Atomic swaps are contracts that automatically trade tokens from two different blockchains between two parties. This type of mechanism, which is sometimes called “atomic cross-chain trading,” completely gets rid of the need for centralized third-party entities when making trades. In a way, this system lets crypto users keep their independence and makes it possible for them to do transactions without having to trust each other or know each other.
Atomic swaps are considered one of the few truly decentralized ways to trade because they don’t require trust and are done peer-to-peer.
What Does An Atomic Swap Do?
“Atomic” is a word that is used to describe things that would either end or not start at all. In other words, an atomic swap has features that make sure both sides of trade meet all the conditions set upfront before the trade can be made. Smart contracts, which are self-starting programs that enforce the rules for a transaction to be successful, make this possible.
To be more technical, an atomic swap makes use of something called a Hashed Timelock Contract (HTLC), which may be thought of as a virtual safe that operates in both directions. To encrypt this contract, hash functions, which are a kind of mathematical algorithm, were used. As the name implies, this was done thus. Additionally, it establishes a time restriction so that transactions are canceled if one of the parties does not perform what they committed to do within a particular length of time. This time limit varies depending on the kind of transaction.
For instance, the two persons involved may come to the conclusion that the atomic exchange may take place at the most in a span of two hours. If after two hours not all of the trade criteria have been satisfied, the contract will give the coins back to the people who originally owned them.
Another important thing to know about the HTLC is that it needs two keys that are encrypted or used for cryptography. These are:
- Hashlock key: This key makes sure that trades don’t go through until both parties send cryptographic proofs (more on this later) that they’ve done their part.
- This is a safety measure that helps traders set a deadline for atomic swaps. It is called a “timelock key.” The mechanism makes sure that traders get their coins back if the swap doesn’t happen before the deadline for one reason or another.
Why Do We Need Atomic Swaps?
Atomic swap is an essential component of blockchain technology because it eliminates the need for intermediaries such as cryptocurrency exchanges. Traders now have the ability to engage in cross-chain transactions without having to rely on the infrastructure provided by centralized trading platforms. Because there are no go-betweens involved in atomic swaps, the transactions that take place as a result are efficient, low-cost, and devoid of the potential security issues that might arise with custodial-based exchanges. All of these benefits highlight to the independence that may be gained via the use of atomic swap. Because users conduct all transactions directly from their own wallets, they are able to exert a greater degree of control over the assets they own.
Additionally, the cross-chain trading capabilities of atomic swaps contribute to the overall openness of the cryptocurrency ecosystem. Through the use of atomic swaps, it is becoming less difficult to conduct transactions on many blockchains at the same time. Last but not least, atomic swaps eliminate counterparty risk since deals are either completed or they are not.