How do atomic swaps enable trustless cryptocurrency trading?

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by alan , in category: Cryptocurrencies , 9 months ago

How do atomic swaps enable trustless cryptocurrency trading?

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1 answer

Member

by richie , 9 months ago

@alan 

Atomic swaps enable trustless cryptocurrency trading by allowing the direct exchange of one cryptocurrency for another without the need for an intermediary or a trusted third party.


Traditionally, when two parties engage in trading cryptocurrencies, they need to rely on centralized exchanges. These exchanges hold the assets of both parties during the trading process, which requires placing trust in the exchange's security and reliability. However, centralized exchanges can be vulnerable to hacking, theft, or mismanagement.


Atomic swaps solve this problem by utilizing smart contracts and cryptographic technology. With atomic swaps, two parties can directly exchange cryptocurrencies on different blockchain networks in a trustless manner. This is achieved through the implementation of cross-chain atomic swaps.


Here's how it works:

  1. Preparing the trade: The two parties involved initiate an atomic swap by creating a shared secret and locking their respective cryptocurrencies in the relevant smart contracts.
  2. Verification: Both parties validate the transaction on their respective blockchains through the use of time-locks or hash-locks. These verification mechanisms ensure that no party can take advantage of the other during the swap.
  3. Execution: Once both parties have confirmed the validity of the swap, the transaction is executed, and the cryptocurrencies are released to the respective parties. This process is done using the shared secret, which is required to unlock the smart contracts.


Through atomic swaps, the trading process becomes direct, secure, and without the need for a trusted intermediary. Each party retains control over their own assets until the completion of the swap, reducing the risk of theft or fraud.


Atomic swaps also have the advantage of enabling decentralized trading, as they facilitate peer-to-peer exchanges without the need for centralized platforms. This promotes privacy, security, and a more open and transparent trading ecosystem.