At the present moment, one of the main reasons why most vendors hesitate to accept cryptocurrencies is because of convertibility issues. To increase the widespread adoption of cryptocurrencies, one should be able to easily convert his/her crypto-tokens for some other tokens/product/service etc.
With more than 1500 cryptocurrencies trading live, swapping from one coin to another is a routine task for all traders. Atomic swaps make swapping between cryptocurrencies a lot easier. This encourages to the practical and widespread use of cryptocurrencies, providing much higher liquidity.
Before we get into details of atomic swaps, first let’s have a look at the existing ways for swapping cryptocurrencies:
The traditional peer-to-peer way of exchanging cryptocurrencies. Doing this relies entirely on each user trust for each other user. One of the users would have to risk sending the money to the other first. This can result in theft and fraud & is considered to be far too risky for most people to consider for large swaps.
Swapping cryptocurrencies on exchanges is another method that people currently use to swap cryptocurrencies.
So, what Are Atomic Swaps?
A relatively new piece of technology, atomic swaps (or atomic cross-chain trading) is looking to revolutionise the way in which users transact with each other. An atomic swap is the exchange of one cryptocurrency directly for another cryptocurrency without the need to trust a third-party or to rely on IOUs (centralised exchange).
Atomic swaps use a system called hash time-locked contracts (HTLCs), which in turn leverages the potential of multi-signature addresses and time-locks. All this is enabled by the primary scripting language found in Bitcoin and most altcoins, including Litecoin.
Hash time-locked contracts ensure that the atomic swap process is entirely trust-less by ensuring both parties fulfil the requirements of the trade. HTLCs require the recipient of payment to acknowledge receiving payment before a deadline by generating a cryptographic proof of payment otherwise the recipient risks losing the right to the claim the payment, therefore returning the funds to the sender.
Interoperability between Bitcoin and altcoins is not new. So-called atomic swaps (or atomic cross-chain trading) were first described by Tier Nolan back in 2013.
Charlie Lee, creator of Litecoin successfully completed atomic swaps using Litecoin in exchange for Bitcoin, Vertcoin and Decred. On March 15, 2018, Lightning Labs announced the first Lightning beta release for mainnet on both Bitcoin and Litecoin. One of the most anticipated applications of the Lightning Network (LN) is Atomic Swaps.
Komodo, completed an atomic swap using an Electrum server which allows a user to interact with a cryptocurrency without having to download the whole blockchain. Therefore, this makes the prospect of a decentralised exchange all the more practical.
Blockchain.io — A centralised exchange with a decentralised settlement — “The Blockchain.io platform will combine a centralised custodial exchange with a decentralised “trustless” cross-chain “fair exchange” settlement.”
The BCIO decentralised cross-chain settlements will be using the cross-chain atomic swaps. The exchange is going live in Nov.
Strengths of Atomic Swaps:
Protection from fraud/cheat — Atomic Swaps can couple two inherently separate blockchains together and create an exchange of value whereby both parties are ensured and protected from fraud/cheat.
True P2P — Atomic swaps are the true peer to peer exchange of value.
Transparency — A sort of “open” network — Trades are conducted in a manner the prevents one person with large amounts of market share from creating fake volumes.
Security — Ability to retain your private key as opposed to keeping your private key on an exchange
Instant transactions — Wait time for confirmation and transactions to clear have been reduced
Lower Costs — switching costs are near zero
Weaknesses of Atomic Swaps:
One potential disadvantage to atomic swaps is in privacy. Using the hash value which is shared during the atomic swap transaction(s), one can easily trace the transaction(s).
Anyone can monitor the two blockchains as the coins get swapped from one to the other.
Another key challenge to atomic swaps is the fact that very few cryptocurrencies support them as of now. Eventually, this number will most likely grow exponentially.
Final challenge atomic swap is facing is the direct competition to the established cryptocurrency exchanges. Currently, the cryptocurrency exchanges charge traders a lot to convert one cryptocurrency into another. With the low-cost atomic swaps coming into the picture, it is possible that they can create their atomic swaps. This could eventually lead to a competition to the traditional atomic swaps.
Currently, we can use only a few cryptocurrencies in our daily life but as time progresses a wide variety of cryptocurrencies could be used quite regularly. This indicates the upcoming future need of swapping different cryptocurrencies.
Given that case, Atomic Swaps is undoubtedly a space to watch out for! With the advent of the atomic swaps, we can achieve seamless transactions for cryptocurrency swapping. It is an innovation encouraging the real sense of cryptocurrencies providing freedom from the centralised financial system.