Atomic Swap Explained
An atomic swap is a smart contract technology
that empowers the exchange of one cryptocurrency for an alternative
cryptocurrency without using central intermediaries, such as exchanges.
Atomic swaps can take place unswervingly amid
blockchains of different cryptocurrencies,
or they can be conducted off-chain, away from the foremost blockchain. They
first came into prominence in September 2017, when an atomic swap between
Decreed and Litecoin was conducted.
Since then, other start-ups and decentralized
exchanges have allowed users the same facility. For example, Lightning Labs, a
start-up that uses bitcoin’s lightning network
for transactions, has conducted off-chain swaps using the technology. Cryptocurrencies
and decentralized exchanges, such as 0x and Altcoin.io, have also
incorporated the technology.
Atomic Swaps Break Down
As it occurs today, the process for switching
cryptocurrencies is time-consuming and complex. This is due to several reasons.
For example, the disjointed nature of today’s cryptocurrency ecosystem presents
several challenges to average traders.
Not all cryptocurrency exchanges support all coins. As such, a
trader wishing to exchange her coin for another one that is not supported on
the current exchange may need to migrate accounts or make several conversions
between intermediate coins to accomplish her goal. There is also an associated
counterparty risk if the trader wishes to exchange her coins with another
trader.
Atomic swaps solve this problem through the
use of Hash Time- lock Contracts (HTLC). As its name denotes, HTLC is a
time-bound smart contract between parties that involves the generation of a
cryptographic hash function, which can be verified between them.
Atomic swaps necessitate both parties to admit
receipt of funds within a specified timeframe using a cryptographic hash
function. If one of the involved parties fails to authorize the contract within
the timeframe, then the entire transaction is voided, and funds are not
exchanged. The latter action helps remove counterparty risk.
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