Decentralization is an essential element that powers cryptocurrency exchanges as the blockchain industry develops. Each cryptocurrency is supported by particular blockchains that only accept tokens or coins that it is compatible with.
For example, Bitcoin (BTC) and Ethereum (ETH) have their respective blockchains. If a trader wants to exchange his BTC for ETH, he would first convert BTC to a fiat currency and then trade it to ETH.
Utilizing various exchanges and cryptocurrencies several times is another way to get the desired cryptocurrency. With atomic swaps, traders can exchange tokens or coins from multiple blockchains in a single transaction completely decentralized.
You can execute atomic swaps using the decentralized exchange (DEX) app, i.e., Riverex. A DEX is a trading platform where you may transact without the participation of a third party.
What is an Atomic Swap?
An Atomic Swap, aka Cross-Chain Atomic Swap, is a protocol that enables cryptocurrency owners to exchange their coins and tokens directly across various blockchain ecosystems, giving them complete control of their assets.
This protocol increases the anonymity of the two traders involved in the exchange, making transactions trustless. Therefore, being trustless and peer-to-peer in nature, atomic swaps are highly regarded as one of the genuinely decentralized trading techniques.
Moreover, atomic swap transactions eliminate the need to utilize fiat money like dollars and euros as reference values.
How Does Atomic Swap Work?
The idea of swapping two coins from different blockchains was first proposed in 2012, a few years after Bitcoin’s debut and after altcoins were released. The emergence of altcoins prompted cryptocurrency owners to shift funds between digital assets.
In September 2017, the first atomic swap materialized when Litecoin (LTC) and Decred (DCT) were exchanged without the use of a fiat currency.
Since atomic swap operates on a decentralized exchange, it is not controlled by third parties like banks, centralized exchanges, or payment networks.
So, how do traders ensure the transaction is trustless, and the other party is fulfilling their end of the contract?
A smart contract is a fundamental solution for a trustless atomic swap transaction.
How is an Atomic Swap Executed?
Smart contracts are programs that run on a blockchain and act as a virtual vault to carry out an agreed-upon transaction. Each party must agree to a particular condition before a timer runs out. With the use of a smart contract that binds the transaction, it prevents one party from stealing the funds of the other.
For example, User A must send funds to a specific contract address where it is locked. User B will then be notified to confirm User A’s deposit. Simultaneously, User B will also lock his funds into a second vault address.
Once the smart contract program confirms that both parties have locked their funds as agreed, the swap is now executed. They both can now claim their swapped funds. If the other party does not approve the trade, the transaction will not be completed after the swap time expires.
Security Algorithm of Atomic Swaps
Atomic swaps utilize Hash Timelock Contracts (HTLC) to transfer tokens automatically in a set timeframe.
Two parties enter into a time-bound smart contract where they agree to each produce an advanced mathematical-based encryption mechanism called a cryptographic hash.
The HTLC stipulates a deadline by which both parties must confirm receiving payments. The entire transaction is canceled, and the funds are returned if one party doesn’t confirm the transaction within the allotted time. Therefore, this program removes the possibility that one person will take the given coins and reject his transferred coins.
HTLC consists of two cryptographic or encrypted keys:
- Hashlock Key
By using the hashlock key, transactions are only completed until both parties have provided cryptographic hash to ensure that they have locked both their assets in the smart contract.
- Timelock Key
The timelock key is a safety feature that enables traders to set an expiration time for atomic swaps. The system ensures that both traders receive their coins or tokens back when the swap is not finalized within the predetermined time frame.
Why You Need to Use Atomic Swaps
Since atomic swap avoids the need for an intermediary, like centralized trading platforms, it is seen as one of the vital blockchain technology of the future.
Atomic swap transactions are faster, more affordable, and free of the security risks associated with custodial-based exchanges.
These advantages allow traders to remain anonymous during every atomic swap transaction, giving them complete control over their assets.
Additionally, atomic swaps improve the interoperability of the crypto ecosystem by simplifying transaction procedures. The transactions in atomic swaps further reduce counterparty risks as atomic means either completed or never occurs.
Does it seem complicated? You don’t have to learn or become a blockchain software developer to perform an atomic swap. Atomic swaps can be facilitated through a decentralized exchange app, i.e., Riverex.
To get started, refer to our step-by-step guide on initiating an atomic swap on the Riverex platform.