How Do Atomic Swaps Work?

Atomic swaps can be executed on-chain, which means directly between the blockchains of different cryptocurrencies, or off-chain, which means outside of the blockchain. Both methods are valid for conducting atomic swaps. The first transaction of this kind took place on September 19, 2017, and it involved the cryptocurrencies Decred and Litecoin.

What do “Atomic Swaps” mean?

An operation to exchange one cryptocurrency for another that can be carried out instantly without the need to rely on a trusted third party (intermediary) in the form of an exchange or exchange platform is referred to as an atomic swap. An exchange or exchange platform is an example of a trusted third party. As a direct consequence of this, the parties involved in the transaction are the only ones who have authority to control it.

The process of exchanging cryptocurrencies on exchanges and other specialized platforms can still take a significant amount of time, and it is frequently associated with exorbitant commission fees. In addition, not all exchanges support all the coins or trading pairs that are necessary. As a consequence of this, a trader who wishes to trade one cryptocurrency for another will be required to perform additional conversions in order to accomplish their goal.

The technology of atomic swaps was developed as a solution to these issues, including the risks that were mentioned previously associated with trusting a third party. It wasn’t until 2013 that it was first described, but just recently have we started putting it into practice.

How Does The Process Work?

A time-locked hash contract is utilized in atomic swaps (HTLC). The HTLC is a temporary smart contract, as its name suggests, and it includes the generation of a cryptographic hash function that exchange participants are able to verify.

To put it another way, HTLC necessitates that the payee generate a cryptographic proof of payment in order to confirm that they have received funds prior to the expiration of the allotted time period. In that case, the transaction will be canceled, and the funds will be sent back to the person who initiated it.

Lightning Network and Atomic Swaps

Lightning Network technology is not necessary for successful atomic swaps, despite the widespread belief to the contrary. However, using this technology can make the process of exchanging coins simpler, more expedient, and more effective.

The Lightning Network, much like atomic swaps, makes use of time-locked hash contracts. The main difference between the two, however, is that atomic swaps link blockchains, whereas the Lightning Network links payment channels. This method operates under the presumption that Alice and Bob establish a payment channel with Carol and exchange information via Carol without having to initially place their trust in Carol.

Due to the fact that different Lightning networks can be interconnected on different blockchains thanks to the same underlying mechanism, atomic swaps can be easily incorporated into the Lightning Network, making it possible for multiple Lightning networks to communicate with one another. Because of this, a participant in a swap that opens payment channels on both blockchains has the ability to function either as a payment processor or, for instance, as a decentralized altcoin exchange.

Which digital currencies have support for the atomic swapping protocol?

The first successful exchanges using atomic swap technology were between Litecoin and Decred, Vertcoin and Bitcoin. They may have attracted increased attention from the community, but the matter is not limited to these cryptocurrencies alone.

It should be noted that for the successful implementation of atomic swaps in their initial implementation, the user needs to download the blockchains of both currencies. For the average user, this process is quite inconvenient from a practical and technical point of view.

On the other hand, a solution to this issue has already been discovered, and it is highly likely that it will soon be made accessible to a very large number of users. Therefore, the Komodo project is currently working on the development of its very own decentralized exchange called BarterDEX. In particular, its developers have successfully carried out an atomic swap using the Electrum server, which allows you to interact with cryptocurrency without having to download the entire blockchain.

Furthermore, the Komodo team claims that after successfully linking the Bitcoin and Ethereum blockchains and implementing support for ERC-20 tokens, their BarterDEX exchange now supports peer-to-peer exchanges between 95 percent of all existing coins and tokens. This claim was made after the Komodo team successfully linked the Bitcoin and Ethereum blockchains.

Other well-known projects are actively working on the practical application of the idea of atomic swaps. These projects include Blocknet, which aims to create an Internet of blockchains based on the technology of Xbridge, Altcoin.io, which is working on creating a decentralized exchange based on the technology of Plasma, and Atomic Wallet, which is working on creating a wallet with built-in atomic swap functions.