What are atomic swaps?
Can I really exchange my Bitcoins to any other cryptocurrency out there,
instantly and for free?
Why is this even important?
Well stick around,
in this episode of Crypto whiteboard Tuesday
we’ll answer these questions and more.
Hi, I’m Nate Martin from 99Bitcoins.com
and welcome to Crypto Whiteboard Tuesday
where we take complex cryptocurrency topics,
break them down
and translate them into plain English.
Before we begin,
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and click the bell so you’ll immediately get notified
when a new video comes out.
Today’s topic Atomic Swaps,
and if this term doesn’t really mean much to you
well then you’re in the right place.
If you've ever tried changing between two different cryptocurrencies,
you’ve probably noticed the high switching costs it involves.
You might be thinking it’s not that hard,
but let’s think about it for a moment.
If, for example, you want to trade Bitcoins for Litecoins
you’ll need to do several things.
First you’ll need to find an exchange that supplies this currency pair.
Once you've found such an exchange,
you’ll need to sign up to it
and go through its KYC process to verify your identity.
Assuming you passed the KYC process,
you can then deposit your Bitcoins into the exchange,
basically forcing you to give up control over your coins.
Once the Bitcoins are on the exchange,
you can then trade the coins -
for a transaction fee.
Finally, once the trade is complete
you can withdraw the Litecoins from the exchange
which will include additional fees and waiting time
until the coins arrive in your wallet.
As you can imagine this situation is less than optimal.
In a truly decentralized world,
users will be able to switch crypto to crypto directly
without any third party,
instantly and feeless.
That’s exactly where Atomic Swaps come in.
An Atomic Swap allows users to trade two cryptocurrencies directly,
without the need for an intermediary or trust.
In my particular case,
it will allow me to exchange Bitcoins for Litecoins with complete strangers
directly from my wallet.
The term Atomic comes from computer science.
It means that either the operation is conducted as planned
or it isn’t conducted at all.
With an Atomic Swap
I will either exchange my coins with the other party
exactly as we agreed,
or it won’t happen at all.
Let me explain.
A non Atomic swap would be me sending Bitcoins to a stranger,
and then hoping the stranger will send me back Litecoins.
This leaves the door open for fraud or theft
since my counterparty can just walk away with my money.
In an Atomic swap on the other hand,
either both of us get the money or neither of us do.
There’s no room for human error or manipulation.
It’s important to note that Atomic Swaps don’t work with fiat currencies,
only with cryptocurrencies.
Now that you know what Atomic Swaps are,
let’s move on to how they work.
Since this is a non technical video,
I’m going to use a simple analogy to explain the process.
Let’s say I want to participate in an Atomic Swap
of Bitcoins to Litecoins.
As the initiator of this swap,
I will take my Bitcoins, represented by this baseball,
put them in a see through box and lock it with a lock
that can only be opened with a long secret combination
that I have written down and kept hidden in my pocket.
I then send this box over
so he can inspect and see that it has the right amount of Bitcoins
for the swap.
Once I verify the amount is correct,
I'll take my Litecoins and put them in my own see through box.
However, my box will have the same exact lock on it
as his box has.
So, I don’t know the combination to open this box.
So at the moment
only I hold the combination that opens the two boxes,
and that combination is hidden inside my pocket.
So I'm going to send my box of Litecoins over to him
so that he can verify the amount as well.
Once I see that everything is in order,
I pull out the secret combination out of my pocket
to open the box of Litecoins.
As soon as he does that,
I'm able to see the combination as well
and can now use it to open the box of Bitcoins
that he sent to me.
We then each get our funds and the Atomic Swap is complete.
Thanks Nate.
Anytime.
This was a very simplified non technical explanation of the process.
In real life,
the boxes are actually a smart contract
which states that if the transaction doesn’t occur as expected
within a specific time frame,
each party will get their money back.
To get a bit more technical,
these smart contracts are called Hashed Time Lock Contracts
or HTLC.
The lock on the box is called a hash
and the combination to open the lock is called a preimage.
Putting this all together,
in an Atomic Swap,
funds are locked inside smart contracts
that can be publicly inspected on the blockchain.
The funds can only be released with a preimage,
a private key of sorts,
that matches the hash of these contracts.
If at any point either party wants to cancel the swap
they can just walk away
and the funds will be automatically returned to the original owners.
Atomic Swap technology is just starting out
and it still has several limitations.
For example,
both currencies that are being exchanged must have the same hash algorithm
and both currencies should support specific types of smart contracts.
At the moment
you will also need certain programming skills
to use atomic swaps.
However, in the future
it’s highly probable that cryptocurrency wallets
will offer this technology built in to their software.
By now I bet you already understand the impact this might have
on cryptocurrency users.
Just imagine the opportunities this can open up
once you have the ability to morph currencies instantly.
Merchants can accept any cryptocurrency that supports this technology
since they can just instantly exchange it to any cryptocurrency they like.
We can set up trustless exchanges
where you don’t have to give away control of your funds
in order to trade with other people.
Add the Lightning network on top of this
and you basically get
the ability to move any type and any amount of cryptocurrency
with zero fees, instantly.
Pretty neat, right?
So, how far are we from being able to do all that?
Well up until today
only a few successful tests have been done with this technology.
But as cryptocurrencies become more mainstream,
and market competition between wallet providers
and cryptocurrencies increase,
new solutions like Atomic Swaps will come to fruition.
That’s it for today’s episode of Crypto Whiteboard Tuesday.
Hopefully by now you understand what Atomic Swaps are -
A way for individuals to exchange different cryptocurrencies directly
without the need for trust or a third party.
You may still have some questions.
If so, just leave them in the comment section below.
And if you’re watching this video on YouTube,
and enjoy what you’ve seen,
don’t forget to hit the like button.
Then make sure to subscribe to the channel
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Thanks for joining me here at the Whiteboard.
For 99bitcoins.com,
I’m Nate Martin,
and I’ll see you… in a bit.