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Atomic Swaps – What do they do?

November 7, 2017 By Reed K Leave a Comment

 

In 2013 a user on Bitcointalk.org had started a thread titled “Alt chains and atomic transfers”. Fast forward to 2017 and you have “Atomic Swaps”. The terminology sounds simple but it’s quite revolutionary in the Cryptocurrency space. It’s game changing because it will allow the exchange of Coins in different Cryptocurrencies without having a trusted 3rd party or centralized exchange such as Bittrex, Poloniex, etc. What Atomic Swaps do is remove the middlemen.

On October 7, 2017 Altcoin Exchange performed and Atomic Swap between Ethereum & Bitcoin Blockchains. As of now, there are few coins with Atomic Swaps built in. For example: Decred, Litecoin and Vertcoin, there is also word Verge will also incorporate Atomic Swap technology. On September 22nd, 2017 Charlie Lee (founder of Litecoin) performed an Atomic Swap (10 LTC for 0.1137 BTC). We can clearly see Atomic Swaps are still in the early stages of development but it’s going to change the way we trade digital currency forever.

Decentralized Exchanges

Given the fact that Centralized exchanges could be facing stricter regulations, we are seeing some ICO’s (Initial Coin Offerings) such as 0x Protocol & Kyber Network. Both of these projects raised significant amounts of Ether during their crowd sales and are currently in the development phase. Currently one of the most active Decentralized exchanges is Ether Delta. The UI could use some work, but it’s still a very popular resource for traders. It can be accessed using MetaMask, Hardware wallets like the Ledger or generating a Public/Private Key through the site itself. The process of Atomic Swaps is outlined below (credit to TierNolan of Bitcointalk.org):

A picks a random number x
 
 A creates TX1: "Pay w BTC to <B's public key> if (x for H(x) known and signed by B) or (signed by A & B)"
 
 A creates TX2: "Pay w BTC from TX1 to <A's public key>, locked 48 hours in the future, signed by A"
 
 A sends TX2 to B
 
 B signs TX2 and returns to A
 
 1) A submits TX1 to the network
 
 B creates TX3: "Pay v alt-coins to <A-public-key> if (x for H(x) known and signed by A) or (signed by A & B)"
 
 B creates TX4: "Pay v alt-coins from TX3 to <B's public key>, locked 24 hours in the future, signed by B"
 
 B sends TX4 to A
 
 A signs TX4 and sends back to B
 
 2) B submits TX3 to the network
 
 3) A spends TX3 giving x
 
 4) B spends TX1 using x
 
 This is atomic (with timeout).  If the process is halted, it can be reversed no matter when it is stopped.
 
 Before 1: Nothing public has been broadcast, so nothing happens
 Between 1 & 2: A can use refund transaction after 72 hours to get his money back
 Between 2 & 3: B can get refund after 24 hours.  A has 24 more hours to get his refund
 After 3: Transaction is completed by 2
 - A must spend his new coin within 24 hours or B can claim the refund and keep his coins
 - B must spend his new coin within 72 hours or A can claim the refund and keep his coins
 
 For safety, both should complete the process with lots of time until the deadlines.

Another Step in the Digital Money Revolution

I see Atomic Swaps as being an incredible addition to the Cryptocurrency movement. If you take a look at the list of exchanges that have been hacked since 2011 there have been around 26 breaches. This is a clear indicator that Cryptocurrency traders are not trusting of centralized platforms. The only way exchanges will survive is if they adopt what the people want and the people want decentralization.

 

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