Isn't it interesting how we have created an entire crypto trading world surrounding the theme of decentralization however; the majority of people use centralized trading platforms to trade and swap out their coins? This is a huge contradiction.
Atomic swaps allow direct trading between different Blockchain networks. Instead of a third party (such as a centralised trading platform) taking a fee from both sides, atomic swaps eliminate this process completely. An atomic swap would allow a true Peer-to-Peer cryptocurrency Trade.
Let's say you have two friends, Sarah and Mike. Sarah owns some game coins from World A and Mike owns some game coins from World B; they want to exchange these coins, but there is no game shop closer to them that can facilitate this exchange.
How Atomic Swaps Work: HTLC & Smart Contracts Explained
Hash Locks are essentially a "password" created through cryptography. A user selects secret data, makes a unique hash from their secret data, and then provides the hash to the second user. The second user will need the user's secret data in order to submit their side of the transaction.
Time Locks act as "countdowns" for the transaction to be successfully completed by both parties. If for any reason the swap does not happen, then the transaction will reverse itself after the specified time limit, enabling both parties to recover their original funds.
Real-World Use Cases of Atomic Swaps
One of the more obvious uses for this technology is in cross-chain exchanges of cryptocurrency (i.e. exchanging bitcoin for litecoin, ethereum for bitcoin, monero for zcash, etc.). Any pair(s) of coins that both blockchains have all of the necessary smart contract capabilities to allow for such exchanges are valid candidates for this type of exchange.
The reason this is important to the industry is that the crypto ecosystem is fragmented by thousands of different tokens and chains, and historically would require centralized exchanges or centralized bridge solutions to move value from one token or chain to the other. Atomic swaps will help to eliminate this fragmentation.
Benefits & Limitations of Atomic Swaps
Let's face facts. No tech is flawless, atomic swaps represent the same reality. Although they are beneficial and advantageous there are also requirements and constraints involved that you need to be cognizant of before engaging with them.
Trustless exchange: You're not putting your trust in a third party with your money, even for a short period of time. Given the recent history of Exchange hacks (i.e FTX), this is significant; you always have control of your keys and crypto.
How to Execute Atomic Swaps: A Beginner-Friendly Guide
Not every wallet supports atomic swaps yet, but there are already a number of great wallets on the market that allow atomic swaps. Komodo has developed an easy-to-use application called AtomicDEX, which has built-in support for atomic swaps.
Atomic Wallet is a wallet that will let you do cross-chain swaps for some specific pairs of coins. As the technology behind atomic swaps develops further, there will be more platforms that will also have support for atomic swaps.
Why Every Crypto Trader Should Understand Atomic Swaps
Crypto is set to build the future of finance; however, many people use it as if it were still in 2010 - centralised exchanges, KYC processes, custodial wallets - basically, we have returned to the traditional financial systems' problems in what purports to be a decentralised environment. Atomic swaps are what crypto was always meant to be; a true P2P exchange, with no third-party mediation and you simply have two people and some very clever cryptography to ensure neither party loses out.
Is it a good idea to immediately switch to atomic swaps for all of your trades? Not necessarily; by no means are they the answer to every problem as the technology is still maturing and there are advantages to using a centralized exchange for convenience. However, if and when you understand how atomic swaps work, you will have more choices.
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