Atomic swaps: what it is and how they work

Many specialists in the developer community are working on a new function called atomic swaps. These swaps completely eliminate the need for third parties to participate in the exchange between blockchains of various crypto currencies and transfer the reins of the trade directly to the user. In recent months, much has been said about the revolutionary idea, known as internetwork atomic swaps. Atomic swaps are a new technology that is still in development, allowing P2P trading between different types of digital assets.

Both transactions occur simultaneously, so that neither side can withhold funds in the process. In the event that one of the parties refuses the transaction halfway, then after a certain period of time the coins return to the owners - each in its network.
This has huge implications for the future of the crypto currency, because the ability to freely change coins between blockchains opens up a whole new world of possibilities. Atomic swaps can dislodge traditional crypto-currency exchanges from the market (except for trading with fiat currencies), because this new technology can give users full control over their money if they want to exchange one crypto currency for another.

HOW ATOMIC SWAPS WORK

Imagine two people, Alice and Bob, want to trade some Vertcoin for Bitcoin. Alice is the initiator in this scenario and creates a “lockbox” of sorts that holds funds during the swap. It is also known as a contract address. This lockbox is special, as to open it requires Bob’s signature and a secret number that Alice generates herself. It is important that Alice does not share the number with Bob, as he could simply open the box and take the coins before the swap even takes place.

From there, Alice takes the secret number and creates a hash of the number. A hash is a number derived from the first that is mathematically tied to the first, but it is impossible to figure out the first number from the hash. However, it is very easy to get the hash from the original number. The hash acts as the lock, the number being the key. So, while Alice has both the lock and key, she cannot open the box and get her funds back because it still needs Bob’s signature.

Bob will then look over Alice’s contract address and make sure everything is in order before he creates his own lockbox. Alice will send Bob the hash of her box so that Bob can make a similar box with the exact same key, but in his case, he needs Alice’s signature to open it.

From this point, Alice has both the key and the ability to sign for Bob’s box and can redeem the funds tied to the address. When this is done, the secret number that Bob needs but does not know is broadcasted for all to see. Bob can then take the secret number, open Alice’s box, and redeem the funds.

In a scenario where Alice or Bob backs out halfway through the swap, both lockboxes are made so that if the swap does not take place all funds are returned to their owners depending on a specific time period set by each party.

Both parties agree on an exchange rate and then the trade is completed. No third party required.

FURTHER IMPLEMENTATIONS

Currently, there are only select currencies that can participate in an Atomic Swap. Recently, Litecoin and Decred made headlines when the founder of Litecoin, Charlie Lee completed one of the first atomic swaps between himself and the Decred development team. Bitcoin, Litecoin, Decred, Viacoin, and Vertcoin are the only currencies that have successfully completed Atomic Swaps, the code being open source to allow anyone interested to give it a shot for themselves.

Decentralized exchanges could spawn thanks to this new advancement, once much more rigorous testing can take place. This is huge, especially with constant news stories of this exchange getting hacked for all their worth and that one losing customer info. With an atomic swapping based exchange, users would have control over their funds the entire time and could be as anonymous as their currency of choice allows.