Atomic swaps secure digital asset exchanges by utilizing smart contracts and hash lock cryptography.
“Atomic” is a term used to describe a process that ends successfully or does not start at all – with no other choice. Atomic swaps for cryptocurrency transactions mean only two possible outcomes: either the transaction is executed successfully, or nothing happens.
In short, atomic swaps create a mechanism in which both parties to a cryptocurrency transaction must meet all predetermined conditions in order to complete the transaction. This is achieved through the implementation of smart contracts, which are self-executing programs designed to enforce the conditions required for a transaction to succeed.
Atomic swaps utilize hashed time-locked contracts (HTLCs), a form of smart contract, to enable secure and trustless cryptocurrency exchanges. HTCL is essentially “locked”. Transactions and require both parties to verify information before the exchange takes place.
An atomic swap smart contract has two basic components:
hash lock
The hash lock mechanism allows contracts to be locked using unique cryptographic keys that can only be generated by cryptocurrency depositors. This key is the only piece of data that ensures the exchange is only finalized when both parties approve the transaction.
time lock
The timelock mechanism is like a deadline for swapping. It ensures that transactions are completed within a certain amount of time, and if that doesn’t happen, it returns the depositor’s funds. Timelocks inherently help secure transactions. Both parties must approve the exchange within a specified time frame, otherwise the transaction will be aborted and the cryptocurrencies will be returned to their respective owners.
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