What are atomic swaps?
In the following years, many developers started to experiment with atomic swap protocols. Evidence suggests that Bitcoin, Litecoin, Komodo, and Decred communities all played an important role in the process.
How do atomic swaps work?
Atomic swap protocols are designed in a way that prevents any of the involved parties from cheating. To understand how they work, let’s imagine that Alice wants to trade her Litecoins (LTC) for Bob’s Bitcoins (BTC).
The term ‘atomic’ relates to the fact that these transactions either happen entirely or not at all. If any of the parties give up or fails to do what they are supposed to, the contract is canceled, and the funds are automatically returned to their owners.
Hash Timelock Contracts (HTLC)
Other than that, atomic swaps bring up concerns about users privacy. That’s because on-chain swaps and transactions can be quickly tracked on a blockchain explorer, making it easy to link the addresses. A short-term answer to this problem is to use privacy-focused cryptocurrencies as a way to reduce exposure. Still, many developers are experimenting with the use of digital signatures in atomic swaps as a more reliable solution.
Why do they matter?
Atomic swaps have great potential to improve the cryptocurrency space and are yet to be tested on a broader scale. Cross-chain trading can eventually solve many of the problems that are part of most centralized exchanges. Although these exchanges have maintained the cryptocurrency systems up until today, there are several concerns about them. Some of these issues include:
Greater vulnerability: keeping many valuable resources in one location makes them more vulnerable to hacking, and centralized exchanges are prime targets for digital heists.
Funds mismanagement and human error: centralized exchanges are run by people. If those in important roles make mistakes or if the leaders make poor choices regarding exchange operation, users’ funds can be compromised.
Higher operational costs: centralized exchanges have higher withdrawal and trading fees
Inefficiency in regards to volume demands: when the market activity gets too intense, centralized exchanges often fail to deal with the increased trading demand, causing the system to slow down or go offline.
Regulation: in most countries, cryptocurrency regulation is far from ideal. There are still many concerns surrounding government approval and management.
Although atomic swaps are still fairly new and limitations certainly exist, this technology is driving significant changes in regards to blockchain interoperability and cross-chain trading capabilities. As such, the technique has great potential to influence the growth of the cryptocurrency industry, opening up new avenues in terms of decentralization and peer to peer monetary transfers. The chances are that atomic swaps will be used more and more in the near future, especially within decentralized exchanges.