What Are Atomic Swaps? Our Guide to a Revolution in Decentralization

One of the major themes in the cryptocurrency ecosystem’s beginning decade has been the bottleneck pains of having to resort to a small array of centralized exchanges in the early, unregulated space in order to trade in cryptos.

Indeed, the burgeoning digital currencies community is still dealing with the ramifications brought on by the infamous Mt. Gox exchange collapse. Or, sooner still, the EtherDelta exchange was just compromised, bringing the fallibilities of traditional cryptocurrency exchanges to the fore once more.

Less dangerous but still incredibly frustrating, fees are another source of heartache for many investors in this early, blossoming arena. Every exchange takes their cut, of course, and some are worse than others. Binance is an explosively popular exchange right now, and rightfully so, but their withdrawal fees on smaller coins like ChainLink (LINK) and Request Network (REQ) are painful for many.

And beyond hacks and fees, regular exchanges are going through the growing pains of hyper growth right now. A major talking point in 2017 was how Coinbase seemingly crashed every time some explosive market movement began to take place, forcing its users to de facto watch from the sidelines.

That’s where atomic swaps come in. This revolutionary development can take the promise of decentralization to a whole different level, particular when it comes to exchanging different cryptocurrencies or tokens for one another.

So let’s dive in: we’ll walk you through why atomic swaps are so mind-bendingly promising

The Future Of Crypto Trading ?

The main problem in peer-to-peer (P2P) trades hitherto? The first sender in the transaction was at a pronounced disadvantage. Why? Because transactions are final and can’t be reversed or disputed on the blockchain. Once you press send, that’s it; you have to trust (or get burned) by the party on the other side of your transaction.

But atomic swaps are the way to facilitate P2P trades in a completely trustless way. And there’s no need for any kind of third-party, centralized infrastructure to make these swaps work. That’s why they’re the future of crypto trading.

An example of this is the upcoming Altcoin.io exchange which is aiming to launch as early as February of this year. It bills itself as “A truly decentralized cryptocurrency exchange. Powered by Atomic Swaps.”

How Atomic Swaps Work

Mathematics to the rescue, as math powers the solution that makes atomic swaps a reality.

In layman’s terms, the two transacting parties both make a respective “secret.”

This process relies on generating hash functions, i.e. random numbers, to make a hash of the users’ “secrets.” These hashes can’t be reversed, so they can’t be forged or anything like that. Through a multi-sig, these secrets are then used to make atomic swap transactions; they have to be revealed in order for the agreed upon cryptocurrencies to be swapped.

If both secrets are revealed, then the transactions with be coupled instantly on both of the relevant blockchains. If one of the parties fails to reveal their secret, then your funds will be safely dispersed back to you, making scams or mistakes impossible. Either the trade happens, or nothing happens at all.

The Main Advantages

Atomic swaps will be a dream come true for merchants and everyday crypto investors alike. That’s because these swaps can be an improving force in the space in so many different ways.

First off, “the future of crypto trading” will allow merchants to accept and transact in more cryptocurrencies than has ever been possible before. This will be a huge dynamic to watch in 2018 as more and more vendors begin making crypto payments a part of their business models going forward. Adoption, adoption, adoption, right?

Moreover, atomic swaps make the whole cryptocurrency ecosystem much more “currency agnostic.” These swaps will make it trivial to move between different cryptos, making it likely that users will eventually come to rely on dozens of different coins in the future. There will be no need to choose between one, or two, or three, when you can move between any you want at a moment’s notice.

And trustless and fee-less decentralized exchanges based on atomic swap technology will bring “friendliness” to the cryptocurrency space’s strong need for “user friendliness.” Instant, fee-less, and trustless? What’s not to like, enthusiasts are saying.

“Switching costs” is another major point to consider, with this being the economic cost to change to a competing system. Users will be able to save money by switching to atomic swaps, plain and simple. Especially over the long run. So, to this end, atomic swap exchanges could be explosively popular in the years ahead.

Atomic Swaps + Lightning Network = Major Potential

The Lightning Network (LN) is the second layer scaling solution for Bitcoin, and if pulled off according to plan, LN should be able to power millions and even billions of transactions per second: lightyears above the 7 transactions per second the Bitcoin network can pull off now.

So, if you combine the promise of atomic swaps with LN, the potential is huge. We can see it now: a multicurrency payment network, where you can send BTC into a Lightning channel and have Litecoins (LTC) come out the other end.

In this sense, LN and atomic swaps can be fantastic complements to each other.

Swaps Should Fade Into Background In Coming Years

The whole swapping process will be entirely frictionless in the years ahead. Wallets will likely take over, so that users never have to “see” what’s going on in the background: you just prime you swap, and voila! It’s done. To this end, atomic swaps could become more or less invisible; they may just be taken as a given one day.

This dynamic could be huge in maximizing cross-border payments and international commerce.

Indeed, when it comes to atomic swaps, the future is beyond bright. Financial transactions may never be the same again.

Decred to Litecoin The First Successful Swap

A major breakthrough occurred in September 2017, as the first successful atomic swap occurred between Decred and Litecoin. Per the Decred project’s Twitter announcement:

Just completed the first $DCR <> $LTC cross-chain atomic swap with @SatoshiLite. Huge shout-out for debugging with us! More info soon™… pic.twitter.com/o2viQm3LTR

— Decred (@decredproject) September 19, 2017

Litecoin creator Charlie Lee helped pull the test run off, and the swap went down without a hitch. He also announced plans to perform an Atomic swap with Vertcoin, another promising cryptocurrency.

I'm going to do an on-chain atomic swap of 1 LTC for 55 VTC with @jamesl22, lead dev of @Vertcoin. Will it work or will the it explode? ???? https://t.co/AC0CqKHDbZ

— Charlie Lee Ⓜ️????️ (@SatoshiLite) September 21, 2017

And this is surely just the beginning of a tsunami of swaps to come.

Bitcoin To Litecoin Swap Breakthrough

Just two months after the first atomic swap between Decred and Litecoin, the first successful swap between Bitcoin and Litecoin took place on the Bitcoin testnet.

There’s no word yet on when these swaps will be able to start taking place on the mainnet, but the progress being made looks promising for now.

Soon, people might think it strange that BTC was ever traded through “exchanges” in the first place.

The Limitations for Swaps

To be clear, you can’t just facilitate atomic swaps between any two blockchains. Three requisite characteristics have to be met by both of the blockchains involved, whatever they may be. These conditions are:

• A hash algorithm must be inherent to both of the participating cryptocurrencies
• Time lock contract capabilities must be inherent to both cryptos
• Specialized programming functionalities

For now, then, these three characteristics limit the amount of cryptos that can benefit from swaps. But it also limits the amount of individuals and companies that can experiment with swaps right now, in that the learning curve for the entire phenomenon is so great right now.

This dynamic won’t always be dominant. But there’s no question it’s in play for now. Yet it certainly won’t be enough to stop the steady march of progress.

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