The percentage of cryptocurrencies that have executed Atomic Swaps is still low, but along with DEX are shaping up to be the technology that moves the centralized Exchange.
Decentralized exchange platforms
A Decentralized Exchange (DEX) is a market for cryptocurrencies or Blockchain projects that is open source. It is a market ecosystem in which sellers and buyers coexist and in which the transactions resulting from their exchanges are recorded in an accounting book, distributed in each node that participates in the network.
In the DEX nobody has control, users buy and sell directly using point-to-point apps, being able to perform the whole process without any intervention, using mechanisms such as smart contracts to make the transaction secure. This means that no person is swindled even though there is no one intervening. The client’s information and funds are not of interest in this type of exchange.
Advantages of DEX
Unlike Centralized Exchanges in which funds and market prices can be manipulated and transactions are recorded outside the chain, DEXs offer security advantages that make them attractive to users who wish to avoid any risk.
- It does not require confidence: thanks to its “no trust” nature, it is not necessary to trust any entity or individual properly, since the funds are contained in a personal wallet and do not depend on a third party.
- Privacy: it is not necessary to provide personal information, unless it is bank transfers and it would only be necessary to reveal it to the person with whom the transaction is made.
- Security and anti-censorship: since the accounting book is distributed among all the nodes of the network, it undoubtedly provides a large layer of security, making a cyberattack difficult, since the network would have to be affected in all its magnitude, something really expensive and therefore almost impossible. Likewise, the DEX does not suffer the fear of being censored, closed or deprived of their property by the authorities.
- Functional limitation: lack of trading volume and impossibility to withdraw or deposit fiat money. There is not a great variety of cryptocurrencies that can be exchanged, which should be a very useful option for potential investors. It is not possible to exchange between different blockchains, it is another missing functionality.
- Low volume and liquidity indexes: exchange volume within the chain of less than 2% of all day transactions. Liquidity really low. Less orders are placed compared to centralized orders. Marketing uncertainties (rates, validation time). The available cryptocurrencies do not respond to the general needs.
- Slow process of validation and high cost: the validation time becomes slow because the transfers are stored in a blockchain, sometimes it could take up to hours. This results in its high cost, an aspect that undoubtedly blemishes this type of exchanges.
Most popular DEX
- Waves: a platform designed as a blockchain ecosystem that has become very popular, because it allows developers to create their own token and market it through their DEX, including ICO to raise funds for their projects. It is both a DEX and a cryptocurrency wallet, with which you can buy and sell tokens, as well as store them. The mining service is also available on the platform, as well as a variety of tasks that include financing, voting and reward programs.
- EtherDelta: a solution based on Ethereum that can be downloaded from GitHub. It is a professional solution, developed by traders for traders. Its popularity is that it is easy to make transactions with ICO tokens, many of which are created in Ethereum. In turn, it has a popular feature that is to convert tokens in Ether, which have more liquidity.
- Kyber Network: a more recent DEX option than the previous ones, designed to trade and exchange Bitcoin, Ethereum and ICO. Its creators hope to obtain extremely accurate prices for altcoins through a mechanism called liquid-weighted price (LWP). The idea is to base the price on liquidity so that there is always money available to negotiate. It offers both conversions and exchange between Bitcoin and Ether tokens through its network called Kyber Network, which aims to provide coverage against inflation and pay anyone with your token.
- OX: it is not an exchange but a protocol to exchange cryptocurrencies among them, which aims to create a mechanism that allows people to move tokens among many different exchanges created within the Ethereum ecosystem. It is currently a decentralized network where a great variety of cryptocurrencies and exchanges operate. It aims to solve the difficulty that these products present to relate directly to each other.
- OMG: a company that aims to be disruptive in several financial areas, money sending, digital wallets, exchange between cryptocurrencies and fiat currencies, an to function as a DEX that connects the entire network.
Atomic Swaps, also called cross-chain swap exchanges, is a technology that allows the exchange of different cryptocurrencies in different blockchains without the need for a third party or intermediary.
They rely on a contract with temporary hash blocking, which allows the exchange of both cryptocurrencies to be efficient and almost immediate. It works through a temporary closing contract in which each participant must perform their part of the operation in time for it to be successful.
The process uses a secret code or password to complete the transfer of funds. Once in accordance with the conditions of the exchange and verifying that the amount equivalent to each cryptocurrency is correct, each one must use their code to receive their share. This acts as an insurance contract and at the same time grants exclusive responsibility to each party for the operation to be carried out. Otherwise, if any of these elements fail, the transaction will be canceled.
Atomic Swaps can be made in two ways, within the cryptocurrency blockchain (On-Chain) or out of it (Off-Chain). When it is done within the blockchain, it is necessary that they meet some requirements, both cryptocurrencies must use the same hash algorithm and have compatibility with temporary closing contracts (HTLC), such as Litecoin and Decred, one of the first Atomic Swaps that were known in the community.
In the Off-chain mode they are carried out in a secondary layer of nodes, resulting in the swap of an extension of the chain, an example of this was done between Bitcoin and Litecoin in 2017 using Litghtning Network.
Atomic Swaps technology aims to correct the centralization error generated in a concept of decentralized origin such as Bitcoin and cryptocurrencies in general, apart from eliminating the intermediary facilitating transactions between people on their own terms.
The percentage of cryptocurrencies that have been executed by Atomic Swaps is still low, but along with the DEX they are the technology that moves centralized Exchanges to become the main method of use for P2P exchanges.