# Understanding Atomic Swaps in Cryptocurrency Trading

## What Is an Atomic Swap?

Atomic swaps are a way to exchange cryptocurrencies directly across different blockchains. The primary goal is to remove centralized intermediaries like exchanges, which potentially simplifies trading. Atomic swaps reduce the number of trades needed by consolidating transactions into one.  

The term atomic derives from the term "atomic state" in which a state has no substates. This refers to a cryptocurrency transaction between two people using different blockchains that either happens or it doesn't—there are no alternatives.

Most atomic swap-enabled [wallets](https://www.investopedia.com/terms/b/blockchain-wallet.asp) and blockchains use smart contracts. Smart contracts are blockchain programs that execute when specific conditions are met. In this case, the conditions are that each party agrees to the transaction before a timer runs out. Using a smart contract in the trade prevents either party from stealing a cryptocurrency from the other.

Atomic swaps are also called [cross-chain](https://www.investopedia.com/what-are-cross-chain-bridges-6750848) atomic swaps.

### Key Takeaways

*   Atomic swaps enable direct cryptocurrency exchanges across different blockchains without intermediaries.
*   This process is facilitated by smart contracts that ensure the trade is completed securely, eliminating counterparty risk.
*   Hash Timelock Contracts (HTLC) enforce time-bound conditions for swap execution, ensuring trades are voided if not confirmed in time.
*   Decentralized exchanges and special wallets can conduct atomic swaps, enabling more seamless token exchanges. 
*   While atomic swaps are faster and cheaper than traditional exchanges, they may require specific knowledge and tools to execute.

## How Atomic Swaps Transform Cryptocurrency Trades

Each cryptocurrency is supported by a blockchain, designed only to accept transactions in specific tokens. For instance, Bitcoin and Ethereum blockchains have native tokens that can't move between them. You first need to convert them to fiat currency and then buy the other using other cryptocurrencies and exchanges to get the one you want. Depending on the cryptocurrency, this can take several trades. Atomic swaps allow you to exchange tokens from different blockchains in one trade.

Some decentralized exchanges can conduct atomic swaps for you. A decentralized exchange (DEX) operates without a central authority, letting you trade without third parties. You can also choose from cross-chain swap providers, where you transfer your digital assets into another wallet, conduct the swap, and transfer them back out.

> **Fast Fact**
>
> Atomic swaps rely on each party to provide proof through key encryption and acceptance of both parties through the encrypted key.

### The Evolution of Atomic Swaps in Crypto Trading

The concept was conceived shortly after altcoins—cryptocurrencies other than Bitcoin—materialized. The creation of altcoins meant some cryptocurrency owners became interested in moving capital between coins. This type of token swap first appeared in September 2017, when an atomic swap between Decred and Litecoin was conducted.

Since then, startups and decentralized exchanges have created ways to facilitate swaps and given users the same ability. For example, Lightning Labs, a startup that created the Lightning Network for Bitcoin transactions, has conducted off-chain swaps utilizing the technology.

Special cryptocurrency wallets have also been developed that are capable of cross-chain atomic swaps—Liquality has developed a wallet that will swap Bitcoin, ETH, and more by connecting to swap providers like 1inch, Jupiter, and Sovryn.

##  How the Atomic Swap Process Works

In an atomic swap, two token owners agree to exchange their tokens. A smart contract is programmed to lock the tokens of both owners, and redeem them in the tokens desired. For instance, if Alice wanted to trade one bitcoin (BTC) for an equal amount of Bob's monero (XMR), the smart contract would lock both amounts on their respective blockchains. Once Alice and Bob agree on the trade, the smart contract would redeem Bob's BTC on the Bitcoin network and Alice's XMR on the Monero network.

Atomic swaps use [Hash Timelock Contracts (HTLC)](https://www.investopedia.com/terms/h/hashed-timelock-contract.asp) to automate the exchange of tokens. As its name denotes, HTLC is a time-bound smart contract between parties that involves generating one cryptographic hash on each end.

