Atomic Swap

An “Atomic Swap” refers to a cryptographic technique that enables the secure and trustless exchange of one cryptocurrency for another directly between two parties. The term “atomic” indicates that the swap is indivisible and occurs either entirely or not at all, ensuring that both parties either successfully exchange the specified assets or the trade is canceled with no partial transactions.

 

How It Works

 

Smart Contracts: Atomic Swaps often leverage smart contracts, self-executing contracts with the terms of the agreement directly written into code. These contracts facilitate the exchange process without requiring a trusted intermediary.

 

Hash Time Locked Contracts (HTLC): One common method for Atomic Swaps involves HTLCs. Each party involved in the swap creates a contract that includes a cryptographic hash and a time lock. The hash is a cryptographic puzzle, and the time lock sets a deadline for the completion of the swap.

 

Exchange Proposal: One party initiates the swap by proposing an exchange to the other party. This proposal includes the terms of the trade, the hash, and the time lock.

 

Verification: The second party acknowledges the proposal and provides their own contract details. Both parties verify each other’s contracts.

 

Reveal and Redemption: Each party reveals the preimage (solution) to the other party’s hash, unlocking the funds in the smart contract. If successful, the swap is completed, and both parties receive the agreed-upon amount of the other’s cryptocurrency.

 

Refund in Case of Issues: If either party fails to reveal the preimage within the specified time lock period, the funds are refunded to their original owners. This prevents the risk of one party not honoring the trade.

 

Atomic Swaps are particularly relevant in the context of decentralized exchanges and are considered a powerful tool for achieving interoperability between different blockchain networks. By allowing users to trade directly without relying on centralized exchanges, Atomic Swaps enhances security and privacy and eliminates counterparty risk. As the technology continues to evolve, Atomic Swaps contribute to the broader goal of creating a more decentralized and interconnected landscape for digital assets.