Atomic Swap! Learn the definition of cryptocurrency trading mechanism and more here
The word “atomic” describes processes that would either end or not even begin. Tokens from two separate blockchains may be traded between two parties via atomic swaps and automated exchange contracts. This technique, also known as atomic cross-chain trading, eliminates the requirement for centralized third-party organizations when carrying out deals. In a sense, this approach protects the liberty of cryptocurrency users while enabling trustless transactions that do not require the users to know one another and are free from counterparty concerns. In other words, an atomic swap has features that ensure both parties to a transaction satisfy all requirements before the transaction can be finalized. Smart contracts, which are self-initiating programs that enforce the rules controlling the completion of a transaction, are used to make this happen.
A Hashed Timelock Contract (HTLC), which serves as a two-way virtual safe, is used specifically in atomic swaps. As its name suggests, this contract uses a complex mathematical-based encryption technique known as a hash function. Additionally, it adds a deadline, meaning that transactions are annulled when one or both parties fail to keep their end of the contract within the allotted period. You must also know the HTLC’s requirement for two cryptographic or encrypted keys. As follows:
Trades are only concluded when both parties give cryptographic evidence (more on this later) that they have fulfilled their obligations under the transaction, thanks to the hashlock key.
The timelock key is intended as a safety feature to assist traders in establishing a deadline for atomic swaps. When the swap isn’t finished for one reason or another before the deadline passes, the system makes sure that traders get their money back.
Atomic swap is a crucial blockchain technique since it eliminates the necessity for mediators like cryptocurrency exchanges. This allows for the execution of cross-chain deals without the need for centralized trading platforms’ infrastructures. By removing intermediaries, atomic swap transactions are quicker, more inexpensive, and free of the security risks of custodial-based exchanges. All of these advantages hint at the autonomy that the atomic switch offers. In other words, since all trades are carried out directly from users’ wallets, individuals have more control over their assets. Atomic swaps’ cross-chain trade methods also support a more interoperable crypto environment. Transactions across various blockchains are getting simpler because of atomic swaps. Lastly, as deals are completed or never happen, atomic swaps reduce counterparty risk.
Two token owners agree to trade their tokens for any agreed-upon sum in an atomic swap. The smart contract computer exchanges them after determining that they both concurred. A new block is opened for the next transaction when the transaction has been added to the blockchain and verified by the network nodes. There is no going back on the deal. A new exchange transaction involving both parties is required if any party wants the tokens around. Atomic swaps automate the transfer of tokens using hash timelock contracts (HTLC). HTLC is a time-bound smart contract between two parties that uses one cryptographic hash generated on each end, as the name suggests.
HTLC stipulates a deadline by which both parties must confirm receiving payments. The entire transaction is canceled, and the money is refunded if one party doesn’t guarantee the transaction within the allotted period. The chance that one party will accept the provided coins but reject the transfer of their coins is thus eliminated.
