Atomic Swaps: All You Have to Know

One of the key challenges plaguing the crypto industry is cross-chain interoperability. This challenge arises from the diverse consensus mechanisms and system architectures that blockchain networks employ. But with atomic swaps, we might just have one more solution that addresses that problem.

The reason we call it one more solution is because exchanges have created several swap solutions to make the process easier. But the key difference with atomic swaps compared to those solutions is that you won’t need any exchange or centralized intermediary to make cross-chain swaps.

This guide will take you through all you need to know about atomic swaps, from how they work to the limitations they face.

Table of Contents Table of Contents

1. Addressing the Cost Problem with Atomic Swaps
2. Atomic Swaps to the Rescue: Ditching the Fees
3. The Swap Process
4. The Advantages of Atomic Swaps
5. The Limitations of Atomic Swaps
6. Conclusion
7. FAQs

Show Full Guide

Table of Contents

1. Addressing the Cost Problem with Atomic Swaps
2. Atomic Swaps to the Rescue: Ditching the Fees
3. The Swap Process
Show Full Guide
4. The Advantages of Atomic Swaps
5. The Limitations of Atomic Swaps
6. Conclusion
7. FAQs

Addressing the Cost Problem with Atomic Swaps

Like we mentioned earlier, crypto exchanges already have several cross-chain swap solutions. However, these solutions typically come with high costs, from the deposit fees to the exchange charges. Additionally, you may encounter waiting times, which can occur during the deposit, exchange, or withdrawal process.

Then you have to consider the centralized system and the need for KYC to access these cross-chain swap solutions. This requirement might be a deal-breaker if you prefer non-KYC crypto exchanges.

Depositing into these exchanges also forces you to relinquish control over your assets before the trade. That is unlike a P2P system, where you interact directly with the buyer.

The Swap Process

For an atomic swap to work, you have to agree with the other party to exchange tokens. Then, a smart contract will be programmed to lock your tokens and those of the other party. The redemption will come when both parties are satisfied with the locked tokens.

Let’s say you want to swap your BTC coins with ETH coins from trader A. A typical atomic swap process will go as follows:

• ➡️ You will bring your BTC coins.
• ➡️ Trader A will bring their ETH coins.
• ➡️ The smart contract will lock both cryptocurrencies in their respective blockchains.
• ➡️ Once you and trader A agree on the trade, the smart contract will redeem your BTC on the Bitcoin network for trader A and vice versa.

The hash timelock contracts (HTLC) allow atomic swaps to automate the token exchange. These contracts are time-bound between you and the other party. As such, you and the other party have to acknowledge receipt of funds within the specified timeframe.

If you or the other party fails to confirm the transaction within that timeframe, the contract will be void. And you will receive your cryptocurrencies, the same as the other party. 

This approach is similar to what you’ll get on a P2P exchange, but with the added advantage of counterparty risk elimination. This risk is where one party accepts the contract coins but declines to transfer their coins.

The Advantages of Atomic Swaps

A few notable reasons we would recommend this approach are as follows:

• You don’t have to give your details or relinquish control of your assets to a third-party exchange.
• Counterparty risk is eliminated, as both parties have to confirm the transaction before the smart contract releases the tokens.
• You still maintain full control over your private keys, especially if you use non-custodial wallets for your assets.
• Atomic swaps eliminate trading, withdrawal, deposit, and custody fees that are typical in centralized exchanges. The only costs you’ll have to worry about are the on-chain network transaction fees.
• You can trade cryptocurrencies on entirely different blockchain networks.
• The process is typically faster than going through centralized exchanges.

Conclusion

As of this writing, only a handful of platforms support atomic swaps. Still, they are superior to the more popular cross-chain bridges, which facilitate the transfer of wrapped assets across blockchains using minting/burning or locking/unlocking mechanisms.

The atomic swap technology will only get better with competition. But for now, you will likely have to stick with what centralized and decentralized exchanges provide.

FAQs