How Atomic Swap Technology Is Revolutionizing Cryptocurrency Exchanges

Owing to increasing awareness and changing government perception, the cryptocurrency ecosystem is expanding rapidly. It now boasts hundreds of white-label crypto exchanges with more than 2000 digital coins and a market cap of $142 billion. Most exchanges, however, use a centralized cryptocurrency trading software or system.

Although the number of centralized exchanges (CEXs) far exceeds decentralized (DEX) ones, they are not safe. Centralized crypto exchanges face a constant threat of cyber hacks, unexpected shutdowns, and government seizures. In the first half of 2018 alone, cybercriminals managed to steal $1.1 billion worth of cryptocurrency.

So, is there a better alternative to CEXs?

Enter Atomic Swaps.

This blockchain-based technology has the potential to offer an efficient, secure, and fast peer-to-peer alternative to exchange crypto assets. It promises to provide a fully self-governing cryptosphere that hardcore crypto users have been dreaming of from the beginning.

Read on to know more about Atomic Swaps and their impact on centralized crypto exchanges.

Atomic swap involves a peer-to-peer exchange of cryptocurrencies without the need of a crypto exchange. Users have complete control over their digital assets throughout the transfer as there is no third party involved.

There are two types of Atomic Swaps.

For the last couple of years, centralized crypto exchanges have become a target for cyberattacks. As a result, an increasing number of seasoned cryptocurrency users have always wanted to explore better alternatives.

However, until the development of Atomic Swap and Lightning Network technology, there was no better alternative to centralized exchanges. This crypto asset trading technology is more secure, has lower or zero transaction cost, offers interoperability between the different crypto coins, requires no government regulation, and is fast.

Many crypto experts including Bitcoin developer, Jameson Lopp believe that the atomic swaps via Lightning Network will soon enter the crypto exchange ecosystem. In fact, in 2018, the Lightning Network implementation grew significantly. Now, there are more than 2,800 nodes with active channels, 20,000 total channels, and network capacity of $2 million.

Simultaneously, the decentralized exchange landscape is also expanding rapidly. Several DEXs that use smart contracts or HTLCs to complete trade have witnessed an increase in their trading volume. In November 2018, three leading decentralized exchanges namely Bancor, Kyber and 0x reached over 100,000 monthly trades combined. On the other hand, some DEXs such as Komodo have performed over 110,000 atomic swap transactions so far.

The combination of increased demand for DEXs and the growing adoption of Atomic Swaps based on Lighting Network technology are leading the charge against centralizing exchanges. As these technologies are making the crypto ecosystem more currency agnostic, they will encourage crypto traders to move away from CEXs. In other words, Atomic Swaps will have a considerable negative impact on centralized exchanges in the coming years.

But, hold on! There’s a catch.

Although the future of Atomic Swaps looks bright, at present, the technology is facing a few limitations. To begin with, not many cryptocurrencies can support the hash algorithm required to perform atomic swaps. Further, the lack of the ability to initiate hashed timelock contracts and specialized programming functionalities is slowing down a widespread adoption of the technology.

In theory, Atomic Swaps are supposed to be extremely fast. However, right now, they are not fast enough to handle large volumes of data. The lightning network technology needs further refinement and enhancement to overcome this lack of scalability. Although several exchanges and crypto wallets are adopting Atomic Swap technology, the progress has been slow, especially among wallet developers. In other words, there is a need to generate more awareness among the various facets of the crypto realm about this technology.

Lastly, unlike CEXs, Atomic Swaps can’t offer value-added features such as trading charts and tools, customer support, and user-friendly interface. You can’t use cross-chain atomic swaps for fiat currency trades. You will still need CEX to buy crypto assets using fiat currency, which is a big letdown.

Despite the limitations, Atomic Swap is the technology has the potential to disrupt the crypto world in the coming years. In future, the number of decentralized exchanges that use off-chain (via lightning network) and on-chain Atomic Swaps is bound to increase as well. However, it still has a long way to go before its impact on CEXs becomes visible. The question is, are you going to wait until that happens or are you going to grab the early adopter advantage? Let us know what you think in your comments.