what are cross-chain swaps

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What are Cross-chain swaps?
leewayhertz.com/what-are-cross-chain-swaps
Blockchain exists with a vision to evolve and
widen the scope of its use cases across the
world. While we understand that blockchain could
redefine various industries (such as finance,
trading, gaming, and capital market), the
non-cumulative nature of its ecosystem continues
to trouble the growing prevalence of blockchain
technology. Currently, there are numerous
blockchain platforms available, ranging from
first-generation blockchain like Bitcoin to
third-generation like Avalanche. All of these
blockchains have separate and isolated chains.
These chains can neither come across nor
facilitate token exchange or trade that belongs
to different blockchain protocols. Such a lack
of interoperability poses various challenges for
people who use blockchain and wish to exchange
different tokens on multiple blockchains without
any intermediary. However, tons of projects built
on Ethereum protocol are interoperable,
including Uniswap, Dave, etc., that can easily
interact for exchanging cryptocurrencies,
swapping assets, and performing trades.
Similarly, Cardano launched a unique sidechain
protocol to move values between two blockchains
supporting the Cardano protocol safely. Even
with these facilities, blockchains could not
provide users with the freedom to exchange tokens
on different protocols. Since then, the users
have started looking for technology to address
the challenges of exchanging or swapping on
multiple blockchain platforms. They found the
solution with the cross-chain swap, which plays a
vital role in improving the blockchain ecosystem.
This article will discuss cross-chain swap in
detail to explain its importance in the
evolving blockchain ecosystem.
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What limitation did the Siloed Decentralized
System have? Even the high demanding platforms,
Bitcoin and Ethereum, have their isolated
ecosystem. Although they are decentralized and
independent, they need a separate ecosystem to
allow a token exchange. In other words, one
cannot exchange Ethereums native tokens on
another protocol such as Avalanche. The
limitation certainly became a major challenge
(for both the individuals and businesses using
blockchain) with the growing decentralization
trend and advanced blockchains being introduced.
Taking Avalanche as an example, the network
launched in September 2020, and over 225
projects are built as of now on the platform. At
the same time, AVAX tokens are being traded on a
large volume. So, people started to invest in
different blockchains, and they eventually had
the need for technology supporting cross-chain
token exchange. Cross-chain swap makes it
possible. But, how can token holders of a
particular blockchain deploy those tokens on
different ecosystems? Lets go deeper to
discover the technology. What is the cross-chain
swap? A Cross chain swap, often known as Atomic
swap, is a smart contract technology that
enables the swap of tokens between two unique
blockchains ecosystem. It allows the user to
swap tokens directly on another blockchain
without any intermediary or central authority.
For instance, exchange ERC-20 tokens with BSC
tokens. Hence, a cross-chain swap allows
individuals to exchange tokens with the members
involved in the blockchain network. Moreover,
the swap happens directly from the wallet, and
that makes the process faster. Tier Nolan at
first laid out the idea of peer-to-peer swaps
between blockchains. However, the technology was
implemented in 2017 by Charlie Lee, a famous
computer scientist, and creator of Litecoin. He
exchanged LTC for BTC and thus explained the
mechanism of cross-chain swap. Cross-chain swap
implements an atomic process for completing the
transactions between nodes (participants). The
term atomic is derived from computer science,
which represents indivisible transactions. It
means the transaction executes as per the
agreement, or the whole transaction becomes
invalid. How do cross-chain swaps
work? Cross-chain swaps use smart contracts to
enable token exchange between two parties on two
different blockchains. These smart contracts are
powered by a technology called Hash Time Lock
Contracts (HTCLs), which locks the transactions
with unique combinations to ensure verification
is done on both ends. The HTCL technology has the
following security features Hashlock
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• Hashlock technology allows smart contracts to
  lock the coins with a secret key (the
• combination of data). Only the swap initiator can
  access this secret key. Once verification of the
  deposit is done on his end, he reveals the secret
  combination. After the revelation, the receiver
  can also see the combination to unlock the
  deposit on his end.
• Timelock
• Timelock mechanism utilizes time constraints to
  secure the transaction on the blockchain
  network. It ensures quick completion of the
  transactions. It specifies that the transaction
  should complete in a given timeframe or the funds
  will be returned to the depositor.
• Practical example
• Jack deposits his ADA tokens into an HTCL
  address. The HTCL acts like a robust virtual
  safe and can be unlocked only with the unique
  secret combination that Jack has generated and
  kept secret.
• Once the deposit reaches Lara, she will inspect
  and determine that the deposit has the right
  number of tokens for swap. She then uses the
  cryptographic hash of the unique combination
  that Jack shared with her. Using it, she can
  deposit her tokens (Ether) to the same HTCL
  address.
• After Jack receives the deposit from her and
  checks the amount, he reveals the
• secret combination to access the deposit. As soon
  as he reveals the combination, Lara can also see
  the combination and use it to open the deposit.
• When each of them receives the tokens, the
  cross-chain swap is complete.
• Why is cross-chain swap critical for the
  blockchain ecosystem?
• Cross-chain swap is a crucial blockchain
  mechanism as it eliminates third-party entities
  from the token exchange process and facilitates
  multi-blockchain transactions
• simultaneously. It allows people to make payments
  in a particular token even though they are on
  different blockchain protocols. People can
  perform cross-chain swapping using this
  technology without relying on a centralized
  infrastructure like an exchange platform.
• Since intermediaries are not involved in the
  cross-chain swap, and its a smart contract-
  powered technology, the transactions become
  faster, more affordable, and free from potential
  security breaches that are likely to occur in a
  centralized exchange system.
• Moreover, cross-chain swaps are increasingly
  popular among banking, energy industries,
  healthcare, government, and finance industries.

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Decentralized nature The world is recognizing the
significance of decentralization. Cross-chain
swaps make people independent by providing a
decentralized ecosystem for multi-blockchain
exchange. Enhanced security Cross-chain swaps
employ HTCL smart contracts that ensure users
with enhanced security and guarantee a refund if
a conflict occurs or the first participant
(sender) changes his mind for some reason. This
way, the technology leaves no room for security
concerns. Low-cost, peer-to-peer
transactions The use of centralized exchange
involves high switching costs. Besides, you also
need to do lots of formalities like finding a
reliable exchange, getting registered, abiding by
the terms conditions, and so on. In contrast,
Cross-chain swaps allow nodes to join
the peer-to-peer blockchain network and exchange
the tokens. It saves time and ensures low cost
since no centralized entity controls the
protocol. High flexibility Cross-chain swaps
achieve high flexibility by allowing the exchange
of all tokens. Users dont need to convert
tokens into specific protocol-based tokens as
they need to do in centralized exchanges. Conclus
ion Cross-chain swap presents a futuristic model
in terms of the decentralization of token
exchange and payments. Its a simple way to allow
two participants to swap their tokens on
completely different protocols without
intermediaries. The Cross-chain swap is due to
blockchains core focus on achieving higher
interoperability over time, enticing
people towards decentralization as they struggle
with a centralized system. Consequently,
organizations nowadays prefer a decentralized
system, with blockchain-based solutions developed
on multiple protocols. Thus, it is evident that
cross-chain swaps are going to be immensely
popular in this advanced world.