Atomic Swaps

By Juan Molina | Juan Molina | 6 May 2020

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Why if we have earned our crypto in a decentralized way, then we must resort to centralized instances to be able to exchange or commercialize them?

We cannot discuss the benefits of exchanges. We will all have to use them sometime, but obviously it will always cause distrust to place our assets in the hands of a third party.

In the past there have been many regrettable cases of scam, theft, hacking, and mislaying of funds related to centralized exchanges.

So there should be an alternative that allows decentralized crypto exchange securely, directly and without trust.

Atomic Swap

The atomic Swap is an exchange between peers, where both parties always have control of their assets and their private keys, which excludes the participation of third parties in any instance of the process.

The swap is done through the implementation of a special smart electronic contract called Hashed Timelock Contracts (HTLC) which are executed between different blockchains with different native currencies or through channels outside the chain such as forks. of the main chains.

As its name implies, HTLC is a smart contract with a set time limit, which involves the generation of a hash encryption function, whereby both parties acknowledge receipt of the funds. If one of the involved parties does not confirm the transaction within the deadline, the entire transaction is canceled and no funds are exchanged.

The idea is to use a multi-signature transaction system that holds both operators accountable for a successful exchange.

Disadvantages of Centralized Exchanges

Registration requirements, know your customer (KYC)
Deposit times
Deposit fees
Withdrawal fees
Withdrawal times.
Withdrawal limits.
Server downtime and maintenance periods.
Worst of all: swap hacks.

Another negative aspect of centralized exchanges is that you must always make a first transaction in an exchange currency, and then obtain the desired cryptocurrency.
For example, if a Binance user wants to exchange BAT for STEEM, they will first have to convert their BAT to BTC and then buy the STEEM.

Furthermore, users do not have control of the keys of their specific wallets. They only have control of access to their personal session within the exchange.

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Advantages of the Atomic Swap.

Since there is no need for third party intervention in the process, atomic swaps allow for a more transparent and personal form of exchanges.

Security levels are increased at all stages of the process since user funds always remain in their personal wallets and they have control of access codes at all times, neutralizing any possibility of theft.

They allow interoperability between different cryptocurrencies regardless of whether they belong to the same blockchain or not.

@juanmolina

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