Atomic swaps are the silver bullet to KYC/AML and what you need to know

Atomic swaps are the silver bullet to KYC/AML and what you need to know

August 13, 2020

The crypto-world is buzzing with the news of atomic swaps. Atomic swaps are heralded to be the silver bullet to end KYC/AML in crypto trading as they will enable people to directly trade with each other, wallet-to-wallet. So let’s take a look at atomic swaps in more detail and how they could change the crypto trading game.

What are atomic swaps?

During an atomic swap, a third-party service, such as crypto exchange, is not required. This means two individuals can exchange directly with one another, with full control over the exchange.

The first recorded successful atomic swap was in 2017, between Decred and Litecoin. This atomic swap was particularly ground-breaking as it was completed via separate blockchains with different crypto coins.

How does it work?

To complete an atomic exchange, two traders must share a Hashed Timelock Contract (HCL) and use it as a payment channel to a pre-agreed deadline. The contact details of the payment channel are only known by the two traders, so no other user will be able to enter or try to manipulate the exchange in any way.

What are the benefits of adopting atomic swaps?

• Less vulnerability

In the past, if two users wanted to trade cryptocurrencies, such as Litecoin and Bitcoin, they would have to do so on a centralised exchange. Centralised exchanges are infamous for being hacked, with cryptocurrency traders losing millions of hacked coins.

• No interference

Centralised exchanges are required to be registered to a country, meaning they are subject to the policies and ruling of their registered country’s government. Atomic swaps are not subject to any government regulation, meaning they are much more free and versatile.

• Cost-effective

Atomic swaps do not involve transactions fees as some centralised exchanges do.

• Higher speed and efficiency

Centralised exchanges are often subject to maintenance issues, as well as external attacks. They also require multiple confirmations and set-up processes, which are time-consuming. With direct wallet to wallet exchanges, the trading process is much faster and efficient as a centralised exchange does not need to be configured.

The future of atomic swaps

Due to its current limitations about which kinds of cryptocurrencies can be traded (both the cryptocurrencies must have a hash inherent algorithm and be able to initiate HCL) atomic swapping is still not a mainstream cryptocurrency trading process. Atomic swaps do, however, have serious potential and could play a key role in the next regeneration of crypto trading.

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