We see in the market that atomic swaps are getting a lot of attention, and we can expect more developments to take place in this area over the next months. So far the Crypto Atomic Swap pioneers have been Tier Nolan and his altcoin, Litecoin; and Rex Alt, founder of Altcoin Exchange using Counterparty.
According to their white papers, they have outlined how Atomic Swaps can be done in a Peer-to-peer and decentralized way using the Lightning Network and the Counterparty Platform. The goal of this blog is to give an overview of what we know so far on the topic and the challenges that lay ahead.
What is an Atomic Swap?
An atomic swap or atomic cross-chain trading is a proposed feature in Blockchain technology that allows for the exchange of one cryptocurrency for another cryptocurrency without the need to trust a third party. The first formulation of the idea was described by Tier Nolan in 2013 as an «atomic cross-chain transfer». It was later refined by other developers and dubbed «atomic swap» or «atomic cross-chain trading.»
There are still many challenges to overcome, but Atomic Swaps can represent an important mechanism in the future of our financial transactions. The main challenge that atomic swaps aim to solve is allowing for decentralized cryptocurrency exchanges without using third parties. This would be done through a Peer-to-peer contract which would not require either party to trust another.
Blockchain technology is secure, but it does have some vulnerability that need consideration when introducing new features such as atomic swaps. Traders on Bitcoin Prime keep getting valuable tips and information about such technology.
For example, transactions on the blockchain can be intercepted and maliciously modified by a third party without the sender’s and receiver’s knowledge using a Man-in-the-Middle Attack. Atomic swaps are designed to prevent this type of scenario by having both transactions occur on blockchains that are not controlled by either party.
This means that before any atomic swap would take place, the two participants would have to first set up a channel on each of their respective Blockchain’s and send funds to it. Once they have made their initial deposit, they then use that same address to perform the swap with each other.
Tier Nolan and Litecoin Atomic Swap
Using the Cryptonote technology, which is used by CryptoNote Coins (Monero, Bytecoin), Tier Nolan has proposed an atomic swap between two altcoins, one being the primary currency, while the other is the exchanged one.
Tier Nolan outlined several requirements needed for atomic cross-chain trading to be possible:
- 2 Way Peg Between Main Chain and AltChain
The first challenge that Tier Nolan had to overcome was how to have a «centralized» system for each of these two chains using a 2-way peg. This means that both chains have to share the same amount of coins on the main chain and altchain at all times.
- Difficulty Retarget & Block Timing
The second challenge that Tier Nolan had to overcome was that both chains he was using had to have the same mining algorithm. He chose CryptoNight as the hashing algorithm for both XMR and XMO coins.
- Atomic Cross Chain Transfer
The third challenge that Tier Nolan had to overcome was the atomic cross-chain transfer procedure.
Closing Thoughts
Atomic swaps have been successfully tested between different types of cryptocurrencies using Tier Nolan’s approach. However, this method is not optimal for Litecoin or any other blockchain that uses the proof of work (POW) consensus mechanism.
As a result, both participants in an atomic swap transaction will have to pay the network fee (transaction fee) for both chains. The most effective approach for performing atomic swaps is by using a blockchain that uses the proof of stake consensus mechanism instead.
