Blockchain was created with the vision of expanding its application areas and evolving the possibilities. Although we believe that blockchain can revolutionize various industries such as finance and trading, as well capital market, the non-cumulative nature the ecosystem of the technology continues to be a problem. There are many available blockchain platforms, from first-generation ones like Bitcoin to third-generation ones like Avalanche. These blockchains all have their own isolated chains. These chains are unable to cross over or facilitate token trade or token exchange between different blockchain protocols. This poses many challenges to people who use blockchain to exchange tokens on different blockchains. Many Ethereum-based projects, such as Uniswap, Dave and others, can be interoperable to exchange cryptocurrencies, trade assets and perform trades. Cardano created a unique sidechain protocol for moving values between blockchains that support Cardano. These facilities aside, blockchains cannot allow users to freely exchange tokens on different protocols.
The users began searching for technology that could solve the issues of exchanging or swapping between multiple blockchain platforms. Cross-chain Swap was their solution. This is a crucial part of improving the blockchain ecosystem. This article will cover cross-chain Swap in greater detail in order to highlight its importance in the growing blockchain ecosystem.
What limitations did the Siloed Decentralized System face?
Even the most popular platforms, such as Ethereum and Bitcoin, have their own isolated ecosystem. Even though they are decentralized and autonomous, they still require an ecosystem that allows them to exchange tokens. Also, it is not possible to exchange Ethereum’s native tokens using another protocol like Avalanche.
With the advent of advanced blockchains and the growing trend towards decentralization, this limitation has become a problem for both users and businesses who use blockchain. Avalanche is an example of such a network. The platform was launched in September 2020 and more than 225 projects have been built. AVAX tokens also trade on a large scale.
So people began to invest on different blockchains. They eventually needed technology that could support cross-chain token exchange. Cross-chain swap is a way to make it possible. But how do token holders of particular blockchains deploy their tokens to different ecosystems. Let’s dive deeper to learn more about the technology.
What is the cross-chain Swap?
Cross chain swap (also known as Atomic switch) is a smart-contract technology that allows for the swapping of tokens between unique blockchain ecosystems. It allows users to swap tokens directly between two blockchains without the use of an intermediary or central authority. ERC-20 tokens can be exchanged with BSC tokens. A cross-chain swap allows people to exchange tokens among members of the blockchain network. Additionally, the swap takes place directly from the wallet which speeds up the process.
Tier Nolan was the first to propose peer-to-peer exchanges between blockchains. Charlie Lee, a prominent computer scientist and creator Litecoin, was the first to implement this technology. He converted LTC to BTC and explained the cross-chain swap mechanism.
Cross-chain Swap is an atomic method for completing transactions between participants. Computer science has given rise to the term “atomic” which is used to describe indivisible transactions. It refers to the transaction being executed according to the agreement or the entire transaction becoming invalid.
Let’s break this down:
Non-atomic crosschain Swap is when you send one token (say AVAX), and hope to get a different token in return (say Ether). Because the receiver can withdraw from the process after he has received the tokens, this spray-and-pray approach could lead to fraud. An atomic swap on the other hand confirms that the recipient has received valid tokens within the specified time frame or the transaction will become null. The sender will receive the exact amount of tokens he has put into the swap. Cross-chain swap is a way to eliminate manipulation and fraud.
What are cross-chain Swaps?
Cross-chain swaps are made possible by smart contracts. They allow token exchange between parties on different blockchains. These smart contracts are powered using a technology known as Hash Time Lock Contracts. (HTCLs). This locks the transactions with unique combinations to ensure that verification takes place on both ends. The following security features are available with HTCL technology
Hashlock
Hashlock technology is used to secure smart contracts. It allows you to lock your coins with a secret code (the combination of data). Only the swap initiator has access to this secret key. The secret combination is revealed after verification of the deposit has been completed on his side. The receiver can see the combination on his side to unlock the deposit once he has revealed it.
Timelock
The timelock mechanism uses time restrictions to ensure that transactions are completed on the blockchain network. It allows for fast transactions. It states that the transaction must be completed within the specified time frame or funds will be returned.
An example of a practical example:
- Jack deposits his ADA coins into an HTCL account. The HTCL acts as a virtual safe. Jack can unlock it only by using the secret combination he has created and kept confidential.
- Lara will verify that the deposit is in the correct amount of tokens before she can swap it. Jack gave her the cryptographic hash for the unique combination. She can then deposit her tokens, Ether, to the same HTCL address.
- Jack takes the deposit and reviews the amount. He then reveals the secret code to unlock the deposit. Lara will also be able to see the combination once he has disclosed it.
- The cross-chain exchange is completed when each party receives the tokens.
Read More : https://www.leewayhertz.com/what-are-cross-chain-swaps/
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