How the Highly Anticipated Atomic Swaps Will Threaten Centralized Exchanges?

Editor's Note: This article comes fromUnitimes（ID：Uni-times）Editor's Note: This article comes from

, Author: Luke Fitzpatrick, Compiler: Summer, published with permission.

The launch of the Bitcoin network in 2009 heralded the beginning of a whole new financial era. This new era of finance is driven by a fully transparent and decentralized store of value and exchange.

But recent developments in blockchain technology allow traders to trade cryptocurrencies without relying on centralized platforms. Decentralized exchanges (DEXs) allow users to trade cryptocurrencies without exposing their crypto assets outside the security of private wallets using a unique trading technology called atomic swaps .

Atomic swaps were first proposed by Tier Nolan in 2013 on the BitcoinTalk forum. Nolan outlines the basic principles of cross-chain cryptocurrency exchanges by conducting simple cryptocurrency transactions between different blockchain platforms. This transaction process is also called atomic cross-chain transaction.

Fast-forward to September 2017, when Litecoin founder Charlie Lee announced via Twitter that he had successfully conducted an atomic swap between Litecoin and Bitcoin, the Atomic Swap caught the attention of the entire cryptocurrency community.

Atomic swap is a technology that supports the rapid exchange of two cryptocurrencies running on different blockchain networks. The realization condition of atomic swap uses a hash time-locked contract (HTLC), which creates an automatic self-executing contract. Once When certain predetermined rules are met, the contract will perform a specific operation, complete the transaction, and pay very low or no transaction fees.

It can be said that centralized exchanges such as Coinbase Pro, Binance or Gemini are the financial institutions of the cryptocurrency world. This is because, without these platforms, it is difficult for most cryptocurrency traders and investors to trade crypto currencies. In effect, centralized exchanges have become the gatekeepers of cryptocurrency trading.

Having said that, how exactly do atomic swaps work? As mentioned above, atomic swaps use a specific type of smart contract called a hashed time-locked contract (HTCL). This smart contract can be thought of as a "virtual safe" with two special guarantees. These two guarantees are:

1. Hash Lock (HashLock): Before the transaction initiator sends the key Preimage used to unlock the HTCL contract to the other party, it ensures that the funds will be locked in the contract.

2. Time Lock (TimeLock): This is a security mechanism that returns the traded cryptocurrency to the trader if the trade is not completed within a specified time period.

To enable an atomic swap, the transaction initiator (assumed to be Alice) needs to use a hash value generated by a Preimage (original image) through a hash algorithm to create a hash time-locked contract on a blockchain (such as Bitcoin) (HTCL), and deposit the cryptocurrency (assuming 1BTC) that needs to be exchanged into the contract address.

Alice hashes the Preimage through a hash algorithm and generates a hash value, which we call "locking" the Preimage). Preimage is a random number used to create the hash value (for example, you can set Preimage to "Alice in wonderland").

Afterwards, Alice will send the generated hash value (instead of the Preimage) to the other party of the transaction (assuming it is Bob). Bob will use this hash value to verify that the cryptocurrency is already stored in the HTCL address.

After verification, Bob will store the cryptocurrency he uses for exchange (assuming 10ETH) in another new HTLC contract address, which uses the same hash value in another blockchain (such as Ethereum) created on

This means, only Alice has the Preimage to unlock these two HTLC contracts.

And if Alice and Bob have created their respective HTLC contracts, Alice does not publish the Preimage within the time range (such as 24 hours) agreed by both parties and written into their respective HTLC contracts, then the transaction will be invalid, which means Funds in both HTLC contracts will be automatically returned to both parties. This is what the time-locking mechanism of the HTLC contract is for.

Currently, most centralized exchanges enable transactions by forcing traders to hand over their wallets to these exchanges for control and custody. These hosted wallets are called "hot wallets", what does that mean?

With hot wallets, the trader does not control the wallet's private key. Thus, this puts traders' crypto assets at the mercy of centralized exchanges. Therefore, atomic swaps have advantages over trading through centralized exchanges, such as:

Truly decentralized: Atomic swaps are truly decentralized in a way that allows cryptocurrency traders to complete transactions without the need for a third party, with no counterparty risk.

Reduced Transaction Fees: The only transaction fees involved in atomic swaps are the usual blockchain transaction fees, making atomic swaps an almost free way to transact.

But the development of the latest atomic swap technology is driving the development of many decentralized exchanges (DEX). Decentralized exchanges solve the liquidity problem by using atomic swap technology to facilitate order matching between traders.

Early decentralized exchanges were limited by lack of user adoption, limited liquidity, and small order sizes, but some new decentralized exchanges provide users with trading functions comparable to current centralized exchanges, These decentralized exchanges are executing trades through atomic swaps.

In its infancy, the Atomic Swap ecosystem allows traders to transact in a secure and low-fee manner, while being able to enjoy the same services offered by centralized exchanges.

At present, the field of atomic swaps has become more and more competitive.

Atomic swap technology early adopter platform Komodo once performed the first atomic swap via Ethereum. Today, the Komodo platform[1] facilitates 95% of all cryptocurrency atomic swaps. Additionally, Komodo recently released a new blockchain toolkit that allows users to create a complete blockchain network in minutes.

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