many developers continued to experiment with the atomic swap protocol. There is evidence that the Bitcoin, Litecoin, Komodo and Decred communities have all played important roles in this process.

The first peer-to-peer atomic swap transaction occurred in 2014. But it wasn’t until 2017 that the technology became accepted by the public, driven by the successful exchange between the two trading pairs LTC/BTC and DCR/LTC.

How does atomic swap work?

The atomic swap protocol is designed in a way that effectively prevents fraud between counterparties. To better understand how they work, let’s assume that Alice wants to exchange her Litecoin (LTC) for Bob’s Bitcoin (BTC).

First, Alice deposits her LTC into the contract address, which is similar to a safe. After creating security this way, Alice also generates a key to access it. She then shares the encrypted hash of this key with Bob. Please note that Bob cannot obtain Alice's LTC at this time because he only has the hash value of the key, not the key itself.

Next, Bob uses the hash value provided by Alice to create another secure contract address for depositing his BTC. If Alice wants to exchange BTC, Alice needs to use the same key as that address. At the same time, she also needs to show the LTC key to Bob (with the help of the special function of hashlock). This means that once Alice makes a request to exchange BTC, Bob can obtain the LTC in Alice's hands at the same time, and the transaction process of the atomic swap is also completed.

The term "atomic" represents the consistency of a transaction, that is, the transaction is either completely successful or completely unsuccessful. If either party abandons during the transaction or fails to perform as expected, the contract will be canceled and the funds will automatically be returned to their original owners.

Atomic swaps can be performed in two different ways: on-chain and off-chain. On-chain atomic swaps occur on the online blockchain network of any cryptocurrency (in this case, on the Bitcoin and Litecoin blockchain networks). On the other hand, off-chain atomic swaps occur off-chain. Such atomic swaps are typically based on two-way payment channels, similar to those used in the Lightning Network.

Technically speaking, most decentralized trading systems are based on multi-signature and hash time-locked contracts (HTLC) smart contracts.

Hash Time Lock Contract (HTLC)

Hash Time Lock Contract (HTLC) is Bitcoin An important part of the Lightning Network, they are also one of the key components of atomic swaps. As the name suggests, they are based on two key features: hash locking and time locking.

If the relevant key data (Alice's key in the above case) is not displayed, hash locking will freeze the use of funds. Time locking ensures that smart contracts are only executed within a predetermined time range. Therefore, the use of HTLC eliminates the need for centralization and they create specific rules that prevent atomic swaps from being partially executed.

Advantages

The biggest advantage of atomic swaps is related to its decentralization. Atomic swaps eliminate the need for centralized exchanges and any other type of intermediary, and cross-chain swaps can be performed between two or more parties without requiring them to trust each other. Since users do not need to provide funds to centralized exchanges or third parties, the level of security will also increase. Transactions can be initiated directly from the user’s personal wallet.

In addition, this form of peer-to-peer trading uses very low or no transaction fees and therefore has lower operating costs. The final advantage is that atomic swaps allow transactions to proceed faster and therefore have greater interoperability. In other words, various altcoins can be exchanged directly without using Bitcoin or Ethereum as an intermediary currency.

Limitations

Atomic swap also needs to meet some other necessary conditions, which may also become the Major barriers to technology diffusion. For example, in order to perform an atomic swap, the blockchain networks on which both cryptocurrencies reside need to be based on the same hashing algorithm (e.g., both use Bitcoin’s SHA-256 hashing algorithm). Additionally, they need to be compatible with HTLC and other programmable features.

In addition, atomic swaps also bring security risks of leaking user privacy. This is because through Blockchain Explorer, on-chain transactions can be quickly tracked and therefore user addresses can be easily obtained. A short-term solution to this vulnerability is to use privacy cryptocurrencies, thereby reducing exposure. Still, many developers try to use digital signatures in atomic swaps as a more reliable solution.

Why is atomic swap so important?

Atomic swaps have huge potential to improve the cryptocurrency space, but have not yet been tested on a large scale. Cross-chain trading can finally solve many of the problems that exist with centralized exchanges. Although these exchanges still maintain the operation of cryptocurrencies, they still have a series of hidden dangers. Some of these issues include:

• Significant threats: Centralized exchanges unilaterally hold high-value resources, so they are more vulnerable to hackers. Centralized exchanges are digital Main target of currency hijacking.

• Imperfect fund management and human error: Centralized exchanges require human operations. If managers in important roles make mistakes or decision-makers make wrong decisions regarding exchange operations, exchange users' funds will be lost.

• Higher operating costs: Centralized exchanges have higher withdrawal and transaction fees.

• Surge in transaction volume leads to inefficiency: When market activity is too active, centralized exchanges are often unable to cope with the massive increase in transaction demand, resulting in slow system operation or unavailable services. .

• Regulation: In most countries, cryptocurrency regulatory policies are strict. There are still many uncertainties surrounding government approval and regulation.

Summary

Although atomic swap is still a relatively new technology, So there are bound to be limitations, but this technology is revolutionary in terms of promoting blockchain interoperability and cross-chain transactions. Therefore, this technology has great potential to influence the development of the cryptocurrency industry, opening up new avenues in decentralization and peer-to-peer currency exchange. Atomic swaps are likely to be increasingly used in the near future, especially within decentralized exchanges.