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