What are Atomic Swaps And Why We Need Them?

by | Apr 20, 2023

Atomic swaps are a mechanism that enables the exchange of one cryptocurrency for another without the need for a centralized exchange. It allows for trustless, peer-to-peer trading between two parties, eliminating intermediaries and reducing the risk of fraud or hacking.

Atomic swaps work by using smart contracts, which ensure that both parties fulfill their end of the agreement before the exchange takes place. This technology is seen as a major step towards decentralizing the cryptocurrency ecosystem and making it more accessible to the masses.

How do they Work

To best explain the procedure for initiating atomic swaps, let’s assume Bob and Alice have agreed to execute a trade involving bitcoin and ethereum. Here, Bob has decided to trade 1 BTC in exchange for 50 ETH. The swap will be initiated by Bob, who will create a smart contract that locks his 1 BTC in a multisignature address. The multisignature address requires signatures from both Bob and Alice to release the funds.

Alice will then create a smart contract that locks her 50 ETH in a similar multisignature address. This multisignature address also requires signatures from both Alice and Bob to release the funds. Once both of these smart contracts are created, they will be broadcasted to their respective blockchains.

The next step is to reveal the secret key that will enable each party to claim the other’s cryptocurrency. Bob will create a secret key, and Alice will create a corresponding secret key. They will then exchange these secret keys off-chain. Once both parties have each other’s secret key, they can use it to claim the funds from the smart contract on the other blockchain.

The final step is to claim the funds. Bob will use Alice’s secret key to claim her 50 ETH, and Alice will use Bob’s secret key to claim his 1 BTC. If either party fails to claim the funds within a specified time frame, the smart contract will expire, and the funds will be returned to their original owners.

Why do we need Atomic Swaps?

When Satoshi unleashed Bitcoin upon the world, we envisaged monetary freedom, independance from the state and financial security in a way we had never had before. Bitcoin was freedom financialized.

But unfortunately, greed and incompetence are still a thing in this world of humans and where opportunity exists to loot the unsuspecting, loot they will!

Bitcoin and cryptocurrencies allow induviduals to take custody of their wealth. When you own Bitcoin properly, when you, and only you, hold that private key that was used to generate your bitcoin wallet, that bitcoin is yours, only yours. But of course, people had to buy Bitcoin from somewhere, and wait… ‘what about this new cryptocurrency that just came out, everyone says it’s going to the moon!’. Some people wanted to speculate in the markets, some people just don’t have the technical knowhow on how to take custody of their crypto assets and others are just to damn naive, ignorant or both to do so.

And so, billions upon billions of dollars worth of cryptocurrency are even still to this date, held by a third-party with no accountability.

Top Ten Crypto Heists

    1. Ronin Network (Axie Infinity) – $620 million stolen
    2. Poly Network – $610 million stolen
    3. Binance – $534 million stolen
    4. Coincheck – $547 million stolen
    5. Bitfinex – $473 million stolen
    6. MT Gox – $470 million stolen
    7. KuCoin – $281 million stolen
    8. Gate.io – $234 million stolen
    9. FTX – $415 million stolen
    10. Wormhole – $326 million stolen

When a centralized exchange holds your cryptocurrency, they effectively own your cryptocurrency. You hope they’ll return it to you, they promise to return it to you. But, whether they actually do return it to you is something unknowable. 

So, why am I telling you this? Well, Atomic Swaps end this major risk. There is no human third-party involved in the exchange of cryptocurrency with an atomic swap. 

Atomic swaps allow for seamless decentralized exchanges to operate in a totally Peer-2-Peer fashion. You want my Bitcoin, I want your Litecoin? This can all be done without having to rely on someone you don’t know, in an unknown juristiction taking custody of your funds in the process. Just two traders and a contract. And, as they say ‘Code is Law’.

 

Where can I make an Atomic Swap?

There is a lot of confusion about Atomic Swaps and Decentralized Exchanges. A DEX doesn’t necessarily use Atomic Swaps. For example, the Exodus Wallet and DEX service attached to it, doesn’t use a atomic swaps. Rather it relies on third-party services like Changely and Shapeshift to swap funds. So, there is a middle-man, in fact, there are often multiple middle-men with these types of swap services. Though it should be noted that Shapeshift are making their code public and open-source, as well as attempting to remove their centralized corporate structure and become fully decentralized and autonomous [source]

One example of where true Atomic Swaps exist is on the AtomicDEX wallet from Komodo. 

Available on most platforms, the AtomicDEX wallet allows you to swap over 500 cryptocurrencies across multiple blockchains. 

Smart Bridges – An Alternative to Atomic Swaps?

Cross-chain bridges enable the exchange of information, cryptocurrency, or NFTs from one blockchain network to another, allowing the flow of data and tokens across what would otherwise be siloed sets of data on different blockchains. 

These bridges provide a safe means for both chains to transfer assets and data, even if they have distinct protocols, rules, and governance structures. In summary, cross-chain bridges are essential in connecting different blockchain networks and enabling seamless transactions between them. A good summary on Bridges can be found here

A Smart-Bridge is basically all of the above, but smarter. A smart -bridge could fully automate the conversion of crypto assets at point of sale for example. Through carefully constructed contracts, any asset from any blockchain could be swapped for another asset or multiple assets, all from entirely different blockchains.

I think overtime we will see both atomic swaps and smart-bridges utilized together. In time, as more and more exchanges fail to protect their customers money, and, as the state become ever more vigilant in stealing peoples wealth, decentralized financial services will find their place in the world. 

Currently, many people are unaware of the significant impact that decentralized technologies can have. They may not realize the potential for these technologies to protect their freedom when it becomes necessary, and believe me, it will become necessary!

Until then, let us continue to build upon these technologies and educate as many people as we can about them.

If you want to learn more about cryptocurrency and decentralized technologies, why not book a one-on-one session with myself.

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