Atomic Swap

November 21, 2023 - Around 3 mins mins to read

Understanding Atomic Swaps

An atomic swap refers to a direct wallet-to-wallet trading method between two individuals using a smart contract specifically designed for decentralized exchanges. Unlike traditional cryptocurrency trading on centralized exchanges, atomic swaps eliminate the need for trust in an exchange, prevent downtime during high demand periods, and avoid state oversight.

Atomic swaps offer a decentralized alternative to trading on Automated Market Maker (AMM) DEXs like Uniswap, which rely on centralized liquidity pools. A well-known atomic swap-powered DEX is AtomicDEX, which provides a genuine peer-to-peer order book system for crypto trading.

The functionality of atomic swaps is based on hash timelock contracts (HTLC). Each HTLC consists of a hashlock, which locks and unlocks the deposited currency with a key accessible only to the depositor, and a timelock, which returns funds to the depositor if the transaction is not completed within a specified timeframe.

The primary objective of atomic swaps is to ensure that both parties involved either receive the desired funds or retain their original funds (minus a small transaction fee for the order-taker). This ensures the highest level of security in digital asset trading.

Let’s consider an example scenario: Party A initiates an HTLC address and deposits their cryptocurrency, generating a passcode and a hash of that code. Party A shares the hash with Party B, who utilizes it to generate an address and deposits their cryptocurrency. Party A can access Party B’s deposited coins because they possess the passcode used to generate the hash. Subsequently, the contract sends the passcode to Party B, who can then access Party A’s deposited coins. If the contracts are not signed within the specified timeframe, both deposits are automatically returned to their respective depositors.

Atomic swaps can be employed to trade on-chain across different blockchains with varying native coins. This technology is protocol agnostic, enabling asset swaps such as Bitcoin for Ethereum without the need to trust the security of a wrapped token or centralized exchange. Off-chain atomic swaps offer faster transaction speeds, although they are still in the developmental stage.

Author: Kadan Stadelmann, CTO of Komodo

Kadan Stadelmann is a blockchain developer, operations security expert, and Chief Technology Officer of Komodo, an open-source technology provider offering all-in-one blockchain solutions for developers and businesses. Komodo collaborates with organizations seeking to launch their own custom decentralized exchanges, DeFi platforms, and independent blockchains. Its flagship technology and end-user application is AtomicDEX, a mobile and web-compatible non-custodial multi-coin wallet and atomic swap-powered DEX. Kadan is deeply aligned with Komodo’s open-source vision and ideology, driven by a strong desire to make the world a better place. In addition to cryptography, blockchain technology, and development, Kadan has interests in literature, mathematics, astrophysics, and traveling.