Basic Guide About Atomic Swaps – All You Should Know About Them

Atomic Swaps is a hot topic in the cryptocurrency and blockchain industries due to the high impact it could have to both individuals and companies operating in the market. Most of the cryptocurrency users are now trading their digital assets in a wide range of exchanges. 

This is the easiest way to buy or sell cryptocurrencies, including Bitcoin (BTC), Ethereum (ETH) or Litecoin (LTC). Other individuals can certainly use peer-to-peer platforms to exchange their funds in person or by using an escrow platform. Meanwhile, others would prefer to use decentralized exchanges in order to keep their funds under control at all times. 

What Are Atomic Swaps?

There is a third option that would also allow users to exchange their funds in just a few seconds – if not less. Atomic Swaps are smart contracts that would allow users to exchange their cryptocurrencies without having to depend on a third-party authority, including exchanges. 

The interesting thing about these Atomic Swaps is related to the fact that users would be able to exchange their funds between two different blockchains. The first time that there was an atomic swap in the cryptocurrency market was with two digital currencies: Decred (DCT) and Litecoin. 

As Charlie Lee, the founder of Litecoin explained, this was an on-chain transaction that didn’t use other networks outside Litecoin and DCR. In addition to it, the GitHub code released shows it is possible to use Atomic Swaps with Bitcoin, Litecoin, and Decred. 

At the moment, there are several companies that are also working with off-chain atomic swap transactions that would reduce the fees paid by users when trading. Moreover, users would not need to depend on third-parties in order to exchange their cryptocurrencies. However, there are some companies such as 0x that have already decided to implement this technology to offer better services to clients. 

Despite all the work companies have done, we still have some time before this tool reaches the market. Indeed, there are many issues that must be improved before Atomic Swaps become the normal way of exchanging digital currencies. 

Atomic Swaps Working Method

In order for Atomic Swaps to work, they use a mechanism in which they prevent the parties involved in a transaction to cheat. This would prevent malicious parties to steal users funds or free-ride on these Atomic Swap smart contracts. 

It is worth mentioning that Atomic Swaps work with different signatures and Hash Timelock Contracts, also known as HTLC. The HTLC allows the parties to be sure that the smart contract will be fully executed rather than partially.

Conclusion

Atomic Swaps are a great technology and a solution that could help many users in the cryptocurrency world. Some of the benefits related to it include lower operational costs for trading digital assets, lower fees, and higher interoperability between blockchain networks. 

Nonetheless, Atomic Swaps are limited in the extension they can have. Indeed, they may not be able to connect some blockchain networks if they don’t have the same hashing algorithm or if they do not use the HTLC functionality.