Are you interested in knowing what exactly atomic swap is? Are you curious about how it revolutionizes the cryptocurrency trade? Are you interested in knowing how atomic swap is the future of safe and secure cryptocurrency trading?
If you are ready to enter the world of atomic swap, you have reached the right place to know all about it!
Atomic swaps are automatic exchange contracts allowing two parties to trade the tokens from two different blockchains. Sometimes they are also referred to as atomic cross-chain trading and this mechanism eliminates the need for third-party entities when executing trades. We can say that this system is useful in preserving the autonomy of crypto users and enables trustless transactions, where users don’t have to know one another and avoid cryptocurrency risks. It is one of the technologies that is gaining so much attention day by day that promises to improve the way we trade cryptocurrencies. You also want to get benefits from the atomic swap in the crypto world, that’s why we are here to guide you all about this.
In this article, we will explore how atomic swap work and you will be provided with step by step process to use atomic swap. We will also provide you with the benefits of using atomic swap as well as some risks and challenges you have to face while using atomic swap.
Scroll down to learn all about Atomic Swap!
What is an Atomic Swap?
Atomic swap is the exchange of cryptocurrencies from different blockchains. The swap is usually conducted between the two entities without any third party’s involvement. The main purpose of it is to remove centralized intermediaries like regulated exchanges and give total control to token owners.
Most of the atomic swap has enabled wallets and blockchains to use smart contracts. Smart contracts are known as the programs within the blockchains that execute on meeting certain conditions. In this case, the conditions are; that each party should agree to the transaction with in time limit. Using a smart contract in the trade will prevent both parties from stealing a cryptocurrency from one another. Atomic Swaps are also known as Cross-chain atomic swaps.
How Does Atomic Swap Work?
Atomic swap usually comes up with functionalities that ensure that both sides of the trade are fulfilling all the predefined conditions before the completion of the trade. It is possible due to the incorporation of smart contracts which are usually self-initiating programs that enforce the conditions governing the success of transactions. More specifically, atomic swap uses a hashed time lock contract which functions as a two-way virtual safe. That’s why you should be familiar with hash timed-lock contracts and timed-lock contracts.
1. Hash Time-Locked Contracts:
Hash time-locked contracts are the class of payments that uses hash-locks and time-locks that require the receiver of payment to acknowledge the receiving of payment. This key usually ensures that the trades are only finalized when both parties submit cryptographic proofs meaning that they have fulfilled their sides of the transaction.
2. Timed-Locked Contracts:
These types of contracts usually lock the transaction for a specific period as the name indicates. It is a very important part of an atomic swap as it ensures that the transaction happens when both parties agree with it.
After having these fundamentals in one place, an Atomic swap takes a few steps to occur;
3. Transaction Proposal:
First of all, the participant will get the proposal of trade which outlines the details of the transaction, including the amount and the type of cryptocurrency going to be swapped.
4. HTLC Set-Up:
After the transaction proposal, HTLC is created and it generates a hash and cryptographic puzzle. The participant has to solve this puzzle to access the funds.
Now participant has to check the transaction, verify the details, and create their own HTLC.
Now participants have to solve the cryptographic puzzle and share the puzzle with the initiator.
Completion of Swap:
Now initiator will use the solution of the participant’s puzzle to unlock the HTLC of the participant so that they can receive their funds. Keep in mind that you have to solve the puzzle within the time-lock period otherwise, your funds are returned to their original owner.
Atomic Swap Step-By-Step Process:
It is important that both parties have to agree on the exchange rate and the amounts to trade just to carry out the atomic swap. After the agreement of both parties, the process usually unfolds in steps.
Let’s have a look at them!
1. Creation of Contract:
The first party will initiate the process by creating the account. It is a program that specifies the terms and conditions of the transaction which includes the amount of cryptocurrency to be traded and the unique cryptographic hash value.
2. Locking of Contract:
Now initiator will lock the funds into this contract and its initiator is the only one who can unlock these funds by using the private key but here it is important to set the time limit for the transaction to be completed.
3. Contract Address Sharing:
Now initiator has to share the address with the second party and that person will verify the contract and the locked funds.
4. Contract Duplication:
Now second party person has to create a similar contract on the blockchain by using the same hash value that the first person has used. And now it’s time for a second party person to lock the funds in the contract.
5. Completion of Transaction:
Now initiator can unlock the funds by using the private key for a second party person. Once the second person verifies that funds have been withdrawn, he/she can unlock the initiator’s contract and take the cryptocurrency.
The important thing to note here is that both parties have to unlock the funds within the time limit, if either of them fails to do so, the trade will be automatically canceled and the funds will return to their original owners.
What are Some Popular Atomic Swap Blockchains?
You want to know all about Atomic swap blockchains, so if you are looking for some famous atomic swap blockchains here we are discussing them.
