The Great Crypto Reset!
Sam Volkering says a new crypto boom is set to unfold.
Is he out of his mind? Or could he be on to something?
Josh Benton has the answers
The atomic swap was first introduced by crypto enthusiast Tier Nolan, on the BitcoinTalk forums in 2013. Nolan outlined the basic principles for cross-chain cryptocurrency swaps by using simple cryptocurrency trades across different types of blockchains.
Fast forward to September 2017, atomic swaps captured the attention of the cryptocurrency community, when Litecoin founder Charlie Lee announced the successful execution of an atomic swap between Litecoin and Bitcoin.
So, what exactly is an atomic swap?
An Atomic swap is a peer-to-peer (p2p) exchange of cryptocurrencies from one party to another, without going through a third party service like a crypto exchange. During this entire process, the users have full control and ownership of their private keys.
So how do Atomic Swaps work?
Let’s say Alice has some BTC and Bob has some LTC. They want to swap the coins with each other.
The two of them then open up a payment channel. The instigator of this swap (let’s say Alice) then creates a contract address.
Her contract address is like a multi-lock safe that takes care of both of their funds. By creating the address, Alice deposits her BTC and produces a value as well.
The value acts like the key while the hash generated from it will pretty much act like a lock for the safe Upon doing this, Alice then sends the hash to Bob.
Bob generates a contract address using the hash that has been given to him by Alice. Bob then sends his LTC to this contract address.
Only Alice can unlock the litecoin in this address because she has the value which generates that particular hash.
Alice can get her LTC by signing a transaction for Bob’s contract address and Bob can retrieve the BTC by signing a transaction for Alice contract address. However, until now, Bob doesn’t know the value that generates the hash. So, how exactly is he going to unlock the address?
When Alice signs Bob’s contract address with the value, she unlocks the address and reveals the value to Bob as well.
Bob, now knowing the value, signs off the transaction for Alice’s address and retrieves his BTC.
In summary: Alice creates the value and generates its hash which is used to create the contract address and deposits her BTC there. She then sends the hash to Bob. Bob then generates the contract address through the hash and sends his LTC there.
To get her hands on the LTC, Alice will have to unlock the address by using her value. Upon unlocking and getting her coins, the value of the key is given to Bob. Bob then uses the value to get his coins.
What makes Atomic Swaps so great?
The main advantage of Atomic Swaps is they eliminate the need of a third party as all transactions are P2P, directly between two users.
Atomic swaps also enhance security, since users do not need to transfer their funds to a centralised exchange or a third party. Instead, transactions can occur directly from the users’ wallets.
In addition, this also helps users save on commissions. When using swaps, you only need to pay a transaction fee. When using exchanges, apart from paying a transaction fee, you will pay trading commission and a withdrawal commission fee.
However, Atomic Swaps aren’t without their disadvantages.
For instance, to execute the exchange, the two cryptos must be based on blockchains using the same hashing algorithm (for example, SHA-256, as with the bitcoin network). In addition, they must be compatible with Hashed time lock contracts, which is a special form of payment channel.
Regardless, there’s still much to be explored with Atomic Swaps. But this technology has serious potential to take us to the next evolution of decentralised crypto trading.
See you next week.
Managing Editor, The South African Investor
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