What Are Atomic Swaps? Explained in Plain English


What are atomic swaps?
Can I really exchange my Bitcoins
to any other cryptocurrency out there,
instantly and for free?
Why is this even important?
Well stick around,
in this episode
of Crypto whiteboard Tuesday
we’ll answer these questions and more.
Hi, I’m Nate Martin from 99Bitcoins.com
and welcome
to Crypto Whiteboard Tuesday
where we take complex
cryptocurrency topics,
break them down
and translate them into plain English.
Before we begin,
don’t forget to subscribe to the channel
and click the bell
so you’ll immediately get notified
when a new video comes out.
Today’s topic Atomic Swaps,
and if this term
doesn’t really mean much to you
well then you’re in the right place.
If you’ve ever tried changing between
two different cryptocurrencies,
you’ve probably noticed
the high switching costs it involves.
You might be thinking it’s not that hard,
but let’s think about it for a moment.
If, for example,
you want to trade Bitcoins for Litecoins
you’ll need to do several things.
First you’ll need to find an exchange
that supplies this currency pair.
Once you’ve found such an exchange,
you’ll need to sign up to it
and go through its KYC process
to verify your identity.
Assuming you passed
the KYC process,
you can then deposit your Bitcoins
into the exchange,
basically forcing you to give up control
over your coins.
Once the Bitcoins are on the exchange,
you can then trade the coins –
for a transaction fee.
Finally, once the trade is complete
you can withdraw the Litecoins
from the exchange
which will include additional fees
and waiting time
until the coins arrive in your wallet.
As you can imagine
this situation is less than optimal.
In a truly decentralized world,
users will be able to switch
crypto to crypto directly
without any third party,
instantly and feeless.
That’s exactly where
Atomic Swaps come in.
An Atomic Swap allows users to trade
two cryptocurrencies directly,
without the need
for an intermediary or trust.
In my particular case,
it will allow me to exchange Bitcoins
for Litecoins with complete strangers
directly from my wallet.
The term Atomic
comes from computer science.
It means that either the operation
is conducted as planned
or it isn’t conducted at all.
With an Atomic Swap
I will either exchange my coins
with the other party
exactly as we agreed,
or it won’t happen at all.
Let me explain.
A non Atomic swap would be
me sending Bitcoins to a stranger,
and then hoping the stranger
will send me back Litecoins.
This leaves the door open
for fraud or theft
since my counterparty
can just walk away with my money.
In an Atomic swap on the other hand,
either both of us get the money
or neither of us do.
There’s no room for human error
or manipulation.
It’s important to note that Atomic Swaps
don’t work with fiat currencies,
only with cryptocurrencies.
Now that you know
what Atomic Swaps are,
let’s move on to how they work.
Since this is a non technical video,
I’m going to use a simple analogy
to explain the process.
Let’s say I want to participate
in an Atomic Swap
of Bitcoins to Litecoins.
As the initiator of this swap,
I will take my Bitcoins,
represented by this baseball,
put them in a see through box
and lock it with a lock
that can only be opened
with a long secret combination
that I have written down
and kept hidden in my pocket.
I then send this box over
so he can inspect and see
that it has the right amount of Bitcoins
for the swap.
Once I verify the amount is correct,
I’ll take my Litecoins and put them
in my own see through box.
However, my box will have
the same exact lock on it
as his box has.
So, I don’t know the combination
to open this box.
So at the moment
only I hold the combination
that opens the two boxes,
and that combination
is hidden inside my pocket.
So I’m going to send my box of Litecoins
over to him
so that he can verify the amount as well.
Once I see that everything is in order,
I pull out the secret combination
out of my pocket
to open the box of Litecoins.
As soon as he does that,
I’m able to see the combination as well
and can now use it to open
the box of Bitcoins
that he sent to me.
We then each get our funds
and the Atomic Swap is complete.
Thanks Nate.
Anytime.
This was a very simplified
non technical explanation of the process.
In real life,
the boxes are actually a smart contract
which states that if the transaction
doesn’t occur as expected
within a specific time frame,
each party will get their money back.
To get a bit more technical,
these smart contracts are called
Hashed Time Lock Contracts
or HTLC.
The lock on the box is called a hash
and the combination to open the lock
is called a preimage.
Putting this all together,
in an Atomic Swap,
funds are locked inside smart contracts
that can be publicly inspected
on the blockchain.
The funds can only be released
with a preimage,
a private key of sorts,
that matches the hash of these contracts.
If at any point either party
wants to cancel the swap
they can just walk away
and the funds will be automatically
returned to the original owners.
Atomic Swap technology
is just starting out
and it still has several limitations.
For example,
both currencies that are being exchanged
must have the same hash algorithm
and both currencies should support
specific types of smart contracts.
At the moment
you will also need
certain programming skills
to use atomic swaps.
However, in the future
it’s highly probable
that cryptocurrency wallets
will offer this technology
built in to their software.
By now I bet you already understand
the impact this might have
on cryptocurrency users.
Just imagine the opportunities
this can open up
once you have the ability
to morph currencies instantly.
Merchants can accept any cryptocurrency
that supports this technology
since they can just instantly exchange it
to any cryptocurrency they like.
We can set up trustless exchanges
where you don’t have to give away
control of your funds
in order to trade with other people.
Add the Lightning network
on top of this
and you basically get
the ability to move any type
and any amount of cryptocurrency
with zero fees, instantly.
Pretty neat, right?
So, how far are we
from being able to do all that?
Well up until today
only a few successful tests
have been done with this technology.
But as cryptocurrencies
become more mainstream,
and market competition
between wallet providers
and cryptocurrencies increase,
new solutions like Atomic Swaps
will come to fruition.
That’s it for today’s episode of
Crypto Whiteboard Tuesday.
Hopefully by now you understand
what Atomic Swaps are –
A way for individuals to exchange
different cryptocurrencies directly
without the need for trust or a third party.
You may still have some questions.
If so, just leave them
in the comment section below.
And if you’re watching this video
on YouTube,
and enjoy what you’ve seen,
don’t forget to hit the like button.
Then make sure to subscribe
to the channel
and click that bell so you’ll be notified
as soon as we post new episodes.
Thanks for joining me
here at the Whiteboard.
For 99bitcoins.com,
I’m Nate Martin,
and I’ll see you… in a bit.

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