1.Komodo Atomic Swap:
Komodo is usually the first atomic swap exchange that allows its users to take advantage of its features. It is not like other traditional exchanges, as it is a decentralized exchange. Komodo supports almost 95% of all the available coins and tokens, which means that you can use Komodo for almost any atomic swap coins.
2. Bitcoin Atom:
Another famous atomic swap blockchain is Bitcoin Swap, which is also known as BCA. It is usually a SegWit-enabled Bitcoin fork that features a hybrid consensus and on-chain atomic swap option. It allows its users to exchange cryptocurrencies using a decentralized process.
3. Notable Vendor; Atomic:
Atomic is usually the new infrastructure layer above all the existing blockchains that enables a completely new range of financial services. By using Atomic technology, users can easily trade peer-to-peer in a super-fast guaranteed environment without the custodial risks that are associated with exchanges.
Benefits Of Atomic Swaps:
If you are ready to use Atomic swaps, you should be familiar with the benefits of using it. It offers many benefits but here we will provide you with some of them.
Atomic Swaps removes the need for a central authority or any third-party service like the exchange of cryptocurrency. So it is famous for enforcing the true essence of blockchain, decentralization.
Atomic Swap helps reduce transaction fees as there are no intermediaries involved. So it is well-known for its ability to reduce the costs of transactions.
You have seen that other cryptocurrency exchanges usually require KYC (know your customer) procedures, but in the case of Atomic Swap, it can be done directly between users, which enhances the privacy of users.
Atomic Swaps facilitate cross-chain transactions and in this way, they are encouraging the compatibility between different blockchains.
Reduce Counter-Party Risks:
In atomic Swaps, there is no need to hand over funds to a centralized third party to accelerate the transaction. Traders are allowed to have broad control over their assets.
Limitations and Challenges:
An Atomic swap provides many benefits to its users, but it doesn’t mean that you don’t have to face any challenges. Along with benefits, you should be familiar with the risk factors or challenges that you have to face so that you can tackle them easily.
As you know atomic swaps are peer-to-peer transactions, that’s why there can be a problem of finding a match for a specific swap you want to make, which then leads to liquidity issues.
Another problem that users face, is the technical complexity, and it is due to the concept and execution of atomic swap.
Compatibility of Blockchain:
Another main problem that you have to face in atomic swap is the blockchain’s compatibility as not all the blockchains are compatible with atomic swaps, which then limits the range of cryptocurrencies that can be swapped.
Future of Atomic Swaps:
Atomic Swaps usually hold immense potential, as they can revolutionize the way we can trade cryptocurrencies which makes the process more private, secure as well and decentralized.
As this technology is still in its early stages, the active development and growing interest in blockchain technology signals a very promising future. In short, atomic swaps are an excellent solution for those who want to trade crypto coins securely. It is one of the emerging decentralized exchanges that are getting better and more popular.
Atomic Swap is a well-known emerging technology that offers many benefits to crypto investors who want to diversify their coins. If you are one of those who want to take benefits over exchanges at a low cost, faster, and securely, Atomic Swap is just for you. Remember that, there are some limitations also. But there are some secure stories just like the Komodo BarterDex platform which is a decentralized exchange that allows atomic swap between all the available tokens and coins.
If you want to know all about atomic swap before delving into its world, we have got you covered. We have provided you with the basics of atomic swaps along with the process to use. You will learn here about the benefits as well as the challenges to face while using Atomic Swap. We are hopeful that, you have cleared all your confusions related to Atomic swaps after reading this article.
Frequently Asked Questions:
1. Is there any Difference Between Atomic Swap and Bridge?
Atomic swaps and bridges are both technologies that allow interoperability between different blockchains but yes! There is a difference between them as they serve different purposes. About atomic swaps, we have discussed in detail that they allow users to exchange one type of cryptocurrency for another directly and securely without the need for any intermediary like an exchange. But if we talk about bridges, these are usually protocols that connect two different blockchains which allows a token from one blockchain to be used on another blockchain and vice versa.
In short, the focus of atomic swap is to exchange different cryptocurrencies directly but bridges aim to make a single cryptocurrency useable across many different blockchains. Both technologies help promote interoperability in the crypto world.
2. Is it True That an Atomic Swap is Expensive?
The mainstream’s ability to do the atomic swap is usually new in the market, but they don’t have generated the fees yet, but blockchain fees are involved. However, using atomic swap will provide you the benefit of low transaction fees.
3. Are Atomic Swaps Safe to Use?
Atomic Swaps are considered very safe and secure just because of the nature of this technology. As its transactions are atomic, they occur in full or not at all, ensuring safety. It is well known, due to its safety feature, so you can use it without any problem. But being a user, you need to do research and make sure that you are dealing with trusted parties.