An Atomic Swap has the power to revolutionize the exchange of currencies in the cryptocurrency world. Put simply, this concept can allow individuals to exchange cryptocurrencies with one another in the most simple and hassle-free manner.
The concept of Atomic Swap is actually involves a trustless, person to person cryptocurrency exchange and it has been a topic of interest since 2012. The idea of this form of peer-to-peer cryptocurrency first came to Sergio Demian Lerner who drafted the protocol initially. However, it wasn’t until 2013 when the breakthrough was finally made by another researcher named Tier Nolan. This is the reason it is Nolan who is credited for inventing the concept and not Lerner.
Atomic Swaps have their advantages and in this post, we will look at how they work and what benefits they offer.
The problem with centralized exchanges
In order to understand the concept of atomic swaps better, it is important to understand the problems associated with centralised exchanges.
For the novice traders, centralised exchanges mean the real deal, but they are not familiar with the issues that can occur as a result of using them. Let’s take a look at these issues.
A series of steps need to be completed before an exchange between two parties can take place successfully.
Centralised exchanges are vulnerable to hacking. The Mt.Gox hacking incident should be a lesson to those who consider exchanges as a lifesaver. Since exchanges can have poor management, they can put users funds and coins at risk. In all these years, many exchanges have been hacked and millions of dollars worth of cryptocurrencies have been stolen.
The regulations that surround centralized exchanges can be quite stringent. Any centralized exchange which operates must be registered and governed by the respective authorities.
So what exactly are atomic swaps?
Atomics swaps facilitate the transfer of cryptocurrencies between two parties without requiring the services of a centralized third party. The main benefit for users is that they gain full control of the entire transaction process and they also get to hold ownership of the private keys.
All the issues that are faced by centralized exchanges are solved when atomic swaps are incorporated in the process. Since a centralized party is not involved, the entire transaction is carried out by only the sender and the receiver.
So is the service free or does it come with a cost? Whether you have to pay or not depends entirely on your own capabilities. If you can carry out the process by yourself, you will not need to pay anything. However, if you don’t have the expertise or skills to do it by yourself, you may need to seek the services of professionals for which you will have to pay a fee.
Atomic swaps: operational mechanism
So far, we have understood that atomic swap is a method of peer-to-peer transfer of cryptocurrencies. Since there are no third parties involved, what is shared between the two parties involved will always remain a secret between the two.
But, understanding how the process works involves gaining an understanding of Hashed Time Contracts or HTLCs.
Hashed Time Contracts are basically payment gateways which are used to deal with payments. It involves opening a state channel when a transaction is initiated. HTC also involves interaction between the parties and once the two parties reach an agreement, the transaction is finalized. The off chain channel reduces the amount of time that it takes to complete the transaction because there are no third parties involved. Once the transaction reaches its final stages of completion, the state channel is closed.