The concept of Atomic Swaps was introduced to eliminate any third party exchange platform for cryptocurrencies. The aim is to enable people to trade in crypto with each other via the wallet-to-wallet procedure. As per the expert view, it can completely change the way people transfer money in the world of cryptocurrencies.
The Shortcomings Of Centralized Crypto Exchanges
Let’s take up a scenario where A has Bitcoin which he wants to sell for ETH. Likewise, a B has an ETH which he wants to exchange for Bitcoin. In such a case A and B will have to buy their crypto and get new ones with the help of a centralized exchange. However, such a transaction does have its vulnerabilities.
- The first problem with centralized crypto exchanges is that they come to the risk of getting hacked.
- Centralized exchanges have been accused of mismanagement multiple times leading to fraud and hacking incidents as well.
- Exchanges face difficulty when faced with a sudden rise in demand for crypto.
- Centralized exchanges are registered in specific countries making them a fall under government regulation.
What are Atomic Swaps and how can they help?
An atomic swap is the process of peer-to-peer exchange of cryptocurrencies between parties without the involvement of a third party centralized crypto exchange. It enables the exchange of being executed with different native coins between separate blockchains. Or else it can also be executed through off-chain channels of the main blockchain. The first successful implementation of atomic swaps happened in 2017 and the ones involved were Litecoin and Decreed.
Atomic swaps take place with the use of Hashed Timelock Contracts or HTLCs, a unique variety of off-chain state channels that enables payment in two-way communication between the parties. It allows them to conduct interactions on and off the blockchain. With no dependability on a third party exchange, this process minimizes the transaction time. The payments are validated by the submission of cryptographic proofs. The basic idea is to make use of a multi-signature transaction system that will hold the parties involved accountable for the swap of crypto to be a success.
Atomic swaps like many things in the crypto world is still a work in progress. Apart from a few vulnerabilities experts believe that it can revolutionize the way people exchange crypto in the days to come.