The term “atomic swap” refers to the direct exchange of one cryptocurrency for another between two users without the use of a third party.
“Atomic” swaps are those in which either both parties complete the transaction and get the other party’s money, or neither party completes the deal and both parties retain their original funds. Completely decentralized and P2P atomic swaps are executed directly between users’ digital wallets.
It cannot be overstated that, throughout the entire atomic swap crypto process, both traders retain possession of their Bitcoin private key. This means that atomic swap trading is much safer than trading on a centralized exchange.
Users of centralized exchanges do not have legal ownership of their coins and tokens since they cannot keep track of their private keys. Those who have their coins or tokens stolen from an exchange due to a hack have few options for getting them back.
When compared to atomic swap technology, which is used in trading, this is a major departure for two reasons. For starters, atomic swap trading ensures that users never have to give up control of their private keys. Second, an atomic exchange does not enhance the security risk. Storing your coins or tokens on an exchange or other “hot” wallet online exposes them to the same level of danger.
It goes without saying that a “cold” wallet that has never been used to send or receive a transaction is the most secure place to keep digital assets. However, once coins are sent from a specific address, they are no longer considered “cold” and may be traded. Therefore, atomic swap trading is the most foolproof method for exchanging coins or tokens for other cryptocurrencies.
Atomic Swap Trading And Its Advantages
Now that we’ve covered the basics of atomic swaps, let’s dive into the advantages of this kind of trading.
In the first place, users have no obligation to ever reveal their private keys. You never give up control of your private keys while engaging in atomic swaps (and thus your coins and tokens).
2. Safe Trade Processing
Both parties to an atomic swap either complete the exchange and get the agreed-upon amount of money, or nothing at all occurs and both parties keep their original amount of money (less a minor transaction charge for the “order taker”). Trading digital assets is as safe as it can get thanks to atomic swaps.
3. Inexpensive Gas and Commissions
Compared to trading on centralized exchanges, atomic swaps are more cost-effective. Fees at most centralized exchanges are quite expensive, typically 0.2% of each party’s deal. A withdrawal fee is often charged by centralized exchanges as well. Can you picture paying a central exchange a charge so they would return your cash to you?
4 . Trading between Blockchains, Without a Middleman
Finally, atomic swaps facilitate transactions across a broader range of digital currencies and tokens. Komodo’s AtomicDEX, for instance, is a decentralized exchange that acts as a link between currencies based on the Bitcoin protocol and ERC-20 tokens.
A user, for instance, may make an immediate exchange from a Bitcoin-based cryptocurrency to an ERC-20 token (or vice versa). Before the Komodo Trading Platform, this would have required many separate transactions. All three steps of the three-step trade from BTC-based altcoin to Bitcoin to Ethereum to ERC-20 token would have cost money.
With so many compelling reasons to use them, it’s easy to understand why atomic swaps have garnered so much attention in the blockchain space.