Atomic Swaps – The Solution to the Exchange Problem

atomic swaps could be the solution to centralized exchangesThere are currently two obstacles in the way of the inevitable proliferation of DLT. The first is mining centralization, and some cryptocurrencies are at work solving this issue, through various means and methods. The other problem is centralized exchanges, which can potentially be resolved with decentralized exchanges and atomic swaps.

The problems with centralized exchanges

Centralized exchanges are useful in that they provide people with a means of accessing revolutionary technology that could eventually entail a complete exit from the fiat financial infrastructure. While they are a crucial step, ultimately, the cryptocurrency industry will need to remove them for good to continue its evolution towards a fully equitable decentralized system of exchange.

Centralized exchanges are costly, some charging in the region of 8% for trades, an unacceptable figure. This is also the cost of Bitcoin ATMs. While it is possible to avail of lower fees, it takes time and knowledge. Binance and Kucoin are newer exchanges that are better across the board.

Centralized exchanges are extremely vulnerable to hacks, as has been demonstrated time and time again, with the massive loss of user funds. There is also the risk of an exchange simply running off with user funds, aside from a hack.

Another problem is the verification procedures and not just the appalling times due to pointless KYC requirements. Exchanges such as Coinbase are being compelled to give away customer data so that government departments can harvest money off of taxpayers. The ethics and rationale for taxing digital assets are quite thin. Usually, governments can hide behind a veneer of logic, as they regulate certain industries and provide infrastructure. While this provides a front for taxation on many assets, all they have done with DLT is try to repress the technology at all costs.

The whole purpose of DLT is to get rid of problematic third parties such as governments who are now dead weight on an increasingly decentralized society. A centralized exchange is just another vulnerable point for data harvesting and monitoring.

The atomic swaps solution

With all this in mind, atomic swaps could well be the solution. An atomic swap is a peer to peer swap without a middleman. No trust is necessary. The word ‘atomic’ means that the transaction happens completely or not at all.

Typically, people go to third-party specialists to sell something because even if a suitable seller is found online, there is a trust issue. In an atomic swap, the transaction takes places at the same time, an instant swap. So one person does not risk anything by having to make the first move with a deposit or transactions. It is all or nothing, and no party can steal from the other. This atomic swap would also render redundant the escrow services provided by some online platforms.

The current issue with atomic swaps right now is that they are slow and are not yet supported by major exchanges. They also will not work for cryptocurrencies that do not have smart contract support. Like all things in the DLT industry, these issues will be resolved in time. Atomic swaps in conjunction with decentralized exchanges will provide the basis for a transparent, trustless, and zero fee cryptocurrency trading mechanism which will further accelerate the departure from a corrupt banking, taxation, and governance infrastructure.

Digital Nomad with an interest in Zen and Blockchain technology.

Law graduate with 3 years experience as a consultant in the capital markets industry and 4 years experience freelancing on UpWork as a Creative Writer.