Exchanging crypto coins can be complex for many users, also various cryptocurrency exchanges do not support all the coins and it can lead to a time-consuming process of migrating accounts, conversion of the coins or even can have counterparty risk.

An atomic swap is a technology consisting of a smart contract that allows the exchange of cryptocurrencies with each other without the need of any central intermediaries such as the exchange itself. It is a peer-to-peer exchange of cryptocurrencies amongst the users without the need for third party services. It occurs directly amongst the cryptocurrencies of its blockchains, on-chain or with off-chain and it solves the time-bound problems with the utilization of HTLC - Hash Timelock Contracts.

In simple terms, it is like money transfer, wherein atomic swaps help its users to trade directly with one another or can be said wallet-to-wallet.

Atomic Swaps are also known as Cross-chain trading.

The first successful atomic swap was between Litecoin and Decred in the year of September 2017.

On-Chain and Off-Chain Atomic Swaps

Also Read, Know the difference between Exchange and P2P exchange

How does it work

Atomic swaps required both the users in a timeframe to acknowledge the receipt of funds with the use of a cryptographic hash function. And if the process as required is not confirmed as per the method laid out, the entire transaction is hence voided.

Example

For instance, Chandler and Joey use the atomic swap method.

Chandler is a trader who wants to convert his 20 Bitcoins to Ethereum on an equivalent rate with Joey. 

• Chandler submits his transaction with the blockchain of bitcoin, also to encrypt the transaction, he generates a number of the cryptographic hash functions. 
• Chandler then deposits his BTC along with the value and shares the information with Joey.
• While Joey being the end-user conducts the same procedural method by submitting its transaction to the blockchain of Ethereum.
• Chandler and Joey by utilizing their respective numbers, unlock their own funds in a specific timeframe (as a stated method of the process). 
• Hence the transaction is processed. 

This will not happen or will be canceled if either of them misses out on the steps that are required for the completion of the transaction and the funds are returned back to its users.

Also Read, Lightning Network - How it works?

Pros and Cons of Atomic Swap

Pros-

1. Atomic Swap helps to avoid the feature of interoperability that the assets of cryptocurrencies face.
2. People can use and hold diversified crypto coins.
3. It can enable a decentralized exchange that would be fee-less.
4. An atomic swap is decentralized and hence removes the hurdles of utilizing 3rd party services.
5. You will have complete control over your money.
6. The chances of fraudulent activities are very less with the atomic swap.
7. With atomic swap, you need not use the intermediary tokens
8. One saves time and money with the help of an atomic swap.
9. The transaction process of the atomic process is secured

Cons-

1. The need for initiating the hashed timelock contracts for both the users.
2. The need for the facilities of specialized programming.
3. The compatibility with wallets and exchanges needs to increase for the adoption of the atomic swap.

The companies that use Atomic Swap

1. Lightning Labs utilizes the Bitcoin’s lightning network for its transactions and has done through off-chain swaps utilizing the technology.
2. Komodo is a decentralized exchange and supports trades of over 95% of all the existential tokens and coins.
3. Blockchain.io utilizes the combination of centralized and decentralized companies for the implementation of atomic swaps.

Atomic Swap has a great potentiality to be influential for the growth in the world of Cryptocurrency.