Blockchain Future Series (5 part series — Part 1)
Centralized exchanges might soon be a thing of the past if decentralized exchange technologies like Atomic Swaps are anything to go by. Atomic swaps technology aims to allow users to make peer-to-peer transactions without the need of centralized exchanges.Document source
The need to eliminate centralized exchanges is important because of their vulnerability to seizures, hacks and unexpected shutdowns. Not forgetting the cost of services rendered by centralized exchanges. Now to understand Atomic Swaps the first question is…
What is Atomic Swaps?
Simply put, Atomic Swaps, which is also known as the Atomic cross-chain trading, is the direct trade of one cryptocurrency for another cryptocurrency without the need of a third party.
How do Atomic Swaps work?
Atomic Swaps utilize Hash Time-locked Contracts (HTLCs) to facilitate trade. Hashed Time-lock Contract is a smart contract that acts like a puzzle. It has a secret key that has to be provided, by a solver, before a certain time has elapsed. If the key is not provided then the reward goes back to the initiator of the contract.Document source
Therefore HTLCs require the recipient of a payment to generate a cryptographic proof of payment as a way of acknowledging receiving the payment before a set deadline. Therefore, if the recipient fails to acknowledge in time, the funds go back to the sender. The whole process is done automatically.
For example, there is Mike who owns 10 Bitcoins and wants to trade for 200 Litecoins. And there is Rose who has 200 Litecoins and wants to trade for 10 Bitcoins. Mike will have to submit his transaction on the Bitcoin blockchain. And Rose will submit her transaction on the Litecoin blockchain. Now if Mike wants to take the 200 Litecoins Rose sent, he will have to provide proof of payment, which is a number only known to him. The number acts as a key, which was used to generate a cryptographic hash. Rose will also have to provide the same key, so as to claim the 10 Bitcoins provided by Mike.Document source
Atomic Swaps Requirement
Now for cryptocurrency to successfully support Atomic Swaps, there are some fundamental requirements needed, which include the Lightning network. The lightning network allows payment channels to link together. Using the above example of Mike and Rose, for their transaction to take place they had to be linked through payment channels. And the Lightning network allows for such linkage.Document source
Also, a transaction between two different Blockchains will require both Blockchains to share a similar cryptographic hash function, like SHA-256. Both cryptos being traded will have to be compatible with time lock contracts. And certain computer programming knowledge is required for now, when using Atomic Swaps.
Note that the Atomic Swaps requirements are also the limitations of using Atomic Swaps. The requirements limit;
- The number of cryptos to benefit from the swaps
- The number of individuals and companies who can experiment on the swaps
But not to worry because these limitations are known in the crypto ecosystem, and sure enough, they are already solutions being worked on. For example, already there is the off-chain Atomic Swaps powered by Lightning network, which hopefully might solve the limitations mentioned above.Document source
Why use Atomic Swaps?
Well, because Atomic Swaps are the best alternative to traditionally centralized exchanges. They are;
1 Secure
Atomic Swaps eliminate the reliance of third-party exchanges, which are vulnerable to failures and are costly too. Such failures include hacking, for example, the EtherDelta hack which was a costly loss. There is also the sudden disappearance of exchanges with people’s funds, which might be due to hacking or technical issues or just deliberate. Either way, as long as users have no control over their funds, then it becomes a risky and costly venture. And Atomic Swaps aim to give total control of user funds back to the users.Document source
2 Cost-effective
And because Atomic Swaps eliminate third-party exchange reliance when it comes to transactions, the cost is reduced. Without third-party exchanges reliance, there are no fees to be accrued for services rendered. And users are able to save on cash that would have been spent on paying for centralized exchanges services.
3 Require no Regulations
Also, Atomic Swaps decentralized nature eliminates the need for regulations that always accompany centralized exchanges. Because no one person or authority is in control of the transactions, there are no regulations. That is the essence of cryptocurrency, decentralization, which leads to immutability, therefore no government interference through regulations.Document source
4 Fast
And finally, Atomic swaps introduce an efficient and fast way of trading through wallet-to-wallet. Users get to transact directly with each other without relying on third parties. Therefore a buyer is able to send tokens directly to a seller and get the exchanged tokens in time.
Where are we currently?
Atomic Swaps is already enjoying massive success. Especially considering that the creator of Litecoin, Charlie Lee, has successfully completed Atomic Swaps using Litecoin in exchange for Bitcoin. But the success of Atomic Swaps is constrained in that, for the Atomic Swaps to happen between two cryptocoins a user will be required to download the blockchains of either crypto coin.
The desire of the Atomic Swaps technology to conveniently allow average users to run decentralized exchanges is already becoming a reality. The Komodo team, using an Electrum server, has already successfully completed an Atomic Swap. What this means is that a user can now interact with crypto coins without the need to download a whole Blockchain. And it’s all thanks to Electrum server which makes the whole process possible.Document source
The Komodo team has also gone ahead to enable a feature that allows the code executing the komodo network to handle five or more swaps at once (per server performing the operation). Such capability exponentially increases their ability to handle a large customer base.Document source
The Future of Atomic Swaps
The future of Atomic Swaps looks bright. Considering the huge steps the Komodo team is taking to ensure that decentralized exchanges are accessible and easy to use even for the average user. There is also Blocknet, a team aiming to use atomic swaps to create the internet of blockchains. And Lykke, whose commission on trades is 0%.
The race of who has the best services is bound to lead to interesting user experience and user interface in the near future, which will enable easy use of decentralized exchange.
There is also bound to be decentralized exchanges that utilize the use of off-chain atomic swaps and on chain atomic swaps. Such decentralized exchanges will increase the usability of the platforms.Document source
Final word
Atomic Swaps would just be the technology that will disrupt the crypto world. With the advent of Atomic Swaps users do not have to rely on the third party to conduct exchanges any more. Users are able to transact directly, wallet-to-wallet, without the fear of the vulnerabilities of centralized exchanges.
Atomic swaps are ushering in a completely self-governing cryptosphere. Therefore individuals can anonymously trade without the fear of their privacy being interfered with. Now you can trade any cryptocoin for another that you want all thanks to Atomic Swap.Document source
And this is just the beginning of how much more the Blockchain technology can offer.
Note: This document with all the information in it is shared here to boost our knowledge of Trading and Exchange, the original document can be found here
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