The definition of what is an atomic swap is really quite simple; it is an electronic transaction that exchanges a specific value in one currency against another, without the intermediary of a bank or other financial institution. So in essence, what you are doing is trading commodities with each other directly. And like any trade, there are various pros and cons associated with it.
Let us first explore what it is not. Unlike a centralized exchange where trades happen within a relatively small pool of traders, trading in the traditional way requires that you have traders all over the world that can agree to trade at the same time. This leads to price volatility and risk that can be very costly to the small time trader. Because of this, many new and small companies do not have the capital to enter into long-term trading contracts. It also means that they cannot possibly test out their ideas in the marketplace. Because of these reasons, many newer companies will utilize what is called a “smart contract” to enter into exchanges and make trades without the interference of traders and brokers.
But what is an atomic swap trading scheme that is not centralized? In order to answer that question, we need to go back to how the concept works. Unlike the trading that occurs on the public exchanges where prices and times are publicly published, the trades that take place between two independent parties are not visible to the naked eye unless you take advantage of a specially developed technology called a “smart contract”. This technological device is basically a computer code which allows private keys to be encoded which makes it impossible for anyone but those parties to view the information.
Once the parties are notified of the transaction, then it is virtually impossible for a third party to reverse the atomic swap and take back the funds that were transferred. This is because the smart contract has encoded in them an unbreakable code that only the two originalenders can break. The reason this is so effective is due to the fact that once a trade is sealed in this manner, all future trades involving that particular asset will be recorded within the relevant block in the relevant chain. This means that if you ever want to take a look at your portfolio or some other information about your investments, you have the ability to look right into your past for answers.
The question might be what is an atomic swap if it isn’t exclusive to the financial world? Private key ownership is just one of the uses that this unique trading platform has in the corporate world. Other uses include online gaming platforms, gold trading, commodities trading, stock trading, and even real estate. Private key ownership is also beneficial to the environment as well as to ensuring the safety of finances. One interesting use of the system was developed by a group of Canadian developers who call themselves the “rious” people.
The “rious” individuals realized that there were distinct benefits to their fellow traders when they started using an atomic swap for trades on their local exchanges. First, by making trades on their local exchanges, they reduced their carbon footprint, because most of their trades were made within the same block, rather than at different exchanges. Second, by exchanging coins from their local transactions, they ensured that no single entity stood in their way, limiting their personal wealth to just a few select assets. This way, they avoided the fees often associated with exchange trading and could diversify their holdings. Third, by taking advantage of the low cost and high liquidity nature of these exchanges, they were able to use their funds for more productive purposes. For example, trades that involved large amounts of money (in excess of a few hundred dollars) allowed them to purchase real estate or invest in other productive assets.
What is an atomic swap, then, isn’t just a new concept that has suddenly materialized into the financial world. Instead, what is the application of technology to create new methods for people to manage their funds. Specifically, atomic swaps are created between two independent communities, both of which have a unique history and current relationship. One community takes the form of a “buyer” fund, making funds available to other buyers on the peer-to-peer platform. The other community becomes the “seller”, who offers funds to the other buyer on the peer-to-peer platform.
By doing so, the buyers of these funds benefit by enjoying lower transaction costs and access to a larger range of assets than would be possible with traditional centralized exchanges and clearinghouses. Sellers also enjoy a lower risk level since the assets being traded are not necessarily in their own possession. Instead, sellers take advantage of a system of pooled funds that are accessible to the buying public. What is an atomic swap, then, is really the application of technology to revolutionize how that the traditional exchange process functions.
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