Qtum, a blockchain platform that combines the strength of Bitcoin's blockchain with the Ethereum Virtual Machine to build decentralized applications, has completed its first atomic exchange with Bitcoin on mainnet.
This is a great, first step for atomic swaps, a feature that allows for exchanges or on-chain transactions, between cryptocurrencies on two separate blockchains without the need to rely on a third party. For Bitcoin, this is a big step forward in allowing interoperability between other blockchains and itself in a trusted way.
Atomic swaps are not a completely new feature, like Bitcoin Magazine reported on a Lightning Network ERC-20 exchange with bitcoins only a few months ago.
According to the Qtum blog post, the main solution that makes cross-chain atomic exchange possible is Hash Time-Locked Contracts, or HTLC. In a brief summary, HTLC substantially blocks funds in a transaction for a sufficient amount of time so that both blockchains are able to confirm the transfer of funds on their own (through block confirmation) and grant both parties time to request the funds. If enough time passes in which one party has not claimed their funds, everything is returned to the original parts.
The whole atomic swap process is described in the blog post as follows:
- Alice starts a transaction on Qtum that contains a timed contract and transfers QTUM to Bob.
- Bob checks the transaction.
- If the transaction is approved, Bob participates in a similar transaction on Bitcoin that pays BTC to Alice.
- Alice checks the transaction.
- If the transaction is approved, Alice redeems BTC from it.
- Bob extracts a secret from the ransom transaction.
- Bob redeems QTUM from the initial transaction.
- If the time specified in the time block is reached and Bob has not redeemed the token, Alice can refund the token.
In the last year, Qtum has made significant progress in developing its blockchain for greater adoption and interoperability. Atomic swaps are just the next step. They are also a crucial feature for interoperability with the Lightning network.
Why are atomic swaps important?
Atomic swaps solve a big problem in cryptocurrency, which is the inability to directly exchange two different types of currencies one with the other without having to rely on a trusted third party such as a stock exchange or a company .
In a current example, let's say that Alice wants to buy a collectable digital object of Bob and there is no way to trade in person. If Alice wants to send money to Bob for a collector's item, Bob could easily receive the funds and not send the collectible in return. Also, the opposite could happen, in which Bob sends the collector first and Alice never sends money in return.
The problem in the present example is the trust factor. When trust is taken into consideration in the risk of exchanging things online, it becomes much more risky. Atomic swaps are a solution to this problem, as described above, because they allow the exchange of funds between the parties without having to rely on anything else but mathematics to ensure that the process has been completed smoothly.