Most investors believe that transferring cryptocurrencies can happen only on the blockchain network or using intermediaries such as exchange platforms.
However, investors with technical knowledge of the product can use Atomic swap to exchange tokens and the details are mentioned in this guide.
What is an Atomic Swap?
Atomic swaps are decentralized exchange of cryptocurrencies without intermediaries. Atomic swaps enable transfer of one crypto token from a blockchain network to another.
It does not entail any type of transaction channels that need to facilitate the transfer from one blockchain to another. Atomic swaps were invented by Tier Nolan in 2013 for a trustless protocol created by Sergio Demian Lerner in 2012.
How does Atomic Swap Work?
Atomic swap is based on peer-to-peer technology that enables crypto exchanges. Rather than using intermediaries such as custodial services or wallet addresses, Atomic swaps take place on smart contracts.
Smart contracts are automated protocols that trigger action when predefined conditions are met. The smart contracts utilized in Atomic swaps make use of cryptography, timelocks, and hash functions.
When one investor is sending cryptocurrencies to another trader they open a new contract which is called Atomic swap. This contract contains the detail of the trade from both parties. At the same time, it is protected by hash and time lock.
It means that both parties need to complete the required token transfer within allotted time for the contract to work. Atomic in computer science represents the completion of a successful trade or none at all.
Key Features of Atomic Swaps
Here are some important features of Atomic swaps:
- Atomic swaps can take place from one blockchain to another and from one wallet account to another without any intermediaries such as crypto exchange.
- Atomic swaps work like peer-to-peer trades and both receiver and senders have full control over their private keys.
- It utilizes hashed timeLocks. They are a type of digital contract that create cryptographic code that is verifiable by both parties.
- They remove the threat of hacks, mismanagement, or transaction delays.
- Atomic swaps are usually free of cost or they charge smallest possible transfer costs.
- Atomic swaps eliminate counterparty risks in case one of the parties is unable to fulfill the requirements of the contract within required time frame.
Advantages of Atomic Swaps
Here are some benefits of an Atomic swap mentioned as under:
- Atomic swaps help maintain liquidity in the market by allowing transfer of one cryptocurrency such as Litecoin with another such as Bitcoin.
- Atomic swaps reduce transaction costs as they do not involve third-parties or intermediaries.
- They are secure on account of private keys and utilizing encryption function. The encrypted hashes in this instant verify ownership and reduce fraud risks.
- In the event of default from either party, the atomic swap contract is voided to protect the interest of both parties.
- Atomic swaps ensure rapid transactions and complete the transfer cycle in a matter of seconds because they do not need to wait for confirmation from a nodes.
- They are fully decentralized and take place on a peer-to-peer basis.
Risks Associated with Atomic Swaps
Here are some risks that are associated with atomic swaps:
- Atomic swaps are only available for a limited amount of cryptocurrencies. Developers are working on creating smart contracts that allow atomic swaps for various crypto coins.
- Atomic swaps require knowledge of programming and experience working on blockchain infrastructure for utilization.
- Non-technical investors are usually unable to navigate through the complicated user interface of Atomic swap.
- Atomic swaps are not fully protected against the danger of exploits and hack attacks.
Atomic Swaps and Cross-Chain Blockchains
Cross-chain bridges allow the exchange of information, crypto tokens, or NFTs from one blockchain to another. Here are some important differences between cross-chain bridges and atomic swaps:
- Cross-chain bridges require multi-sig wallets and intermediaries such as exchange platforms. However, Atomic swaps are done without any intermediaries.
- For Cross-chain blockchains interact with each other by creating a connection and for atomic swaps smart contracts execute the function once the necessary conditions are met.
- Atomic swaps use one type of hashing algorithm but cross-chain bridges use different hashing algorithms.
- Cross-chain transfers are centralized while atomic swaps are decentralized.
- Cross-chain can facilitate transfer of various blockchain byproducts but atomic swaps only process cryptocurrencies.
Atomic swap is derived from an atom that cannot be divided further either the trade takes place or does not happen at all. Atomic swap is an innovative and productive way to swap cryptocurrencies while saving time and excessive transaction costs.