What are Atomic Swaps and How Do They Work?
The blockchain world does not cease to amaze us with its constant stream of technological innovations, which somehow simplify and improve the functionality of the entire industry. Today we get into the nitty gritty of one such innovation, called Atomic Swaps.
The Atomic Swaps Process
As a new concept, there isn’t a lot of information on the web right now on atomic swaps, so we felt it was important to give our audience a simple process description for this new and upcoming term. Atomic swaps represent a technology that allows users to exchange cryptocurrencies of various assets without involving third parties. At the present time, when two users decide to exchange their assets, they must conform to using the established cryptocurrency exchanges. The atomic swap operation, on the other hand, allows them to interact with each other directly and exchange assets independently.
An Atomic Swap in Action
For example, when two users decide to change Bitcoin to Litecoin, participant A creates a deposit box. This box is the contract address, which save funds during the swap. The transaction requires the signature of participant B, as well as the secret number generated by participant A.
Participant A creates a hash of this number that is a lock while the number itself is the key to it. Thus, the lock and key are in the hands of participant A. However, he cannot open the cell because it requires the signature of participant B.
Next, participant A gives a hash to participant B, which allows him to create the same cell with the same key. But it also requires participant A’s signature to open. At this stage, participant A owns the key and can put his signature so that participant B can receive the funds contained in his cell.
When the participants agree to the terms of the transaction and pass on the necessary information to each other, a swap is effected. If they cannot come to an agreement for some reason, the system returns all funds to their accounts after a certain period of time. Obviously, the atomic swaps blockchain technology has the potential to increase the security of the entire market.
To exclude the possibility of receiving funds from one of the participants without transferring his own funds, atomic swaps use hashed timelock contracts (HTLC). In addition to this, the implementation of atomic swaps requires compliance with certain technical conditions in both blockchain systems. For example, using one cryptographic function (SHA-256, etc.) and supporting the Lightning Network.
Lightning Network also uses HTLC and conducts payments by connecting payment channels. The network was developed specifically for Bitcoin. But its forks (including Dogecoin, Litecoin, and Zcash) can successfully use this technology. It is also possible to implement within other blockchains depending on their technical features. This technology already takes place between the various blockchains, and the atomic swap coins list is constantly replenished. Previously, the creator of Litecoin, Charlie Lee, reported on the successful exchange of its cryptocurrency for Bitcoin, Decred, and Vertcoin. Atomic swaps and Lightning Network are set to gradually become one whole entity within the blockchain industry.
Obstacles to Overcome
In most cases, an obligatory condition for the atomic swap is the downloading of the blockchain for both cryptocurrencies. This requirement complicates the process significantly and the decreases the capabilities of atomic swaps. However, the Komodo team successfully performed an atomic swap using the Electrum server. It allows users to interact with cryptocurrencies without having to download the entire blockchain. The Komodo team also develops a decentralized BarterDEX exchange based on atomic swaps. The developers from Blocknet are working on the creation of a similar project.
Atomic swaps signify a much needed and useful feature of the cryptomarket. They increase the security of operations, making the industry more transparent. Sign up below to get the latest news about atomic swaps and all things crypto.