What is Cross-Chain Swap in Crypto and How does it work?

Decentralized Finance (Defi) has a rising need for the capacity to exchange tokens across multiple blockchains. As generally known, cryptocurrency tokens and coins operate on many decentralized blockchain networks like Ethereum, Binance smart chain, Polygon (MATIC), Cardano, and so on.

Having tokens on several chains, and with varying values, is a problem. Users require a method of transferring the tokens between chains in order to get the most value out of them or to avoid high gas fees on certain networks, for instance. Hence, a cross-chain swap–commonly referred to as an atomic swap–is the answer to this.

This means that these decentralized exchanges are existing on more than one blockchain network. Therefore, you should understand that not all exchanges can facilitate trades across multiple networks or offer the possibility of swapping tokens built on different networks.

For a proper understanding of how it works, this post will describe cross-chain swaps and explain why they are crucial in today’s ecosystem. We’ll also go over some guidelines to get you started with cross-chain swaps.

What Is A Cross-Chain Swap?

A cross-chain swap sometimes referred to as an “atomic swap,” is a smart contract-based technology that permits the exchange of tokens between the ecosystems of two different blockchains. Without the use of a middleman or a centralized authority, it enables users to exchange tokens and operate directly from one blockchain to another.

For instance, users may trade Binance smart chain-based (BSC) tokens for Ethereum-based (ERC-20) tokens. Essentially, a cross-chain swap enables people to trade tokens with other participants who also want to “cross” their assets from another blockchain network. However, the exchange occurs immediately from one’s wallet–just like the normal trading mechanism.

How Does A Cross-Chain Swap Work?

Cross-chain swaps make it possible for two parties on two distinct blockchains to trade tokens. Hash Time Lock Contracts (HTCLs), a mechanism that locks transactions with certain combinations to ensure that verification is performed on both sides, is the technology that powers these smart contracts. The following security elements are present in the HTCL technology:

Hashlock

Smart contracts can use hash lock technology to lock the deposits with a hash key. Once the transaction has been validated on both ends, each participant is given a hash key, which they trade to release the assets.

Timelock

The blockchain network’s time-lock mechanism uses time restrictions to safeguard transactions. It guarantees that the transactions are finished quickly. Also, it states that the transaction must be finished within a certain amount of time, otherwise the depositor will receive their crypto assets back.

Why Is Cross-Chain Swap Critical For The Blockchain Ecosystem?

Cross-chain swap is an important blockchain technique since it excludes third-party participants from the token exchange process while also allowing for multi-blockchain transactions to take place at the same time. It enables users to make payments at a certain token even if they are using a different blockchain network.

For instance, a person might easily swap a USDT token that is built on the Ethereum network for the same token built on the Binance smart chain network–whenever the needs arise. The transaction will go smoothly without relying on a centralized infrastructure.

As such, transactions are quicker, more inexpensive, and usually free from any security flaws that are likely to emerge in a centralized exchange system. This technique is relatively new in the blockchain space and is still improving to get rid of the flaws that might be present in them. This is apparent in the fact that several cross-chain platforms have witnessed hacking incidences this year–revealing reasons for swift and adequate improvements.

Additionally, cross-chain swaps provide users with the ability to cope with the inherent volatility of the market–just by shifting cryptocurrencies between networks, while also preserving the value of their tokens and the losses that go along with them. One strategy is to replace volatile cryptocurrencies with stablecoins, which guarantee less market volatility. Although this equally works on regular exchanges, cross-chains provide more opportunities.

The usefulness of cross-chain swaps also applies to the use of cryptocurrencies in broader markets, as they allow you to easily have access to tokens built on an ecosystem you are interested in.

Finally, it makes it convenient to transmit cryptocurrency to other users and to pay for goods and services. The variety of uses of virtual tokens may be constrained by the inability of users to exchange crypto coins and tokens on multiple chains.

Advantages and Disadvantages of Cross-Chain Swaps

Advantages

1. It enables a unique decentralized, safe, and private capability that enables currency trades without the need for centralized or decentralized exchanges.
2. Cross-chains allow us to carry out easy transactions across multiple blockchain networks at once, with the possibility of circumventing high gas fees on some chains.
3. It enables us to create a much more dynamic usage of cryptocurrencies. For instance, using the currency exchange would make it easy for us to increase the number of currencies we utilize.

Disadvantages

1. We risk losing our money if we utilize wallets that have a bad implementation of this sort of protocol. This system’s security is based on the programming of extremely clear and safe conditions that safeguard us at all times.
2. Cross-chains are relatively new, hence, there are needs for more developments to take place in avoiding the prevalent hacking instances.
3. They can be difficult to utilize, especially for individuals who are new to the crypto world.

Closing Thoughts

Cross-chain swaps offer a future concept regarding the decentralization of token exchange and payments, as they serve as an easy way for parties to carry out transactions directly across entirely unrelated protocols.

The Cross-chain exchange came about as a result of blockchain technology’s primary goal of advancing interoperability over time and driving users toward decentralization as they battle a centralized system.

As such, businesses now choose decentralized systems, with blockchain-based solutions created using a variety of protocols. Thus, it is clear that cross-chain swaps will become quite common because of the true interoperability features they contain.