Atomic swaps are smart contract systems that allow users to exchange different crypto assets. They make it possible for assets based on two different blockchains to interchange without involving many 3rd party processes. The first-ever blockchain Atomic swap was in 2017 between Decred and Litecoin.
How Do They Work?
The best way to understand the functioning of an atomic swap is by using an illustration. For instance, a trader wants to exchange bitcoin for Zilliqa. Most exchanges do not have the BTC/ZIL pair. Hence, the investor may need to use multiple exchanges for the trade. The trader will have to convert their BTC to USDT, then USDT to ZIL; that’s two trades.
But, atomic Swaps make it possible to swap without involving tonnes of exchanges. You can exchange the coin with a single transaction. They leverage a system called hashed timelock contracts(HTCL). It has two keys;
- A hash lock key works mainly on sending the cryptos to the correct recipient who can unlock them.
- The timelock sets a time limit within which this contract is supposed to be completed. Both parties of this transaction must agree and complete the trade before the time contract locks.
The HTCL address generates a preimage that is sent to the recipient party. This preimage contains the details of the trade. If the second party consents, they autonomously create a similar trade, only they specify which asset they are getting. The second trader must use the original hash key since it shows the authenticity of the transaction.
Benefits of Atomic Swaps
One benefit is decentralization. Atomic swaps are done from wallet to wallet. Hence, the process is entirely decentralized and cheap since it’s a P2P exchange.
These swap systems offer top security. The use of HTCL is quite assuring for the parties of the trades. Investors can get refunds if trades don’t go through.
Drawbacks connected to the atomic swaps include complexity and privacy issues. They require direct interaction and communication between trading parties. Moreover, they could be insecure because of the time spent on the chain. The longer the time on the chain, the easier it is for hackers to take advantage of the transactions.