Decentralized exchanges, like Atomex (https://atomex.me/) provide a reliable way to trade cryptocurrencies without a wallet. You may trade cryptocurrencies using a wallet that just contains the private key. DEXs employ order books and AMMs to facilitate and secure transactions.
Advances like atomic swaps, a peer-to-peer trading method, have enhanced DEX user acceptability. Monero (XMR), a privacy-focused cryptocurrency, gained 20% following the atomic swap introduction. This allows investors to trade ETH to XTZ without third-party exchanges.
Traders and investors now have greater market liquidity using atomic swaps. We’ll define atomic swaps, provide examples, and outline the transaction mechanism below.
What Are Atomic Swaps?
Atomic swaps transmit currencies quickly across blockchain networks. This is called atomic cross-chain trading since it involves two bitcoin wallets and a smart contract. It uses several blockchains for P2P transactions.
CEXs dominate digital asset trading. They allow FX, equity, and commodity trading in cryptocurrencies. Exchanges manage and fund wallets like banks. DEXs enable investors to trade cryptocurrencies without a wallet. Traders may exchange cryptocurrency from their wallets without custody. DEXs use atomic swap to make trading safer.
Cross-chain trade arose after years of discussion and atomic switch. Tier Nolan described atomic exchange in 2013. Daniel Larimer introduced P2PTradeX, a trustless exchange system, in 2012.
Since then, various crypto enthusiasts and developers have experimented with the atomic exchange protocol, including Bitcoin, Litecoin, Decred, and Komodo. First peer-to-peer atomic swap happened in 2014, however it became public in 2017 following Litecoin and Bitcoin exchange. Atomic swaps are decentralized and peer-to-peer. Because of this, traders consider it decentralized.
How do atomic switches operate?
Now that you understand atomic swaps, learn how they work. Atomic activities stop or never start. Atomic swap ensures all transaction conditions are satisfied before execution. Smart contracts automate the enforcement of transaction constraints, making atomic swaps possible.
The atomic exchange uses the hashed timelock contract (HTLC) and its hash function. It also has a time limit that reverses the transaction if conditions aren’t satisfied.
Two parties may agree to a one-hour atomic exchange. If either side doesn’t satisfy all trade requirements within an hour, the contract returns the crypto coins to the owner.
The atomic swap, a trustless trading system, employs HTLC with the following protocols:
- Hashlock key: The hashlock key guarantees that the transaction is completed when both parties submit their cryptographic proofs.
- The timelock key is a safety feature that establishes a deadline for a certain transaction. As a consequence, it verifies that the deposited coins are refunded to the traders in the event that the exchange cannot be completed owing to a single or many causes within the specified timeframe.
On-chain and off-chain processing methods for atomic exchange exist. Using the on-chain technique, atomic swaps are conducted on a single blockchain network. In contrast, the off-chain atomic exchange involves a supplementary layer for the transaction. This sort of atomic exchange employs bidirectional payment channels, a Lightning Network-like method.