Traditionally, a user must utilize a centralized exchange to purchase or sell a cryptocurrency. This structure has numerous disadvantages: both sides must locate an exchange they trust, exchanges frequently have outages during times of heavy demand, and exchanges are subject to state monitoring. An atomic swap, on the other hand, allows direct wallet-to-wallet trade between two peers by utilizing a specifically constructed smart contract for decentralized exchanges.
Atomic swaps provide a more decentralized alternative to trade on Automated Market Maker (AMM) DEXs, which are reliant on centralized liquidity pools. AtomicDEX, one of the most renowned atomic swap-powered DEXs, provides a true peer-to-peer order book mechanism for crypto trading.
Atomic swaps are built on the foundation of hash timelock contracts (HTLC). Every HTLC contains a hashlock and a timelock, which may be used to lock and unlock the deposited money using a key known only to the depositor, which automatically returns cash to the depositor if the transaction is not completed within a certain duration.
Atomic swaps can be used to transfer native currency on-chain between various blockchains. Because atomic swap technology is protocol independent, it is possible to exchange assets such as Bitcoin for Ethereum without depending on the security of a wrapped token or centralized exchange. Off-chain atomic swaps, which are still in the early phases of development, offer substantially quicker transaction rates.