Atomic swaps, or atomic cross-chain trading, is the exchange of one cryptocurrency to another cryptocurrency without the need to trust a third-party or a centralized exchange. Rather, users can be able to exchange with themselves peer to peer via this cross blockchain functionality. Here are the basics on how it works:

We have two parties namely user A and user B who wants to trade with each other. User A has around 20 ETH and user B has 1 BTC. They decide to trade peer to peer via an atomic swap.

One of the key components that make atomic swaps work are HTLCs or Hash Time-locked Contracts. This ensures that both user A and B both act in accordance with the trade. It will require the recipient — user B to acknowledge receiving payment prior to a deadline by generating a cryptographic proof. Failure to comply on this within the specified time deadline on the HTLC and the recipient will risk losing the right to claim the payment therefore returning funds back to sender user A.

Atomic swaps generally operate like barter on the real world but with the addition of an overseer in the form of a smart contract code. This ensures that the swap happens in a correct and timely fashion. Like a double edged sword, Atomic swaps in its current state is not yet perfect and is prone to drawbacks as well. Here we discuss some of them:

Disadvantages of Atomic Swaps

1. Not yet fully developed

There are only a few cryptocurrencies available for atomic swaps and most of which are paired with Bitcoin or Litecoin (which is a fork of the Bitcoin blockchain). The whole atomic swap ecosystem is not yet fully developed and most likely would still require pegging with Bitcoin. For example, we have coin A and coin B. At this point in time there is most likely no direct swap available between coin A and coin B which means that coin A has to be swapped into Bitcoin first then the same amount of Bitcoin needs to be swapped into coin B.

2. Not user friendly

In its current form, atomic swaps require high level knowledge of programming and blockchain protocols. The lack of proper GUI is a big disadvantage as not anyone can access it which means less adoption.

3. Not rigorously tested

Several things can happen in between an Atomic swap. The sender and receiver addresses can be compromised via attacks. There are still exploits that may come up once atomic swaps reach mainstream adoption and the only way to discover these is to rigorously test the protocol and to look into several angles. Sadly this is one of the drawbacks of most new technology.

Overall, these disadvantages are only a minor hurdle compared to the multitude of benefits. Here are its two biggest advantages:

Advantages of Atomic Swaps

1. Plays an important role in decentralized P2P exchange

Atomic swaps are the boon of decentralized trade. Current decentralized exchanges (DEX) only operate within a single blockchain. DEXs like Etherdelta and IDEX only operate within the Ethereum blockchain and they can only trade Ethereum tokens. With atomic swap functionality, we will be seeing interoperability and peer to peer trade capability between several blockchains.

2. You can be able to set-up a payment structure

A decentralized exchange wanting to implement atomic swap functionality and make it easy to use for the public can setup a fee structure on top of the swap protocol as a means of cost for providing the service. Not everyone can be able to understand the intricacies of coding and high level programming involved in doing an atomic swap and most rely on an easy GUI interface. Decentralized exchanges can fill in that need by only providing an interface or platform with a fee structure and not meddling with the privacy aspect of the trade itself.

Most exchanges right now are choosing and going either the centralized path or the decentralized path. Blockchain.io, an upcoming exchange based on Paris, France will feature the best of both worlds having centralized orderbooks with decentralized settlement option available on 2019. The settlement will capitalize on the use of atomic swaps starting with BTC pairs with other alts. This technique also indirectly helps with giving more liquidity to the overall crypto market as big orders can be processed easily via decentralized peer to peer trade without affecting the market prices. With these taken into account, Blockchain.io’s novel idea may very well be the catalyst that will boost it to reach its year 2020 goals.