> **Fast Fact**
>
> A cryptographic hash function is an algorithm that converts data of variable length, such as a person's wallet address and transaction information. It converts it to a hexadecimal number with a fixed length. In general, the number that is generated is called the hash.

HTLC requires both parties to confirm receipt of funds within a set time. If one party doesn't confirm in time, the transaction is voided, and funds aren't transferred. This eliminates [counterparty risk](https://www.investopedia.com/terms/c/counterpartyrisk.asp), or the risk that one party will accept the offered coins and decline the transfer of their coins.

## A Step-by-Step Guide to Conducting an Atomic Swap

Atomic swaps sound complicated, but for most users, they can be very simple. Atomic swap-enabled wallets or decentralized exchanges like Atomic Swap or Uniswap let you choose from your cryptocurrency to swap for another token. The swap might be labeled "Exchange" or "Swap" in the wallet's interface.

 After selecting the swap option, choose your tokens and view the amount you'll receive. The interface shows the swap rate and fees, lets you review the transaction, and has a button to start the trade.  

Depending on the network and method, a swap can take several minutes to complete. For example, Atomic Wallet's instructions state that a swap should take about 20 minutes, but other wallets or decentralized exchanges might take less or more time.  

## What Is the Atomic Swap Mechanism?

Atomic swaps are generally initiated by users and executed by a smart contract. The smart contract can be programmed in many ways, but most tend to lock up the tokens being swapped or burn them, then issue the new tokens to the transferees.

## What Are the Benefits of Atomic Swaps?

When two entities want to trade tokens, they can use an atomic swap to ensure no third parties are involved. This technique is faster and generally cheaper than going through exchanges or other token swap service providers.

## Is an Atomic Swap Anonymous?

In most cases, the only publicly available information is the token amounts and the users' public addresses. However, if other information has been made available, these addresses can be traced back to their owners, so they are realistically pseudonymous.

## The Bottom Line

Atomic swaps are transactions designed to trade cryptocurrencies directly between different blockchains without an intermediary, using smart contracts to ensure the transaction is secure and reliable. The utility of atomic swaps is in reducing the complexity and cost of trading tokens across different blockchains, making them appealing for users looking to avoid centralized exchanges.

There is a reliance on special wallets or decentralized platforms for carrying out atomic swaps, and while the process is streamlined, it requires users to understand the mechanics involved. The Hash Timelock Contracts (HTLC) secures these transactions by setting time constraints and ensuring both parties fulfill their end of the trade.

Atomic swaps became possible with the evolution of altcoins and have been facilitated by innovations like the Lightning Network. There are certain limitations, such as the pseudonymous nature of swaps which, while not entirely private, offer privacy by exposing only public addresses and transaction details. Regardless, atomic swaps present a way to reduce counterparty risk and dependency on centralized exchanges by leveraging blockchain technology.  

_The comments, opinions, and analyses expressed on Investopedia are for informational purposes only. Read our [warranty and liability disclaimer](https://www.google.com/url?q=https://www.investopedia.com/legal-4768893%23toc-warranty-and-liability-disclaimer&sa=D&source=editors&ust=1721401039797944&usg=AOvVaw2sbjIGHpQfUc0BRrcak5vb) for more info._  
  

> **Article Sources**
>
> 1.  Decred. "[On-Chain Atomic Swaps](https://blog.decred.org/2017/09/20/On-Chain-Atomic-Swaps/)."
>     
> 2.  Lightning Labs. "[Connecting Blockchains: Instant Cross-Chain Transactions on Lightning](https://lightning.engineering/posts/2017-11-16-ln-swap/)."
>     
> 3.  Liquality. "[Easily Swap Within and Across Blockchains](https://www.liquality.io/swap-crypto)."
>     
> 4.  Uniswap. "[Swap Anywhere, Anytime](https://app.uniswap.org/?utm_medium=lp&utm_source=lp&utm_campaign=swap-smarter&utm_creative=swap-on-web)."
>     
> 5.  Atomic Wallet. "[How Do I Make a Swap?](https://support.atomicwallet.io/article/73-how-to-make-an-exchange)"