What Is an Atomic Swap?
An atomic swap, also known as a cross-chain atomic swap, is the exchange of cryptocurrency from different blockchains. Atomic swaps, also known as atomic cross-chain trading, allow users to exchange cryptocurrencies directly between blockchains without the need for a third party, such as an exchange.
Smart contracts are used by the majority of atomic swap wallets and blockchains. Smart contracts are programs that run within blockchains when specific criteria are met. The prerequisites in this scenario are that each participant consent to the transaction before a timer runs out. The use of a smart contract in the transaction prevents one party from stealing cryptocurrency from the other.
There are two types of atomic swaps: on-chain swaps between two different cryptocurrencies on two separate blockchains, and off-chain swaps on second-layer channels off a main blockchain.
Off-chain vs On-chain
On-chain transactions are transactions that are completed entirely on a blockchain network. Once validated, the transaction is posted on the public ledger of a blockchain network.
Off-chain transactions, on the other hand, transfer some of the labour from a blockchain ecosystem and can later be merged back into a blockchain. On an off-chain network, users agree that a third party will manage transaction validation and authentication.
Atomic Swap Process
Two token owners agree to trade their tokens for whatever amount they agree on. When the smart contract computer notices that they have both agreed, it conducts the deal for them. The transaction is recorded in the blockchain and confirmed by network nodes before a new block is created to accommodate another transaction.
The transaction is irreversible. If they want the tokens back, both parties must agree to another transaction to swap them.
Atomic swaps automate the exchange of tokens by utilising Hash Timelock Contracts (HTLC). HTLC, as the name implies, is a time-bound smart contract between two parties that entails creating one cryptographic hash on each end.
Both parties must acknowledge receipt of cash within a certain timeframe, according to HTLC. If one of the parties fails to confirm the transaction within the timeframe specified, the entire transaction is cancelled and the money is refunded. This reduces counterparty risk, or the chance that one party may take the provided coins while refusing to transfer their own coins.
Advantages of Atomic Swaps
- Decentralised nature
Although many frequently support a decentralised financial system, cryptocurrency traders must nonetheless conduct their transactions through controlled exchanges like Coinbase. Atomic swaps provide traders total control over their accounts and exchanges by allowing for direct, wallet-to-wallet transfers and being independent of exchange platforms.
- Increased security
The HashLock and TimeLock technologies in HTLC contracts used by atomic swaps provide more security and confidence to traders since they are guaranteed to get their money in the event of delays or disputes and have total control over the transaction.
- Peer-to-peer trading and lower costs
Aside from allowing people to trade with one another individually, atomic swaps lower operating expenses and trading fees associated with centralised exchange systems.
Disadvantages of Atomic Swaps
- Complexity and conditions
A higher level of security is provided by atomic swaps at the cost of stricter trading restrictions than those imposed by exchange platforms and a requirement for indirect communication between parties.
- Privacy issues
Atomic exchanges can be laborious to carry out. Hence, the transaction remains live on the blockchain network for a longer period of time, providing hackers more opportunity to thwart it and obtain sensitive data about traders.