Let’s continue this discussion of decentralized exchanges shall we?
So let’s take a step back and look at what it is that users of cryptocurrency ultimately want.
We want to have control of our coins
We want to make trades as fast as possible- I mean, who actually enjoys waiting to see if their trade went through?
We want to know that we won’t be robbed when we put our coins up for a trade.
Decentralized exchanges are a good start to achieving this ideal.
They kill two birds with one stone by allowing you to stay in control of your coins- this removes third party risk altogether- but their major downfall is low volumes which lead to very slow or uncertain trades.
Thankfully the cryptospace is full of innovative thinkers and awesome developers who come up with impressive ways to improve how value can be transferred.
Today let’s learn about Atomic Swaps.
Atomic swaps are transactions that allow you to quickly trade one type of coin or token for another with another individual without paying any fees to a third party.
Right now in my eyes, this is the epitome of how decentralized exchanges should be.
It is this distinction -that you can trade across blockchains instantly- that makes atomic swaps something that will change how we interact with each other via cryptocurrency in a very dramatic way.
How it works involves smart contractsand the lightning network. If you want to learn about what smart contracts are and how they work and/or what Lightning Network is, check out the links down below.
So basically atomic swaps occur thanks to smart contracts, they are called atomic because they either happen 100% or else all parties are refunded their original coins or tokens. Because of the use of smart contracts, these transactions incur zero fees from a third party, and as long as both parties meet the agreed upon conditions for the trade then it will be initiated.
That’s the beauty of smart contracts, they remove human error and manipulation.
You’ll know that your trade either was a success or else you get all of your coins returned. If you’re interested in learning more about this specific type of smart contract, take a look at HTLC, a hashed timelock contract.
Atomic swaps require different blockchains to interact with each other; this means for an atomic swap to happen, it requires that the coins being traded are both from blockchains that use the Lightning Network. The Lightning Network allows blockchains to have off chain transactions and with a little bit of tweaking, it will allow for any blockchain that utilizes it to become interoperable.
So right now you can conduct atomic swaps using Bitcoin, Litecoin, Zcash, Decred. The only trick right now is finding someone to make the trade with.
In the near future, even if a merchant only accepts bitcoin, you would be able to pay him using Zcash and it would instantly be converted to Bitcoin for him to receive.
This is the type of innovation that makes me all the more excited and motivated to keep diving down the rabbit hole that is crypto and blockchain tech.
Additional Reading/Sources:
Learn more about Smart Contracts
Learn more about Lightning Network
Hashed Timelock Contracts- HTLC
The Merkle Article on Atomic Swaps
Medium Article on Atomic Swaps
Coindesk Article on Atomic Swaps
ZEC Devs demonstrate Atomic Swap with BTC
Zerohedge Article on Atomic Swaps and Decentralized Exchanges
Decred Adds Atomic Swap Option
Lightning Network and Atomic Swaps
BlockGeeks Explains Smart Contracts