The crypto world has a lot of possibilities among which is the ”atomic swap”. Blockchain and cryptocurrencies are taking over our world with technological advancements.
Atomic swap in cryptocurrency is all about the exchange of cryptocurrencies from separate blockchains. The term ”atomic” which is a prefix to the ”swap” is a state in which the atomic state has no substates; it either happens or it doesn’t—there is no other alternative.
In this post, we’ll discuss atomic swap in crypto, and how it works. Before then, let’s define the terms here for our crypto beginners.
Table of Contents
What is Cryptocurrency?
Cryptocurrency is a digitally encrypted, decentralized currency that is not linked to or regulated by any government or central bank.
It is based on blockchain technology, which is a distributed ledger framework. Bitcoin is the first cryptocurrency created which has led to the creation of others alike known as altcoins.
Cryptos are categorized as virtual or digital currencies. They were originally developed to provide an alternative mode of payment for online transactions.
However, cryptocurrencies have not yet been generally adopted or legalized by many nations. They are actually too unreliable to be used as payment methods.
What is Blockchain?
Blockchain is a distributed ledger that is managed by a network of computers. It maintains an exact copy of the database and updates its records by consensus based on pure mathematics.
Blockchain store data in block that are then linked together via cryptography. It can be used to store different types of information but the most common use so far has been as ledger for transactions.
Blockchains and cryptocurrency are part of the most used words in our world today. Although it is known for its role in cryptocurrency system, it has several other functions.
What is Atomic Swap?
An atomic swap is a cryptocurrency exchange between two parties that wish to exchange tokens from different blockchains. It utilize blockchain smart contracts technology in order to facilitate the exchange of one form of cryptocurrency for another.
The swap is conducted between two entities without a third party’s involvement. This means that atomic swap can only be conducted on Decentralized exchanges & cross-chain swap providers.
Atomic swap is done using your cryptocurrency wallet and Hash Timelock Contracts (HTLC). This type of token swap first appeared in September 2017, when an atomic swap between Decred and Litecoin was conducted.
Why Conduct Atomic Swap?
Atomic swap is effective for crypto investors/traders as it gives more possibilities while trading on an exchange. The idea of atomic swap came to be after some cryptocurrency owners became interested in moving capital between coins.
Atomic swaps are therefore helpful if you only have one cryptocurrency but need to use another in a transaction. You can’t exchange your cryptocurrency without first converting to fiat currency then buying the other.
Another way is to convert between cryptocurrencies and exchanges multiple times to get the one you want, however, these methods are not as effective as atomic swap.
How Does It Work?
In an atomic swap, two token owners agree to exchange their tokens for any amount they agree on. The smart contract program on the blockchain sees that they both agreed to it, so it executes the trade for them.
The transaction cannot be reversed. Both parties must agree to another transaction to exchange the tokens again if they would like them back.
For example, Lade wants to convert 1 BTC to an equivalent number of Litecoins with Tolu. Lade has to first submit her transaction to the Bitcoin blockchain via an atomic-swap capable wallet.
She follows this by generating a number for the cryptographic hash function to encrypt the transaction. Tolu follows exactly the same steps as Lade, submitting his transaction to the Litecoin blockchain.
Lade and Tolu need to unlock their funds by using their respective numbers, within a specific timeframe. If they didn’t do on the timeframe, the transaction will not occur. Hash Timelock Contracts (HTLC) within the blockchains then executes the trade if it is both agreed on at the right time.
This method of cryptocurrency exchange is however suited to larger trades. This is because the transactions are bound by the mining of blocks, users are limited by ledger confirmation times, which can be minutes or hours at worst.
Where Can You Conduct Atomic Swaps?
The idea of atomic swap is to remove centralized intermediaries like regulated exchanges and give token owners total control. This means that cannot conduct atomic swaps on centralized exchanges such as Binance but on Decentralized exchanges.
Decentralized exchanges (DEX) are cryptocurrency exchange platforms without an intermediary. DEX doesn’t involve a third party by making use of smart contracts. This help to facilitate trading between individuals, but doesn’t take control of their coins.
This is made possible in three ways: an on-chain order book, an off-chain order book, or an automated market maker approach.
Some of the decentralized exchanges in the crypto world today are Uniswap, SushiSwap, BurgerSwap, PancakeSwap, etc.
Is There Any Risk with Atomic Swaps in Crypto?
It is well-known that crypto endeavors are not without risks associated with it. Atomic swap has been conducted in the past and has been successful but has not widely be in use.
In reality, there are only a few atomic swap wallet providers and decentralized exchanges that can be used in a swap. So care has to be taken in going for this method for the exchange of cryptocurrencies on different blockchain.
Conducting atomic swap for now is not expensive. The mainstream’s ability to do atomic swaps is new, but they don’t yet generate fees unless there are blockchain fees involved.
Atomic swap is one of the ever-growing endeavors in the world of cryptocurrency. With a smart contracts program on blockchains, cryptocurrencies can be exchanged effectively.
Once two crypto owners are in agreement to exchange their cryptocurrencies, follow the time frame and make use of atomic swap-enabled wallet on Decentralized exchange, this is possible.
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