What are Cross-Chain Swaps?
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What are Cross-Chain Swaps?
@SergeenkovAndrey Sergeenkov
Cryptocurrency analyst. Founder and editor at btcpeers.com
Even though the cryptocurrency market seems to be slowing down and most major coins have lost nearly half of their value, there is still interest in digital assets and adoption is still rising. The sustained interest is mostly due to a couple of reasons. DeFi seems to be stronger than ever since it provides a whole new avenue of profit-making. Secondly, even though cryptos have mostly lost their values from their recent bull run, they still outstrip traditional forms of investments in the long run and are an excellent means of hedging wealth.
No wonder the complete cryptocurrency market still has a combined value of $1.3 trillion. One would consider that such an accelerated adoption due to its differences with centralized regular money systems would mean a universal existence between all the thousands of coins and tokens.
The Siloed Decentralized Systems
Sadly, modern coins have an isolated existence. Designed to be decentralized and work independently, they either have their own separate blockchain ecosystem or run off of other larger ones such as Ethereum and Binance Smart Chain.
This essentially means that one token cannot interact with another if they run on different ecosystems. As more and more tokens are launched coupled with increased interest due to DeFi, the struggle is getting more serious than ever. Take Binance Smart Chain as an example. Less than a year ago it was a non-existent player in the market, but recent months have proven that it is a serious ecosystem and a lot of tokens are now using it. Ethereum still retains its dominance as the first ever to allow different tokens to be launched using it.
So what if you have tokens on one blockchain and want another that runs on a different system? This is where cross-chain swaps come in handy.
Let’s Swap!
Sometimes also known as an atomic swap, a cross-chain swap is a complete decentralized mechanism of exchanging your tokens for other non-native ones without the need of an escrow or a middle man.
Cross-chain swaps are performed through special smart contracts that can handle both (or more) types of tokens. Though these swap contracts have been around for four years (the first known atomic swap was done in 2017 by Litecoin creator Charlie Lee who successfully exchanged LTC with BTC.
Today, many platforms offer cross-chain swap functionality. One example is the decentralized platform MintySwap uses its aggregation protocol that leverages cross-chain swaps between the two largest DeFi chains and yet, isolated from each other - Ethereum and BSC.
The aggregation and cross swap functionality give a boost to the maturing DeFi market, as users discover new markets previously inaccessible and provide DeFi developers with a larger audience and growth.
There are many other platforms, such as Shapeshift and Wanhain that claim to have the cross-chain swapping ability, but these platforms slightly move away from a true swap. Shapeshift insists on users signing up and therefore, collecting user data, a major no-no in a purely decentralized system and Wanchain is essentially creating a middle chain that acts like a bridge and doesn’t directly swap tokens.
So How Do Cross-Chain Swaps Work?
As said before, cross-chain swaps are done using smart contracts- small applications that can connect with two different chains and perform an automatic exchange of tokens when certain conditions are met.
The process, though fairly complicated at the back end, is pretty simple to execute. When two persons agree to exchange their assets, they submit these tokens to what is known as a Hash Time Locked Contract (HTLC). Each participant will then exchange the hash keys so both can ensure that the other party has deposited the right amount. The transaction is executed if deposits are made within a specified time. If not the deposited amounts are returned.
In this way, two people with completely different coins are able to swap their assets without the need of a guaranteer to act as an escrow or go to a centralized exchange and then trade in for the required assets.
Though cross-chain swaps are not a new thing, the recent interest in different tokens, especially due to high-profit margins in DeFi oriented farming has led to a demand for tokens from different chains. Cross chain swaps such as offered by MintySwap are the logical choice.
Though centralized exchanges offer swaps, the mere tedious effort of registration, KYC and then paying the associated fee is rapidly making this an obsolete option.
Disclaimer:
The author does not have any vested interest in the projects mentioned above.
The opinions in this article belong to the author alone. Nothing in this article constitutes investment advice. Please conduct your own thorough research before making any investment decisions.
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