The existence of crypto exchanges has been instrumental in enhancing crypto adoption. However, exchanging one cryptocurrency for another is still a challenge attributed to the lack of interoperability between blockchain networks. Depending on the type of coin, exchanging coins may constitute a cumbersome process involving different exchanges and multiple transactions with hefty transaction fees. The time involved and difficulties in exchanging currencies discourage investors from taking up digital assets to store value.
Recent advancements in the crypto space promise to solve the problem of interoperability. Atomic swaps seek to solve the lack of blockchain interoperability. Essentially, atomic swaps are an exchange protocol for cryptocurrencies designed to facilitate cross-chain trading, enabling the direct wallet-to-wallet exchange of different cryptocurrencies. Read on to find out more about this revolutionary technology integrated into a few decentralized exchanges, including Block DX.
Atomic Swap Explained
Atomic swaps, also referred to as atomic cross-chain trades or atomic cross-chain swaps, are peer-to-peer transactions involving two nodes. Atomic swaps facilitate the peer-to-peer exchange of two different coins without a third party or a centralized intermediary.
Simply put, an atomic swap is a smart contract technology powered cryptographically to facilitate the peer-to-peer exchange of cryptocurrency directly between two users. Both parties involved in the trade retain full control and ownership of their coins until the transaction is complete.
A Brief History of Atomic Swaps
The concept of atomic swaps is credited to Noel Tiernan, who introduced it in 2013 on the BitcoinTalk Forum. Noel outlined the idea and basic principles of atomic swaps through an article titled “Alt chains and atomic transfers.” Arlyn Culwick, Blocknet’s co-founder, announced a successful execution of Tiernan’s idea through an atomic swap between LTC and BTC. Litecoin’s founder, Charlie Lee, announced another successful atomic swap later that year.
Following the announcements, Altcoin.io Exchange successfully executed atomic swaps BTC and ETH on 11th October 2017. Years later, several crypto startups and decentralized exchanges such as Block DX have integrated atomic swaps in their platforms.
Types of Atomic Swaps
There are two major types of atomic swaps: on-chain atomic swap and off-chain atomic swap.
- On-chain Atomic Swap
On-chain atomic swap occurs between two separate, yet homogenous blockchain networks. It is conducted directly on both the blockchain’s network. Take, for instance, a cross-chain atomic swap between DCR and LTC or BTC and LTC.
- Off-chain Atomic Swap
As the name suggests, off-chain atomic swaps occur on a separate network layer rather than the blockchain, e.g., Lightning Network in the Bitcoin network. Off-chain swaps can be conducted on both heterogeneous and homogeneous blockchain networks.
In off-chain swaps, two parties agree to swap coins by sharing a standard private key. The exchange executes only when the shared private keys match. An example of a heterogeneous off-chain swap is the swap between ETH and BTC, while the swap between BTC and LTC is an example of a homogenous off-chain swap. Both models involve the use of a second network layer, i.e., the Lightning Network.
Atomic Swaps- How do they Work?
For a simple explanation, atomic swaps involving two parties looking to exchange their coins share an encrypted code. The swap is only completed when the parties’ private keys match. To achieve this, atomic swaps leverage a particular type of smart contract referred to as Hashed Timelock Contracts (HTLCs).
HTLC operates as a “virtual safe,” which requires two specific hash (keys) to open: hash lock Key and timelock key. For the swap to be complete, the involved parties must recognize the funds’ receipt within a particular period, usually 24 hrs, using the cryptographic hash functions. The swap becomes void if the parties don’t acknowledge the coins’ receipt within the specified time.
Requirements for Atomic Swaps
- Both blockchain networks must support a similar type of hashing function
- Both blockchain networks must support time-locked contracts
- Both ecosystems must support specialized programming functions, i.e., layered solutions such as Lightning Network and SegWit.
Steps Involved in an Atomic Swap
The first step, i.e., the set-up phase, involves the first party creating an HTLC address then depositing the coins. After making a deposit, a secret passcode referred to as a preimage is automatically created and hashed (locked).
In the commitment phase, the first party forwards the hashed preimage to a second party. The second party then acknowledges the funds’ receipt and proceeds to deposit a trade capital to a newly created address.
The first party used the preimage to unlock the trade capital deposited to the second party’s address. The second party completes the swap by unlocking the trade capital initially deposited by the first party.
Block DX- A Decentralized, Trustless Crypto Exchange with Atomic Swaps
Block DX is the world’s most decentralized exchange built on the Blocknet Protocol. The exchange is among the few decentralized exchanges that are 100% trustless enabling users to be in complete control of the funds. Trade occurs directly from users’ wallets; thus, the safety of funds is usually guaranteed.
Block DX integrates atomic swaps meaning that trade settlement is decentralized. Atomic swaps not only assure the safety of your funds but also seamlessly carry out cross-chain trading. Instantly trade between Litecoin, Bitcoin, Digibyte, and Syscoin and over 100 other digital assets. Trading is even made better with full trading pair freedom. Block DX is indeed an ideal crypto exchange for any avid crypto trader.
Mainstream blockchain adoption has largely been hindered by the lack of interoperability and scalability issues. However, atomic swaps promise to solve these impediments by enabling interoperability of blockchain networks and facilitating the full decentralization of blockchain-based platforms, eliminating the need for third parties.
Atomic swaps are vital for a trustless, decentralized exchange which are safe and efficient to use. Sign up today at Block DX to experience atomic swaps at its best.