While the crypto market is plummeting and research and analysis are going on and on, to make the economy better than the existing one and so the blockchain technology is getting more talked about. Every now and then, innovation of these technologies and implementations are taking place and people are looking for adopting them for the best way possible and amidst all of the things, the term ‘decentralization’ has caught attention a lot but the existing economy which emphasizes decentralization, cryptocurrency has ironically still dependent on centralized platforms of exchanges basically. The great irony is that through cryptocurrency which enabled us to do transactions peer to peer still we are dependent on a third party to exchange them.
And as of now, all these centralized exchanges charge us a trading fee and also with risk of exchange hacks. In this crypto sphere, the stories of exchanges being hacked are not new. Mt. Gox is the most famous bitcoin hack. Not only Japan-based Bitcoin exchange Mt. Gox is not the only example, so many are there such as bitfloor, Poloniex, bitstamp. So eliminating the dependency on centralized exchanges for cryptocurrency exchange, a new technology ‘atomic swaps’ has come into existence though it’s still in budding phase and still it’s implementation has so many restriction and a lots of studies are required but before even dive into how they function and understand its fundamental core, let us tell you what exactly it is:
What are Atomic Swaps?
Atomic swap is a smart contract technology that allows the exchange of one cryptocurrency for another without the need to trust a third party such as centralized intermediaries, such as an exchange. Term Atomic comes from computer science which means indivisible, so atomic cross chain swaps is a method of trading between two blockchain networks without relying on the use of any third party intermediary. Atomic cross-chain trading is looking to revolutionize the way in which users transact with each other for example if one person name x owned five bitcoins but instead wanted 100 litecoins, so basically it has to be done through an exchanges i.e third party so through atomic Swaps, user x and user y are totally independent for exchanges and no need of centralized intermediaries. Atomic swaps can take place directly between blockchain of different cryptocurrencies or they can be conducted off-chain. They came into limelight, when atomic swaps between Decred and Litecoin happened in September 2017. Since then it is being adopted by several startups and decentralized exchanges such as Altcoin.io and many more.
So as we know, exchanging cryptocurrency in today scenario is a complex process and it takes time as well. This is because of a few reasons. Not all exchanges have listed all the coins to trade. Suppose a trader wants to exchange coin for another one which is not listed in his exchange. So he may need to migrate accounts or make several conversions between intermediate coins to get the final result. There is also a counterparty risk may occur. Atomic swaps solve this problem through Hash Timelock Contracts(HTLC). As the name mention, HTLC is a time-bound between cryptocurrency transaction parties and it uses cryptography hash functions through which verification between the parties could be done. Using a cryptographic hash function, both parties need to acknowledge the receipts of funds within a specified timeframe. Within the timeframe one of the transaction party has to confirm the transactions, if it doesn’t happen then the transaction will be voided and funds will not be exchanged and so it basically removes the counterparty risks.
Few popular atomic swaps so far:
There are few successful atomic swaps has happened, One is Decred and litecoin atomic swaps happened in 2017 and after that many successful atomic swaps has happened so far.
Requirments for using atomic swaps:
1. Both blockchains need to have the same type of hashing algorithm. The type of hashing algorithm can vary between blockchains, but some share the same, such as Bitcoin and Litecoin.
2. Both blockchains need to have time locked contracts. This is a common security feature to prevent double spending.
3. Specialised programming functions.
What problems can be solved through Atomic Swap:
Atomic swaps solve few existing problems in the crypto sphere and that is why it is being considered an important thing in the crypto world. It has great potential to solve some key problem. There are a few mentions, check it out-
Atomic swapping removes the number of steps involved for complete exchange transactions. Centralized exchanges need upward of 50 confirmations for a transaction to be done for trading, also catastrophic server failure can happen or events causing delays and error, lost transactions etc. With atomic swap, instant wallet to wallet trading is possible by removing any third party interaction and thus it saves you with all the process as well and transaction speed obviously would be better.
Atomic swaps also solve the fear of losing your funds by using third-party exchanges or any exchange for which you don’t hold the private key. There are so many security issues involved in these exchanges, last few years we have seen a number of hacks have happened. With atomic swaps, you need not be dependent on any third party for your trading purpose.
Exchanges charge the fee for trading this fee can be upwards of 10% and often the exchange will not adjust the fee as the market price drives up and also setting exchange trading fee of exchanges is quite unpredictable sometimes. By using atomic swaps, there is no need of paying a fee to these exchanges.
With centralization, regulations also come into the picture. By the time, We have seen centralized exchanges has been targeted consistently and also affecting every people involve traders, developers, investors. Atomic swaps strengthen “the people’s money” nature by focusing the peer to peer transaction with no third party involved.
In the crypto world, it will be very immature to anticipate till how extent it is going to affect the market yet because it is still in nascent phase. But surely through atomic swaps, cryptocurrency world will be broader and even more global because it solves the existing exchange problem and by giving equal authority for transactional parties and emphasizing the decentralization, it prevents a single point of failure still crypto space is very young and still need to figure out several aspects. Overall Future of these technologies look bright and constant innovation only shows the way we trade now is going to be the past thing in coming 5- 10 years.