Update Your Crypto Knowledge About Atomic Swap

It is indeed to give Satoshi Nakamoto the credit for bringing up a new concept of digital currency by launching Bitcoin on 3rd January 2009. Cryptocurrency emerged as a new financial technology with promising features of 100% transparency and decentralized storage and crypto exchanges. If you regularly follow blockchain education news, then you must be having an idea about the current developments that are taking place in blockchain technology. These changes have positively influenced the exchange of cryptocurrencies with no need for centralized platforms for traders. There are decentralized exchanges that let users exchange crypto without a centralized platform. In terms of their private wallet safety, they rely on a special method of exchange, called atomic swap. So let us gather knowledge about an atomic swap. 

Understanding About An Atomic Swap

If you have a keen interest in knowing about crypto terminologies, then here is another popular crypto term called atomic swap, which you need to know. The atomic swap was launched in the year 2013 on the BitcoinTalk forums by Tier Nolan. The basic principles of the cross-chain cryptocurrency swaps were outlined by Tier through the easy use of cryptocurrency trading across various blockchains. The concept of atomic swaps gained the attention of the crypto community, when in September 2017, Charlie Lee, the Litecoin founder, declared the implementation of an atomic swap between Bitcoin and Litecoin over social media platform.

But what do we mean by the term ‘atomic swap’. Atomic swaps can be defined as the creation of self-enforcing and automated contracts involved in the execution of particular actions when the pre-planned rules are met with non-fee trading. 

Working Of An Atomic Swap

After getting a brief knowledge about an atomic swap, now know about its working. Gemini, Coinbase, or Binance are among the prominent centralized exchange platforms in the crypto world. Many investors and crypto traders cannot imagine exchanging cryptocurrencies without these exchange platforms. For cryptocurrency trading, these exchanges seem like gatekeepers. According to what is being said here, a special type of smart contract like HTCL (hash timelock contract) is being used. It can be understood as a digital lockbox that needs two specific keys:

A TimeLock Key: It is a protective tool where traded cryptocurrency is returned to traders, at the time when trading is incomplete during a particular time frame.

A HashLock Key: It is a mechanism where traded cryptocurrency is being distributed to traders after signing off respective transactions by all parties.

An important fact, which you must know about an Atomic swap is that it can only be opened when the HTCL address is created by the first party for cryptocurrency deposit. After this step, the creation of a secret password for cryptocurrency becomes very important. It is known as preimage which is hashed. The second party receives this hashed preimage, who proceeds for verification of the capital for the deposited cryptocurrency. 

The trade capital then gets deposited into a new address created with the same hash by the second trader. The trade capital deposited by the second party gets unlocked by the first party through a secret passcode, referred for an initial trade capital deposit. Then the vice versa happens means, the trade capital deposited by the first party is then unlocked by the second party. This indicates the processing of the atomic swap.

Importance Of An Atomic Swap

Currently, traders are being prompted by many centralized exchanges for transferring cryptocurrencies through wallet influenced by them. You can understand it as a hot wallet. But what does it mean? Note that the control of private keys for hot wallets is not done by the traders. Now this reveals another solid point about an atomic swap superseding over centralized exchange trades like:

Complete decentralization: When it comes to complete decentralization, atomic swaps truly abides by it. They allow the exchange of digital assets having no interference from third-party. In that way, there can be no counterparty problem.

Lessen risk for the investor: Atomic swaps prevents the risk of hacking by centralized exchanges. 

Fee-Free Trading: Another interesting fact about an atomic swap is about standard blockchain transaction fees. The trading method applied here is fee-free.

Demerit Of An Atomic Swap

The major demerit about an atomic swap is the limited trade. And this is all because of liquidity. This indicates the difficulty faced by the traders in communication and crypto exchanging without an exchange platform.

Conclusion

So this is all about an atomic swap. Now there is a common notion about the decentralized trading of cryptocurrency, but actually, it is not in various cases. With the evolution of decentralized exchanges driven by technology, users of cryptocurrency will make the best use of crypto trading via atomic swaps. By counting its advantages, atomic swaps fare well in terms of true decentralization. There is no interference with third-party. The other advantage is fee-free trading. However, it lacks in limited trade. And the reason behind this is the factor of liquidity. To know any more about the crypto updates, stay abreast of crypto educational news.