It is a transaction between two cryptocurrency holders on a peer-to-peer exchange platform that eradicates the requirement for any third party. Put simply, a number of tokens are deposited into an exchange contract and provided both sides execute within a set period of time, the transaction is completed.
That’s the surface level overview. But what else is there to know? Below, we go into all the need-to-know facets of the Atomic Swap in what is one of the coolest-sounding crypto terminologies in operation.
Atomic Swap – What You Need To Know
The first-ever Atomic Swap happened in 2017, when Decred and Litecoin were exchanged. Since then, companies and individuals have adopted swap solutions to make things more streamlined.
An “atomic state” typically refers to a state of a transaction that is indivisible and cannot be partially completed – it either happens or it doesn’t. That’s where the Atomic Swap gets its name.
For an Atomic Swap to happen, proof of key encryption and the acceptance of this proof by both parties is the genesis of this transaction.
The use of Hash Timelock Contracts (HTLC) means it must happen within a pre-agreed time period to eliminate the risk of counterparty risk, which concerns the possibility of parties involved in a transaction defaulting on its contractual obligation.
How Do You Complete An Atomic Swap
It sounds complex, but an Atomic Swap can be very easy to execute for individuals on a peer-to-peer platform. That’s thanks to the incredible advances in user interface technology.
Here is a step-by-step breakdown of how the process works within a platform’s heavily user-friendly interface:
- Choose The Cryptocurrencies: Select two cryptocurrencies that support atomic swaps (e.g., Bitcoin and Litecoin).
- Generate Hash Time-Locked Contracts (HTLC): One party generates a secret hash value by applying a cryptographic hash function to a random secret.
- Create a Contract: Each party creates an HTLC that includes either the hash of the secret or a time limit for the swap to be completed.
- Fund the HTLC: One party locks their cryptocurrency (e.g., Bitcoin) in the HTLC using the hash created. The transaction is broadcasted to the network.
- Reveal the Secret
- Party B sees the locked transaction and uses the hash to create their own HTLC for Party B’s cryptocurrency (e.g., Litecoin) before locking it in the HTLC.
- Claim the Funds: Party A Reveals the Secret to Party B to claim the Litecoin. Party B uses the secret to unlock the funds in their HTLC.
- Complete the Swap: After Party A claims the Litecoin, Party B can use the same secret to claim the locked Bitcoin from Party A’s HTLC.
Pros And Cons Of An Atomic Swap
Pros
- Decentralisation: Reducing reliance on intermediaries makes for a more secure and anonymous process.
- Enhanced Security: The use of Hash Time-Locked Contracts (HTLC) in a two-party system means it’s comprehensively defended against any malicious outside parties hijacking
- Lower Costs: Without having to rely on any intermediary to facilitate the transaction, costs are cheaper.
Cons
- Complexity: An Atomic Swap can be complicated for average users, and a solid understanding of smart contracts and cryptocurrency wallets is required.
- Limited Cryptocurrency Pairs: Not all cryptocurrencies support atomic swaps, which can limit the available pairs for trading and may restrict users’ options.
- Time Constraints: These types of transactions can take a good amount of time, which is not ideal in some scenarios.
FAQs
What is an atomic swap?
An atomic swap is a method of exchanging one cryptocurrency for another directly between two parties without the need for an intermediary, such as a centralized exchange. This process utilizes smart contracts and hash time-locked contracts (HTLC) to ensure that the trade is executed securely and simultaneously.
How does an atomic swap work?
Atomic swaps work by using HTLCs to create a contract that requires both parties to fulfill their obligations before any funds are released. Each party generates a secret hash, locks their cryptocurrency in a contract, and once the first party reveals the secret, the second party can claim the funds. If either party fails to complete the transaction within a specified time, the funds are returned.
What cryptocurrencies can be used for atomic swaps?
Not all cryptocurrencies support atomic swaps, but many popular ones do, including Bitcoin, Litecoin, and some altcoins that share similar protocols. It’s essential to verify compatibility before attempting a swap.
Are atomic swaps safe?
Yes, atomic swaps are generally considered safe because they eliminate counterparty risk and fraud through the use of smart contracts. Funds are only released if both parties meet their obligations. However, like any crypto transaction, they are not entirely risk-free, especially if either party fails to understand the process or the technology.
Can I use atomic swaps on any wallet?
No, not all wallets support atomic swaps. To perform an atomic swap, both parties need wallets that are compatible with the specific cryptocurrencies being exchanged and support HTLCs. It’s important to check the wallet’s features before attempting a swap.
