Atomic Swaps Are The Key

in atomic-swaps •  20 days ago 

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If you're here you've probably heard the term Atomic Swaps a few times.

I'm guessing a lot less of us actually know what it means for the cryptosphere. Personally I've been thinking about it a lot more lately.

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An atomic swap is a smart contract technology that enables the exchange of one cryptocurrency for another without using centralized intermediaries.

Sounds simple enough right? Atomic Swaps are simply a way to exchange one crypto for another in a decentralized way. How hard could it be?

So simple.

Until you actually try to do it. Seriously though, think about it. How do you confirm that an Ethereum address received Bitcoin and a Bitcoin address received Ethereum? Don't forget, if something goes wrong both transactions need to be canceled. These platforms were not built for this function in mind.

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lol... remember GDAX? I don't.

Which is why centralized exchanges are just so damn convenient the vast majority of the time. Let the bank-regulated centralized organization do all the heavy lifting for us. The only problem with this is that you have to trust the bank with all your security.

  • Private transactions can be subpoenaed.
  • Massive exchange wallets can get hacked.
  • Internal database error is not out of the question.
  • Accounts can be frozen.
    • KYC can be demanded at any time

Crypto is playing a constant game of leapfrog when it comes to balancing the trust and security of decentralization with the efficiency and convenience of centralization.

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However, not all atomic swaps are difficult to achieve. Any ERC-20 token can be traded effortlessly on the Ethereum network. This is one of the attributes that makes Ethereum so powerful as a DeFi solution.

Even if you're only interested in trading ETH as a speculative asset, the Ethereum network has a lot of advantages over Bitcoin. The main reason being able to permissionlessly trade ETH for DAI.


Once the decentralized option becomes convenient, the centralized option becomes completely antiquated.


Say all you want to do is trade your volatile assets into stable-coins when you're bearish, and stable-coins into volatile assets when you're bullish.

With Ethereum, all you need is a MetaMask wallet, or better yet a hardware wallet. How would one go about doing this with Bitcoin? On platforms that don't have smart-contracts, the process is much more complicated.


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Personally I believe that Bitcoin will start being manually "atomically swapped" with cash peer-to-peer in person on the street.

Such a development would require more adoption and probably catalyze the idea that cash needs to be eliminated, but I'm getting ahead of myself.


Ethereum even created an ERC-20 token pegged to Bitcoin. The problem? Pegging Bitcoin in this way requires the trust of a centralized authority, and regulation comes down on these authorities hard (plus you have to trust them to maintain the peg and not steal the Bitcoin). If Ethereum figured out a way to peg assets like this in a decentralized way (Maker), the entire game would be changed.

So why hasn't Maker pegged a coin to Bitcoin yet?

Well, they are working on gold now... these things take time,
but I'm willing to bet that Bitcoin is next.


A Bitcoin token collateralized by Ethereum; hilarious.

Imagine it: A Bitcoin token being created and destroyed on the Ethereum network without even interacting with the Bitcoin blockchain. All we need are trusted oracles to tell the MakerDAO how much BTC is worth in comparison to ETH. They are literally already doing that with DAI, so they already have experience.

Even better, Steem witnesses also have this built-in oracle feature for the STEEM/USD feed.

Therefore we can theoretically start doing the same thing once SMTs are flushed out.


Atomic Swaps Are The Key To:

  • Privacy
  • Interoperability
  • DEXchanges
    • Liquidity

Privacy

Say we have a bunch of Litecoin and we want to trade it for Monero to make a private transaction. Many of us are just going to make that trade on a centralized exchange. Even if no one knows where the money went, they know you traded that Litecoin for Monero on such and such date. Kind of defeats the whole purpose of anonymity.

Interoperability

The foundation of two networks working together in harmony is obviously a decentralized way of transferring the underlying assets. If you ever hear about Litecoin enabling Atomic Swaps for Bitcoin, this is a huge deal. Bitcoin and Litecoin are already pretty much linked at the hip. This fundamental gain would seal the deal. Atomic swaps between Bitcoin and Monero would be an even bigger deal, as this would allow Bitcoin wallets that haven't been identified yet to go fully private. These sliver networks are going to start combining and synergizing.

DEX

Atomic swaps are the key building blocks of a DEXchange. In fact, one could argue that a DEX is simply a collection of atomic swaps. The more advanced DEXchanges become the less reason we have to deal with the vulnerabilities of fully regulated operations.

Liquidity

Liquidity is a killer app in itself. The higher the liquidity is of a market, the easier it is for players to jump in and out of it without making any waves. Liquidity creates stability.

There used to be huge gaps in DAI liquidity a year ago. There might have been a $1-$5 gap in between the users willing to buy and sell. Now those problems are a thing of the past, and I'm quite impressed.

With atomic swaps (decentralized liquidity) all of a sudden different liquid markets can start to be combined. It would be possible to combine the ETH/DAI liquidity of one DEX with another.

This is absolutely impossible to do with the centralized legacy system. Imagine trying to combine Bitcoin liquidity on Coinbase and Binance. That would be an absolute nightmare and would probably even get banned by regulators if even attempted (it wouldn't). Instead, this is achieved analog-style through arbitrage.

Conclusion

The ability to transfer one crypto for another without an intermediary is a greatly misunderstood and understated fundamental gain. Just like Bitcoin is a revolutionary solution for p2p money transfer, so are atomic swaps.

It doesn't seem like that big of a deal, but Bitcoin solved the Byzantine Generals’ Problem The solution came 26 years after the question was posed. Trustless solution are far from trivial, even if they seem simple from the outside looking in.

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You nailed it. We are progressing there, at a rapid pace I believe.

The centralized exchanges are cooked. I do not expect many of them to be around in 5 years. DEX is becoming more common with the tools continually improving. Some advanced features such as you mentioned means the entire game changes. It also puts the regulators in a pickle.

I look at the changes in the Steemleo DEX yesterday. That is a two week old interface and already providing some nice features. While not in the same class as the Binance of the world, it is only the beginning.

The ability to go from token to token is vital. Include privacy into the mix and it is game on.

Thanks for the post.

Lots of 'dirty' money out there looking for a home. When the crypto world gets privacy right; that's going to be the death knell of the old system. Guns are useless if there's nobody to threaten.

I am pretty excited about atomic swaps I think it will free up so much liquidity especially on networks like ETH where there are so many tokens just sitting and basically being dust since exchanges don't want that small volume it's not worth even exchanging. It will improve the flow of capital and make it easier to take advantage of arbitrage.

We're in desperate need of more DEX and DEX that are easy to use and what will be easier than atomic swaps, once its built into hot wallets it could really change the way we use these currencies

BTC using as SoV and atomic swapping to Grin, which is being used as digital cash with its lightweight private blockchain.. would be awesome (:

https://liquality.io/

This looks interesting ;)
Cant say if it works yet and if it's trustless

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