Atomic Swaps

What does Atomic Swaps mean in crypto terms?

An Atomic Swap, also known as a cross-chain trade or atomic cross-chain trading, is a technology that allows for direct peer-to-peer trading across different blockchain networks. In simple terms, it enables the exchange of one cryptocurrency for another without the need for a trusted third party, such as a centralized exchange.

The term 'atomic' here is borrowed from computer science and implies that the operation is indivisible, meaning it can only be executed in its entirety or not at all, thus ensuring the security of funds in the transaction. If anything goes wrong during the swap, the transaction will be canceled, and the funds returned to their original owners, ensuring that neither party is left out of pocket.

This innovative concept was first proposed in 2013 and has become increasingly prominent with the growth of the cryptocurrency market. The principle behind Atomic Swaps relies on a cryptographic technology known as Hashed Timelock Contracts (HTLCs). HTLCs are a type of smart contract that ensures the parties involved in the transaction meet their obligations as agreed.

It sets conditions that require both parties to acknowledge receipt of funds within a specific timeframe using a cryptographic proof. For example, let's consider Alice wants to swap her Bitcoin for Bob's Ethereum. Both Alice and Bob would create a transaction on their respective blockchains (Bitcoin and Ethereum) locked with the same secret cryptographic hash.

Alice sends her Bitcoin to Bob, and Bob sends his Ethereum to Alice. They then have to unlock the received funds using the secret key. If either of them fails to acknowledge the receipt, the transaction will not go through, and the funds will be returned.

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