Can atomic swaps solve the problems of centralized exchanges?

Can atomic swaps solve the problems of centralized exchanges?

The past few months have been exciting for Bitcoin and cryptocurrencies. In what many observers have likened to the cryptocurrency bull run of 2017, we have seen many cryptocurrencies increase in volume, market capitalization, and prices. Satoshi’s dream of a potential alternative currency seems to have expanded into a reserve asset and a hedge against inflation.

With the rapid growth in cryptocurrencies, there have been several deliberations over cryptocurrencies’ sustainability as a reserve asset or currency. Questions bothering around volatility, energy consumption, and recently, increasing transaction fees on Bitcoin and Ethereum networks are often raised about cryptocurrencies. However, just like the early days of the internet, blockchain networks continue to evolve by addressing some of these issues.

Atomic swaps

In January 2021, active Bitcoin wallets reached 22.3 million unique addresses, setting an all-time high. Without a doubt, the asset is attracting interest from both long-term believers and new investors. In the past few years, we’ve also witnessed improvements and challenges with cryptocurrency purchases as the network continues to grow. One of such innovations is the atomic swap.

An atomic swap is a smart contract-based decentralized technology that allows users to exchange different blockchain assets whereby control of one users’ asset is not given up until they have certainty of control of the other asset. By the way, if you’re not familiar with smart contracts, they are computer algorithms that execute once certain preset conditions are met.

Invented in 2013 by Tier Nolan, the technology was very much in limbo until 2017 when Litecoin’s founder, Charlie Lee, made a tweet on a cross-chain atomic swap he performed with LTC and BTC. Since 2017, atomic swaps have steadily improved, providing a truly decentralized method of exchanging essentially any cryptocurrency.

How does an atomic swap work?

As mentioned earlier in the article, atomic swaps use a smart contract technology, in this case, the Hash Timelock Contracts (HTLC). HTLC is a timed smart contract that involves a cryptographic hash function generated by both parties willing to make the exchange. In an atomic swap, cryptocurrencies are locked on the smart contracts by parties willing to exchange, inspection and transaction are subject to both parties, and transactions are voided if the time limit is not met.

Using less technical terms, let’s consider this hypothetical scenario. Elon has 1 Bitcoin he wants to exchange for the equivalent of litecoins; Michael has these Litecoin equivalents. To begin the atomic swap, Elon creates an HTLC address and submits his transaction to Bitcoin’s blockchain, at the same time generating a cryptographic hash to encrypt the transaction. Michael does the same on his end, and by exchanging keys for verification, the transaction is completed within a specified timeframe, or else, it is voided on both ends and the coins returned to their respective senders. No centralized entity ever has control of the two assets being exchanged.

The future of cryptocurrency exchange and Atomic swaps

Over the past three to four years, the concept of atomic swaps has continued to evolve while fundamentally maintaining the same principles and overall objectives. In a time where centralized exchanges are struggling with substantial trading fees, KYC verification, and potential hacks, atomic swaps are providing a genuinely distinct alternative to them.

Now Nimiq provides one of the top crypto atomic swaps in the industry; Nimiq is a decentralized, censorship-resistant payment protocol that focuses on simplicity and ease of use. In less than 30 seconds, you can create a self-custodial Nimiq wallet and subsequently purchase BTC and NIM in the wallet directly with a bank transfer. More specifically, Nimiq today enables up to 350mio users in Europe to onboard effortlessly from EUR into BTC and NIM with nothing more than a SEPA Instant capable bank account. Only in five minutes, without installation or sign up and with only 1.25% fees (plus blockchain networks fees which for NIM are close to zero).

Nimiq’s distinction comes from being the pioneer of fiat smart contracts, providing users with an atomic swap between fiat and crypto with the same simplicity. The open-source project also allows developers to participate in the journey and ultimately aims to contribute largely to the idea of a decentralized world. The multiple potentials locked up in Nimiq set a precedent that would popularize atomic swaps in the coming years.

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