What exactly is a nuclear swap?
An atomic swap is the process of exchanging digital currencies that are stored on distinct blockchains. The transaction takes place directly between the two parties without the participation of any other party. It is proposed that centralized intermediaries, such as regulated exchanges, be done away with to give token owners full power.
The phrase “atomic state” comes from the concept that a state cannot have any substates; an event either takes place or does not, and there is no third possible outcome. This concept is where the name “atomic” comes from. This relates to the transaction’s status involving the cryptocurrency; either it takes place or it does not.
The majority of blockchains and wallets that support atomic swaps make use of smart contracts. Blockchains include computer programs known as smart contracts, which are triggered to run when specific criteria are satisfied. In this particular scenario, one of the requirements is that both parties reach a consensus over the transaction by a predetermined deadline. When both parties use an intelligent contract throughout the transaction, there is no way for one of them to take Bitcoin from the other. Atomic swaps, or cross-chain atomic swaps, are another name for atomic swaps.
Acquiring Knowledge about Atomic Swaps
Each cryptocurrency is backed by its blockchain, which was developed only to acknowledge transactions involving that cryptocurrency’s tokens. To give one illustration, Bitcoin (BTC) and Ethereum (ETH) each have their blockchain. BTC and ETH cannot be readily exchanged without first being converted to a fiat currency and then purchasing the other; an alternative method is to convert between cryptocurrencies and exchanges many times to obtain the desired cryptocurrency. You can exchange tokens from several blockchains in a single transaction when you use atomic swaps.
Atomic swaps can be carried out on your behalf via decentralized exchanges. A decentralized exchange, also referred to as a DEX, is a trading platform that does not use any intermediaries and is not under the control of any centralized authority. You also have the option of selecting cross-chain swap providers, which require you to move your digital assets into another wallet before carrying out the exchange and then moving them back out again. In atomic swaps, each participant must encrypt their key to offer proof, and both participants must accept the encrypted key.
A Brief History of Nuclear Switches
Shortly after the appearance of other cryptocurrencies (not Bitcoin), the idea was formed. As a result of the development of altcoins, some owners of cryptocurrencies have developed an interest in transferring their holdings to other coins. This particular kind of token exchange made its debut for the very first time in September 2017, when an atomic swap was executed between Decred and Litecoin.
Since then, startups and decentralized exchanges have integrated swaps and made the same feature available to consumers. For instance, Lightning Labs, a business that processes transactions using Bitcoin’s lightning network, has used the technology to undertake off-chain swaps.
Additionally, specialized cryptocurrency wallets capable of cross-chain atomic swaps have been developed. For example, Equality has built a wallet that can swap not only Bitcoin and ETH but also other cryptocurrencies.
The Process of Atomic Swap
In an atomic swap, two owners of tokens come to an agreement that they will trade their tickets for a sum that they both agree upon. The computer program that manages the smart contract determines that both parties have consented to the transaction and then completes the exchange on their behalf. After the transaction is added to the blockchain and confirmed by the network nodes, a new block is created for other transactions.
It is not possible to cancel the transaction. If either party wants their tokens back, they must negotiate and agree upon a new transaction allowing them to be traded once more.
Hash Timelock Contracts (HTLC), which are used in atomic swaps, make it possible to automate the trading of tokens. HTLC is a time-bound smart contract between parties, and it entails the generation of one cryptographic hash on each end of the transaction. The name of the protocol indicates this.
A cryptographic hash function is an algorithm that translates data of varying lengths, such as the address of a person’s wallet and information about transactions. It alters the value so that it is represented as a hexadecimal integer of a predetermined length. The term “hash” refers to the number produced in most circumstances. HTLC mandates that both parties acknowledge cash receipts within a predetermined time. If one of the parties involved in the transaction does not confirm it within the allotted period, the entire transaction will be canceled, and the cash will be refunded. This removes the counterparty risk, which is the possibility that one party may accept the coins that are being supplied but will refuse the transfer of their currencies.
Let’s say, for illustration purposes, that Jane is interested in converting 1 BTC to an equivalent amount of Litecoins with John. She submits the transaction using a wallet capable of atomic swaps. During this procedure stage, a cryptographic hash function will produce a hex number to encrypt the transaction. At John’s end, the process is carried out once more.
By utilizing their encrypted numbers, Jane and John can unlock their separate funds. They have a certain amount of time in which to do this task; otherwise, the transfer will not take place. The deal is then carried out using the HTLC included within the blockchains.
Is there a high cost involved in an atomic swap?
The capacity of the mainstream to conduct atomic swaps is very new; nonetheless, at this time, they do not produce fees unless blockchain fees are also included.
What is the procedure for performing an atomic swap?
This is accomplished with the use of Bitcoin wallets and hash timelock contracts (HTLC), which ensure that the trade takes place only when both parties are in agreement. There are only a select few decentralized exchanges and atomic switch wallet providers that may be utilized in the context of a swap.
What exactly does the term “cross-chain atomic swaps” mean?
Exchanges of cryptocurrencies or trades conducted across cryptocurrencies that operate on distinct blockchains are referred to as cross-chain atomic swaps.
Conclusion
- When two parties want to trade tokens from separate blockchains, they will engage in what is known as an atomic swap. This is a type of cryptocurrency transaction.
- Atomic swaps are a valuable tool for exchanging one cryptocurrency for another if you only have access to a single coin.
- Because the procedure is still in the process of being developed and perfected, doing an atomic swap requires the use of specialized wallets or exchange services.
