Turgon on Nostr: Cross-Chain Atomic Swaps in Bitcoin: How Do They Work? Bitcoin is a decentralized and ...

Cross-Chain Atomic Swaps in Bitcoin: How Do They Work?

Bitcoin is a decentralized and secure digital currency that allows users to exchange value without relying on a central authority. However, transferring assets between different blockchains (for example, Bitcoin and Ethereum) can be challenging because these systems are not inherently designed to interact with each other. This is where cross-chain atomic swaps come into play. This technology enables the exchange of cryptocurrencies between two different blockchains without the need for a third-party intermediary. So, how does it work?

Atomic swaps allow two parties to exchange digital assets on different blockchains without relying on each other’s trust or a centralized middleman. The term “atomic” refers to the fact that the transaction either happens fully or doesn’t happen at all. Both parties either get what they want or the deal is canceled, leaving everyone with their original assets.

To understand this better, let’s use the classic “Alice and Bob” example. Alice has Bitcoin, and Bob has Ethereum. Alice wants to exchange her Bitcoin for Bob’s Ethereum, and Bob wants to exchange his Ethereum for Alice’s Bitcoin. However, they don’t trust each other, so they decide to use a cross-chain atomic swap instead of going through a centralized exchange.

Step 1: Alice Locks Her Bitcoin
Alice creates a contract on the Bitcoin blockchain using a Hashed Time-Locked Contract (HTLC). This contract locks her Bitcoin for a certain period of time and can only be unlocked by Bob if he knows a specific “secret” that Alice has generated (the hash of the secret is used in the contract).
Step 2: Bob Locks His Ethereum
Bob also creates an HTLC on the Ethereum blockchain, locking his Ethereum. This contract allows Alice to claim Bob’s Ethereum, but only if Alice reveals the secret used to unlock her Bitcoin. Bob can’t unlock Alice’s Bitcoin without this secret, and Alice can’t unlock Bob’s Ethereum without revealing it.
Step 3: Alice Claims Bob’s Ethereum
Alice now uses the secret to unlock Bob’s Ethereum. This action is recorded on the Ethereum blockchain, and Bob can see that Alice has revealed the secret.
Step 4: Bob Uses the Secret to Claim Alice’s Bitcoin
Bob, having seen the secret that Alice used, now uses it to unlock Alice’s Bitcoin. Thus, both parties successfully complete the swap without ever needing to trust each other or involve a third party.

If at any point the swap isn’t completed (for example, if one party doesn’t unlock their assets within the time limit), the contracts will automatically expire, and the funds will be returned to their respective owners. This ensures the system remains safe and fair.

Why Use Atomic Swaps?

• Security: No need for a centralized exchange or a trusted third party.
• Privacy: More private than conducting trades on an exchange.
• Decentralized: No one can stop or delay the transaction

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