The term “Atomic Swap” is getting used a lot in cryptocurrency circles. Find out what atomic swaps are today.
What Are Atomic Swaps?
Atomic Swaps are a type of cryptocurrency trading technology that could vastly improve the overall usefulness of cryptocurrency.
Atomic swaps have become increasingly important throughout 2017. As TheMerkle explained in their recent overview,
“Atomic swaps will change cryptocurrency forever.”
Atomic swaps are scheduled to be introduced by the Lightning Network, a proposed improvement to the bitcoin network.
As altcoins have become more popular, it has become increasingly evident that we need a better way to transfer value between currencies. Right now, the only way to do that is through centralized services – like exchanges.
Fortunately for the crypto community, technology may have a better solution than centralized exchanges. If atomic swaps are successfully implemented into bitcoin and altcoins, then exchanges could become a thing of the past.
How Do Atomic Swaps Work?
Atomic swaps, also known as atomic cross-chain trades, were first proposed all the way back in 2013. With the upcoming proposed Lightning Network upgrade, it seems that bitcoin will finally, after 4 or 5 years, gain atomic swap functionality.
An atomic swap works in a similar way to how you send funds to other cryptocurrency users. Whether you’re sending money or doing an atomic swap, you’re transferring digital currencies between accounts.
However, there are some major differences with atomic swaps. Specifically, users can cross-trade different cryptocurrencies without relying on centralized parties. If user A has bitcoin, and user B wants Ethereum, for example, then they can agree to a fixed trading price and complete the transaction immediately.
How Does Trust Work with Atomic Swaps?
Obviously, when you’re performing a transaction with another party, you naturally need to trust that other party. How do you know the party will send bitcoin to you after you send Ethereum?
That’s where atomic swap technology gets innovative: every atomic swap uses a hashed time-locked contract to facilitate a trusted transaction. Hashed time-locked contracts are part of the scripting language used for most major cryptocurrencies in existence today.
With these types of contracts, both parties submit their individual transaction to the appropriate blockchain. User A sends bitcoin on the bitcoin blockchain, and user B sends ETC on the Ethereum Classic blockchain. The recipient can only claim this transaction by revealing a secret number.
The end result is that both transactions are linked to each other – even though the transactions were conducted on two separate blockchains.
Which Cryptocurrencies and Blockchains Will Support Atomic Swaps?
Theoretically, any altcoin forked from bitcoin’s codebase is capable of implementing the Lightning Network.
That’s why Litecoin may be one of the first altcoins to support the Lightning Network. Once the Lightning Network has been integrated on bitcoin and at least one other altcoin, atomic swaps can begin.
Atomic swaps are still possible on other blockchains unrelated to the bitcoin codebase. However, they’ll require extensive scripting capabilities to make atomic swaps possible.
With some cryptocurrencies, including Monero, it seems unlikely that atomic swap technology could ever be implemented.
Cryptocurrency Exchanges Could Be a Thing of the Past
Full support for atomic swaps across the cryptocurrency community may be years away. However, once atomic swaps become acceptable across currencies, it could make exchanges a thing of the past.
At this point, users would be able to open payment channels on two different blockchains and create something like a transaction processor.
Users could also swap different currencies – even ones they don’t own themselves – as long as they have a payment channel to someone who does own that particular cryptocurrencies.
What Happens if the Price Changes During the Transaction?
When you’re exchanging two different currencies with one another, there’s always the possibility that the price could shift halfway between the transaction. This could cause an unbalanced transaction, where someone spends too much bitcoin for too little Ethereum.
Atomic swaps don’t prevent this. However, the exchange is locked in at the time the contract is signed. Both parties agree on this price prior to the contract being signed. Any price changes that occur during the transaction are irrelevant.
Litecoin Has Already Performed an Atomic Swap
Litecoin’s creator Charlie Lee is a big fan of atomic swaps. Atomic swaps may sound futuristic. However, Lee, the Litecoin team, and the Decred team have already launched a cross-chain atomic swap on the Litecoin network.
For this atomic swap, the Decred developers created a smart contract using SCRIPT. SCRIPT, which is also the smart contract language for BTC, could also be used for atomic swaps between Decred, Litecoin, and BTC, or any combination thereof.
Coins like Bitcoin Cash (BCH) and Vertcoin (VTC) also have similar SCRIPT capabilities – so these coins could become the first that offer extensive atomic swap functionality.
Atomic Swap Conclusion
Atomic swaps could change the future of bitcoin and altcoins. They could lead to a future without no cryptocurrency exchanges required. It could help us embrace the true benefits of digital currencies without moving towards centralized infrastructure.
For all of these changes to occur, however, some major technological innovations need to take place. Stay tuned for more information about atomic swaps and the Lightning Network as the upgrade gets closer to launch.