What is an Atomic Swap?
An Atomic Swap is a smart contract technology that enables one cryptocurrency being exchanged for another, without the need of a centralized intermediary such as an exchange.
An Atomic Swap happens between intermediaries in a trustless manner without depending on a third party with no default risk on either side. In other words, no party can run off with the money before the trade is complete thanks to the cryptographically powered smart contracts of atomic swaps.
The Idea of Atomic Swaps
Atomic Swaps were first suggested way back in May 2013 on the BitcoinTalk forum, by a community member called TierNolan. At that time there was no need for atomic swaps. Fast forward to September 2017, an exchange between Decred and Litecoin using Atomic swaps occurred. Two months later Charlie Lee, founder of Litecoin confirmed a successful swap between Bitcoin and Litecoin on the Bitcoin testnet.
Are Atomic Swaps the Future?
Atomic Swaps play an important role in the future as it will help institutional investors carry out larger exchanges. Take for instance an investor wants to exchange 10,000 Bitcoin (BTC) to Litecoin (LTC). The institution would feel more secure carrying out the transaction through an Atomic Swap than a centralized exchange as they will not risk losing the 10,000 BTC due to the cryptographical smart contracts involved.
The exchange as above will take place on-chain. An on-chain atomic swap can be defined as a cryptocurrency transaction that occurs on the blockchain and is dependent on the blockchain for validity.
On-chain atomic swaps, however, have certain limitations. For example:
- Both currencies being exchanged need to have the same hash algorithm
- Both currencies should support lock contracts
- Specific Programming Skills are Required to Conduct Atomic Swaps
Hence off-chain atomic swaps are currently being developed so that atomic swaps become more mainstream and overcome the challenges faced by on-chain atomic swaps.
In conclusion, decentralized exchanges should make use of atomic swaps to make cryptocurrency exchanges instant, fee-less and trustless. One prime example is Komodo Platform’s BarterDex which is an advanced decentralized exchange using atomic swaps.