Clear DefinitionsAtomic Swap
1 min read
Pronunciation
[uh-tom-ik swop]
Analogy
An atomic swap is like two people exchanging items inside a special room with a timer. Both must place their items in the room and confirm receipt within a set time, or both items automatically return to their original owners. No one can take the other's item without giving their own.
Definition
A peer-to-peer exchange of cryptocurrencies from different blockchains without using intermediaries or centralized exchanges. Atomic swaps use smart contracts and hash time-locked contracts (HTLCs) to ensure either both parties receive their exchanged assets or the transaction fails completely.
Key Points Intro
Atomic swaps enable trustless cross-chain trading without centralized parties.
Key Points
Eliminates counterparty risk through cryptographic guarantees.
Requires both blockchains to support similar cryptographic hash functions.
Executes as an all-or-nothing transaction—either completes fully or cancels entirely.
Enables direct wallet-to-wallet exchanges across different blockchain networks.
Example
Alice wants to trade Bitcoin for Litecoin with Bob without using an exchange. They initiate an atomic swap where Alice's Bitcoin is locked in a contract that Bob can claim only by revealing a secret code, which, when used, automatically reveals the same code to Alice, allowing her to claim Bob's Litecoin.
Technical Deep Dive
Atomic swaps typically implement Hash Time-Locked Contracts (HTLCs) on both blockchains. The process begins when Initiator creates a secret and generates its hash. This hash is used in a contract on Chain A that locks funds until either the secret is revealed or a timeout occurs. Counterparty then creates a similar contract on Chain B using the same hash. When Counterparty claims funds on Chain A by revealing the secret, that same secret is exposed and can be used by Initiator to claim funds on Chain B. The 'atomic' property comes from the cryptographic guarantee that either both transfers succeed or both fail. Key requirements include compatible hashing algorithms between chains, timelock functionality, and script flexibility.
Security Warning
When performing atomic swaps, ensure timeout periods are set appropriately—the first timeout (for the counterparty) must be significantly longer than the second (for the initiator) to prevent scenarios where funds could be locked on one chain after being released on another.
Caveat
While atomic swaps eliminate counterparty risk, they face practical limitations including complexity, slower execution compared to centralized exchanges, limited trading pair support, and potentially higher on-chain fees due to the multiple transactions required.
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