The phrase “atomic state” refers to a state with no substates. This is the fundamental thing to know when understanding atomic swaps.

An atomic swap is an exchange of coins from distinct blockchains. The objective is to remove centralized intermediaries like exchanges and simplify the processes needed to transfer tokens. Many exchanges and businesses have devised swap solutions to make the process easier.

History of atomic swaps

Atomic swaps, sometimes termed cross-chain atomic swaps, were postulated in 2013 but achieved reality post-2017. In July 2012, Sergio Demián Lerner, a developer, released the earliest prototype of a trustless exchange protocol. However, Tier Nolan, who is widely regarded as the pioneer creator of atomic swaps due to his comprehensive description of the technique, gave a detailed working paper in 2013.  In 2017, the concept received its first actualization when Charlie Lee, inventor of Litecoin, tweeted the historic moment of the completion of the first successful atomic exchange. He completed a cross-chain atomic swap involving LTC/BTC, where he traded Litecoin (LTC) for BTC.

Ever since this milestone, several DEXs and swaps have been leveraging this technology to offer new bitcoin trading solutions. Popular DEXs and networks that provide atomic swap trading include AtomicDEX, the Lightning Network, Liquality, and others.

Atomic Swap: Step-by-Step Process

An atomic swap requires both parties to agree on the exchange rate and trade quantities. Once these details are agreed upon, the procedure proceeds in the following steps:

• The first party, let’s say Moradeke, starts the process by generating a contract. A contract is an effective software that describes the details of the transaction, such as the amount of bitcoin to be transferred and a unique cryptographic hash value.
• Moradeke then secures her cash under this contract. She is the only one who can unlock the funds using her private key, but she also sets a deadline for the transaction to be completed.
• Moradeke provides the contract address to the second party which is in this case, Ige. Ige confirms the contract address and the locked money.
• Ige then writes a similar contract on his blockchain, with the same hash value as Moradeke’s. Ige has locked up his cash in this contract.
• Moradeke can now unlock Ige’s funds with her private key, confirming the swap. When Ige notices that his funds have been withdrawn, he can unlock Moradeke’s contract and retrieve the cryptocurrency.
• If either party fails to unlock the funds within the time limit, the trade is automatically canceled, and the funds are returned to their original owners.

The Difference Between Traditional Transactions and Atomic Swaps.

A blockchain transaction transfers asset ownership from one wallet to another. It is unidirectional, with a sender and a recipient, and it is trustless because no intermediaries or counterparties are required.

A blockchain transaction doesn’t require an exchange. It is specifically designed not to necessitate an exchange. However, moving value between two distinct blockchains complicates things. One solution to this issue is to use an exchange as a third party in the transaction.

While this works, it undermines the blockchain’s intended purpose. A cross-blockchain transaction with an exchange necessitates the presence of third parties rather than their removal.

Atomic swaps allow a cross-chain transfer without third-party participation. Rather than a traditional ‘transaction,’ it’s a ‘swap’ since independent standalone transactions are formulaically bound together and based on each other’s successful completion. This matches more cogently with the trustless nature of blockchain.

Advantages of Atomic Swaps

• Reduce counterparty risks: The use of cryptographic algorithms guarantees that payments are only exchanged when both parties satisfy the stipulated requirements, lowering the risk of fraud.
• Deeper liquidity: Making assets tradeable across various blockchain networks makes those assets more liquid.
• Simplicity: Users can easily get crypto assets directly without needing to first switch to a highly liquid stablecoin and perform many transactions. Users may trade whatever coin they desire in a decentralized setting.
• Guaranteed outcome: Traders have assurances that their transaction will execute as promised or they will receive their monies back.
• Lower costs: By eliminating intermediaries, atomic swaps make trading more inexpensive for users.

Disadvantages and Considerations

Despite their advantages, atomic swaps do not come without their own disadvantages as well. These include:

• Complexity: Atomic swap implementation can be technically challenging, necessitating a thorough grasp of HTLCs, smart contracts, and blockchain protocols.
• Limited Adoption: While atomic swaps are becoming more popular, their adoption is still in its early stages, and not all blockchains support them.
• Scalability: As the number of transactions grows, scalability difficulties may emerge, needing more technological advances.

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