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What Are Atomic Swaps? Are They a Smart Contract?

An atomic swap is a smart contract technology that enables the transfer of one cryptocurrency for another without using intermediaries. Atomic swaps can take place directly between blockchains of different cryptocurrencies. Also, they can be conducted off-chain away from the main blockchain.

The first atomic swap occurred in September 2017 between Litecoin and Decred. Throughout the past few years, several decentralized exchanges have allowed users to participate in this new technology.

Pros and Cons of Using Atomic Swaps

Why does the crypto community prefer using atomic swaps? Because it’s generally faster than using an intermediary. Although cryptocurrencies have been in existence for over 10 years, the ecosystem still isn’t fully developed. For example, many exchanges still support only a few coins. Therefore, a trader might need to use several exchanges to complete one single desired conversion.

To remove counterparty risk from an atomic swap, both parties should know the receipt of funds within a specified period. If one of the parties fails to confirm the transaction, the entire transaction fails.

How Does it Work?

Let’s review an example. Mary wants to convert 10 Bitcoin to an equivalent amount of ETH with her friend, Jane. Mary submits her transaction to the Bitcoin blockchain. Additionally, she encrypts the transaction by generating a number for a cryptographic hash function. Jane repeats the same process at her end by submitting the transaction to the Ethereum blockchain. As you can see, the entire process was simple, quick, and 100% secure. This explains why people enjoy using atomic swaps.

Atomic swaps are another example of how the cryptocurrency community continues to unleash state-of-the-art financial products. The legacy financial system has been using centralized intermediaries since the brokerage industry was born with the signing of the Buttonwood Agreement on Wall Street in May 1792. Over the past three centuries, the industry has never made an effort to improve the underlying structure of brokers acting as intermediaries. The crypto community took the initiative to improve upon the system of centralized intermediaries by creating atomic swaps. They accomplished the task in less than 10 years.

Brief Summary of Atomic Swaps

  • An atomic swap is a smart contract technology that enables crypto transfers.
  • Atomic swaps don’t require the use of centralized intermediaries.
  • The swaps can be conducted on-chain or off-chain.
  • The first atomic swap occurred in September 2017.
  • Crypto traders prefer atomic swaps because they are less time-consuming.
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