Why Atomic Swaps Are Important

Over the past year or so Atomic Swaps has emerged as the trending topic of choice for crypto enthusiasts. Atomic Swaps will be an potential game changer in 2018 and the years to come.

In this brief analysis of Atomic Swaps, we will discuss the following:

• What are Atomic Swaps?
• Why do they matter?
• Advantages
• Challenges 

What are Atomic Swaps?

An Atomic Swap allows you to exchange one crypto/altcoin for another from your wallet without a third-party intermediary (like an exchange). In other words, instant settlement trading from one blockchain to another blockchain.

It’s worth noting that this feature of instant settlement, is made available from the folks at Lightning Labs creators of the Lightning Network protocol.

According to Elizabeth Stark, co-founder of Lightning Labs, the Lightning Protocol functions as a “checking” account with instant settlements, while cryptocurrency/bitcoin on the blockchain would act as a “savings” account. The two will be connected via the Lightning Protocol. Crypto on the blockchain could be transferred to lightning for day-to-day trading/expenses, where transactions and settlements will be seamless and automatic.

The Lightning Network protocol scales Bitcoin and other blockchains such as Litecoin, Decred, VertCoin, MonaCoin, Syscoin, Digibyte, Groestlcoin, and Viacoin.

In order to perform an atomic swap between 2 cryptocurrencies, there are several prerequisites. Both chains must support:

• Branched transaction scripts
• Identical hash algorithm in both chains’ transaction script
• Signature checks in transaction scripts
• CheckLockTimeVerify or CheckSequenceVerify (“CLTV” and “CSV” for short) in transaction scripts

Why Do Atomic Swaps Matter?

Prior to Atomic Swaps, you were required to use a third -party middlemen to conduct trades.

Fast forward to today, and with the advent of atomic swaps conducted between Bitcoin and LiteCoin, Litecoin & Decred, and Litecoin & Vertcoin, you can now implement a trustless exchange between two parties without a third party such as an exchange.

According to Andreas Antonopoulos, author and speaker on Bitcoin and cryptocurrencies, the main benefit of Atomic Swaps is the ability to couple two inherently separate blockchains together and creating an exchange of value whereby both parties are ensured and protected from fraud and or malicious intent to cheat.

In other words, a transaction utilizing Atomic Swaps will either take place successfully where both parties are satisfied, or not at all. The benefit of Atomic Swaps is that transactions become completely and fully automated as the currency morphs itself into another currency instantly, fluidly and liquidly.

Atomic Swaps - Advantages

We covered some of the advantages above but let’s quickly recap:

• ​Instant transactions - Wait time for confirmation and transactions to clear have been reduced
• Lower Costs - switching costs are near zero
• Security - Ability to retain your private key as opposed to keeping your private key on an exchange
• True P2P - Atomic swaps are true peer to peer exchange of value
• Transparency - A sort of “open” network - Trades are conducted in a manner the prevents one person with large amounts of market share from creating fake volumes.
  

Atomic Swaps - Transaction Fees & Privacy

Atomic swaps were created for large trade volumes that require low latency and high frequency. And as transactions depend on the blockchain, (for example an atomic swap between BTC and LTC) one might have to wait for the confirmations to be cleared one one side.  Thus, contributing to somewhat of a low latency response. Moreover, with the BTC to LTC atomic swap example, transaction fees could be inflated as well, as BTC tends to have higher transaction fees.

Another potential disadvantage to atomic swaps is in the area of privacy. As the hash value is shared during the atomic swap transaction(s), the transaction(s) can be easily traced.

Atomic Swaps that are conducted on-chain can have privacy issues that users need to be aware of. As each transaction is “swapped” a hash value is created, unfortunately that same hash value is used throughout the transaction lifecycle. Thus making it easy for someone from the outside to monitor the two blockchains as the coins get swapped from one to the other. Following the coins from one chain to the other can pose potential issues, however there is no specific identifying data on either side of the swap that can link the transaction to the actual user’s true identity.

Conclusion