Atomic swap bitcoin monero

DEXs, however, use several mechanisms to make trading more secure, with atomic swap being one of them. Although the atomic swap is an innovative way to exchange cryptocurrencies, the idea of cross-chain trading came after many years of discussion. In , Tier Nolan described the atomic swap system. Before that, Daniel Larimer presented the trustless exchange protocol P2PTradeX in , and some people consider it to be the atomic swap prototype. Since then, many crypto enthusiasts and developers have started experimenting with the atomic swap protocol, with the Bitcoin, Litecoin, Decred and Komodo communities playing an important role.

The first P2P atomic swap took place in , but it became publicly available in after a successful swap between Litecoin and Bitcoin. In addition to being used as part of CEXs, the atomic swap has a trustless and peer-to-peer nature. This is why traders consider it to be a true decentralized trading system. How Do Atomic Swaps Work? The term atomic connotes processes that will either complete or not start at all.

In other words, we can consider the atomic swap as a function which ensures all predetermined conditions are fulfilled before a trade occurs. Atomic swaps became possible with the utilization of the smart contract, an automated process to enforce conditions during a transaction. The atomic swap uses a two-way virtual safe function, the hashed timelock contract HTLC , which utilizes complex mathematical encryption known as hash function.

Moreover, it implements a time constraint by which the transaction is reversed if any parties fail to fulfill conditions within a predetermined time. For example, two parties may agree to set a one-hour time constraint for an atomic swap. As a trustless trading system, the atomic swap uses HTLC with the following protocols: Hashlock key: The hashlock key ensures that the trade is finalized when both parties submit their cryptographic proofs from their sides of the transaction. Timelock key: The timelock key is a safety mechanism that sets a deadline for a particular transaction.

There are two ways to process the atomic swap: on-chain and off-chain. With the on-chain method, the atomic swap takes place on a single blockchain network. On the other hand, in the off-chain atomic swap the transaction occurs via a secondary layer. This type of atomic swap uses bidirectional payment channels, which is a mechanism comparable to Lightning Network.

Later on, a passcode known as preimage pre-image is generated and hashed, which subsequently locks the transaction. Next, the first party sends the preimage to the second party to verify that the cryptocurrency has been deposited. Now the second party can deposit their cryptocurrency into a new address with the same generated hash. Once the second party deposits the cryptocurrency, the first party can unlock the amount with a secret passcode used to initiate the first deposit.

Lastly, the second party completes the atomic swap process by unlocking the deposit made by the first party. First, Allison deposits Litecoin into a safe contract address. While creating the contract, Allison generates an access key and shares the cryptographic hash with Scott. Remember that Scott cannot access the deposited Litecoin yet, because he knows only the hash, not the access key. Next, Scott creates another safe contract address using the hash provided by Allison and deposits his Bitcoin.

To claim the deposited BTC, Allison needs the same access key that she created while depositing. As soon as she claims the BTC with the access key, the swap is completed. The overall process is straightforward and neither party has to rely on a CEX that charges more. Two or more parties can easily execute a transaction with a cross-chain swap.

In this way, the whole process runs through a high-security environment, and no party has to give their funds to a CEX or any other third party. Key Takeaways An atomic swap is a cryptocurrency exchange between two parties that wish to exchange tokens from different blockchains. Atomic swaps are helpful if you only have one cryptocurrency but need to use another in a transaction.

Special wallets or exchange services are needed to conduct an atomic swap because the technique is still being developed and refined. Understanding Atomic Swaps Each cryptocurrency is supported by a blockchain, designed only to accept transactions in specific tokens. You cannot easily exchange BTC and ETH without first converting to fiat currency then buying the other; another technique is to convert between cryptocurrencies and exchanges multiple times to get the one you want.

Atomic swaps allow you to exchange tokens from different blockchains in one trade. Decentralized exchanges can conduct atomic swaps for you. A decentralized exchange DEX has no central authority regulating it; it is a platform you can trade on without third parties. You can also choose from cross-chain swap providers, where you transfer your digital assets into another wallet, conduct the swap, and transfer them back out.

Atomic swaps rely on each party to provide proof through key encryption and acceptance of both parties through the encrypted key. History of Atomic Swaps The concept was conceived shortly after altcoins—cryptocurrencies other than Bitcoin—materialized. The creation of altcoins meant some cryptocurrency owners became interested in moving capital between coins. This type of token swap first appeared in September , when an atomic swap between Decred and Litecoin was conducted.

Since then, startups and decentralized exchanges have implemented swaps and allowed users the same facility. Special cryptocurrency wallets have also been developed that are capable of cross-chain atomic swaps—Liquality has developed a wallet that will swap Bitcoin, ETH, and more.

Atomic Swap Process In an atomic swap, two token owners agree to exchange their tokens for any amount they agree on. The smart contract program sees that they both agreed to it, so it executes the trade for them. The transaction is recorded in the blockchain and validated by the network nodes, and then a new block is opened for another transaction. The transaction cannot be reversed. Both parties must agree to another transaction to exchange the tokens again if they would like them back.

As its name denotes, HTLC is a time-bound smart contract between parties that involves generating one cryptographic hash on each end. A cryptographic hash function is an algorithm that converts data of variable length, such as a person's wallet address and transaction information. It converts it to a hexadecimal number with a fixed length.

In general, the number that is generated is called the hash. HTLC requires both parties to acknowledge receipt of funds within a specified timeframe. If one party fails to confirm the transaction within the timeframe, then the entire transaction is voided, and funds are returned. This eliminates counterparty risk , or the risk that one party will accept the offered coins and decline the transfer of their coins.

She submits the transaction through an atomic swap-capable wallet. A cryptographic hash function generates a hex number to encrypt the transaction during this process.

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