Introduction to Atomic Swaps: for beginners

Hello everyone, since when I came to this esteemed forum I still haven’t found any thread that directly explains what Atomic swaps are for beginners and so I decided to create a thread that will explain what it is for beginners sake..

What are Atomic Swaps

Atomic swaps refers to a way of exchanging cryptocurrencies across different blockchains without needing centralized intermediaries. It is an innovative solution for a more decentralized and efficient trading between different cryptocurrencies.

How Atomic Swaps work

Atomic swaps work relying on smart contracts and a specific type of contract called Hash-Time Locked Contracts (HTLCs)

To explain the process of how it works, let denote Kim as one of the parties involve in the atomic swap and Tunde as the other party involved.

Initiation if Kim want to trade his Bitcoin for Monero with Tunde who wants to trade his Monero for Bitcoin, then the both of them will will agree to start the atomic swap.

Hash Creation After their agreement, Kim will create a hash of a secret, and he will reveal the hash to Tunde.

HTLC Creation Kim will then create the first HTLC on his blockchain(Bitcoin), thereby locking up his coins and linking them to the hash he earlier created. Tunde will also create a HTLC on his blockchain(Monero), lock up his coins and also link the coins to the same hash Kim created.

Funds Claiming Kim will claim Tunde’s coins by using the secret of the hash which he created and then inform Tunde the secret then Tunde will also use the secret to claim Kim’s coins.

Refund system if one of the parties didn’t complete the swap within the specified time, the coins can be automatically refunded to their owners by the Hash-Time Locked Contract(HTLC).

Benefits and Limitations of Atomic Swaps

BENEFITS

Privacy By using Atomic swaps, users privacy is secured because it is not like centralized exchange which requires some Personal informations.

Decentralization Atomic swaps does not need third parties and so it remove the need of centralized exchanges or trusted third parties making the transactions more decentralized and also reducing the risk associated to custodial services.

Security The funds involve in Atomic swaps are not at risks if one of the parties didn’t complete the transaction and Atomic swaps trades are secured.

LIMITATIONS

Knowledge and Experience Atomic swap currently complex and it requires users to have some technical knowledge and thereby limiting users with no technical knowledge to use Atomic swaps. But in the future we might see some user-friendly interfaces which are still under development.

Compatibility Atomic swaps limit the possibility of swapping some coin pairs directly because it requires coins who support similar scripting capabilities.