In a move that has put cryptocurrency exchanges across the world on notice, the first cross chain atomic swap was executed between Decred and Litecoin. To the novice, you can think of an atomic swap as a method of directly covering your cryptocurrency from one form to another without the need of an exchange. In a statement from the Decred blog, Jake Yocom-Piatt said –
“This is an important step in a direction that allows users to conduct trustless, cross-chain, over-the-counter (“OTC”) trades without a third party. This disintermediates the exchange process between cryptocurrencies that support these swap transactions.”
The Decred team has built rudimentary tools for users to swap between BTC, LTC and their own currency, DCR.
How does it work?
An atomic swap works very similar to how we send cryptocurrency today with some key differences. If you have Bitcoin and your recipient wants another coin, say Ethereum, you simply agree on an exchange rate and send your BTC in the form of ETH, without the use of any third party exchange.
Now for something that touts itself as a trustless currency exchange, you can argue that the atomic swap seems to require some amount of trust between the two parties. This, however, is not the case. Atomic swaps are based on hashed time locked contract, which currently governs most cryptocurrency transactions. The sender uses the corresponding blockchain of the cryptocurrency they have and the receiver can only claim the transaction by revealing a common secret key.
Currently, the Atomic swaps can only happen between cryptocurrencies if the following prerequisites are met –
- Both chains should support branched transaction scripts and should use the same hash algorithms
- Both chains should have signature checks in their transactions scripts
- Both chains should support CLTV and CSV in their transaction scripts
The current atomic swap was possible because both LTC and DCR are forks of the Bitcoin blockchain.
Privacy and transparency
As the transaction is happening entirely on the blockchain, it is possible for passive observers to track the flow of coins. This is because the transaction on each value included the same hashed values. However, there is no identity data on these coins, so there is no threat of privacy breaches.
On the flipside, being able to track transactions also gives observers on the blockchain complete transparency. A lot of has been said about the impending “casino-isation” of exchanges and the atomic swap can very easily overcome this problem.
The atomic swap is a revolutionary technology that will change cryptocurrencies forever. It poses no immediate threat to exchanges due to the aforementioned limitations. But over time, more research into this field can prove to be a threat to the current currency operations of cryptocurrency exchanges. Furthermore, this is the ultimate aim of cryptocurrency – money with no intermediary. This Atomic Swap is the biggest step in this direction.