The blockchain ecosystem continues to expand and evolve every day. As such, the need for interoperability between different blockchain networks becomes increasingly apparent. Atomic swaps and bridges constitute two of the prominent solutions that try to address this challenge. While both offer methods to transfer tokens across blockchains, they possess different features and limitations.
We look at the concept of atomic swaps, explore how they compare to bridges, and analyze their potential benefits and drawbacks.
What are Atomic Swaps?
Atomic swapping involves the process of using peer-to-peer technology to interchange cryptocurrency between two traders. Through this process, no intermediary is involved, and it is carried out through self-executing smart contracts. The atomic swap smart contract conditions are directly written in the code.
This smart chain technology uses cryptography, has functions, and timelocks, ensuring the swapping is secure and is done in a time frame, but invoices may not adopt the user interface.
For a better understanding of the functioning of atomic swaps, it is important to understand the concept of based hashed time-locked contracts (HTLCs).
HTLCs constitute smart contracts that enforce time-based conditions for carrying out transactions.
During an atomic swap, the HTLC ensures that both parties fulfill their obligations within a specified timeframe. When this does not happen, the swap is canceled, and the funds are returned to their original owners.
Atomic Swaps: Main Features
Atomic swaps have one of the best technology in that;
- They allow the included parties to trade directly from one wallet to another without an intermediary.
- Users have control over their private keys during the process of swapping.
- When one party fails to confirm a transaction, the transaction becomes void, and there will be no exchange between the parties. This process eliminates any occurrences of counterparty risk.
- Atomic swap crypto allows faster and simpler trading and removes third parties like crypto exchanges.
Steps Involved in an Atomic Swap
The steps that are mainly involved in an atomic swap include:
- Preparing the HTLC, where both parties create and fund the HTLCs with the tokens they wish to exchange.
- Revealing the secret, where a secret cryptographic key is generated and shared between the parties. The key is mandatory to claim the funds from the HTLCs.
- Initiating the swap, where both parties verify the transaction details, including the HTLCs’ existence and the amount of assets involved.
- Complete the swap. Once the parties confirm the details, the atomic swap is executed, and the tokens are transferred between the blockchains.
Benefits of Atomic Swaps
The process of atomic swap blockchain has various advantages over the traditional exchanges of cryptocurrencies, which include:
- They help attain more liquidity in the crypto space. This is attributed to the fact that there is easy processing of peer-to-peer transactions from one wallet to another.
- No third parties are involved, which reduces the transaction cost and tediousness in settlement transactions.
- Privacy protection is due to private keys, encryption, and hash functions.
- These ensure both parties fulfill their trade requirements per the contract. Either the parties honor the contract, or the contract itself is voided.
- Atomic swaps save much time, as they are done almost instantly. This is compared to the traditional method, where several confirmations are needed.
- Since the process is done on a peer-to-peer basis, it makes them decentralized.
Limitations of Atomic Swaps
However advantageous atomic swaps may seem, there is still a long way to go because;
- Atomic swaps are not fully developed yet. As such, not all cryptocurrencies are made available for atomic swapping.
- It may not be viable for newbies as the process requires knowledge and experience in blockchain and programming.
- Though it seems secure, there is still a possibility of attacks that may compromise the process.
How do Atomic Swaps and Bridges Compare?
While atomic swaps offer a trustless and secure method for cross-chain token transfers, bridges are another mechanism that helps achieve interoperability between blockchain networks. Bridges offer an additional layer of trust, as they often require the involvement of bridge validations to facilitate token transfers.
Cross-chain bridges are usually centralized or decentralized platforms that lock tokens on one blockchain and issue corresponding wrapped tokens on another.
The wrapped tokens represent the original tokens and can be exchanged within the destination blockchain’s ecosystem.
The difference that exists between atomic swaps and bridges is the level of decentralization. Atomic swaps are fully decentralized and do not require any intermediary. However, bridges mainly involve some centralization level, which depends on their design.
Both technologies have their own features and are used for different purposes depending on the user’s needs.
Both Atomic swaps and bridges play a significant role in achieving interoperability between blockchain networks. Atomic swaps offer a decentralized and secure method for cross-chain token transfers, while bridges provide simplicity and user-friendliness.
The choice between the two mainly depends on the particular use case and the level of decentralization and security required.
In the future, whether atomic swaps will outperform bridges or vice versa, the only important thing remains that both solutions contribute significantly to the ongoing quest for seamless cross-chain token transfers in the blockchain space.