Thursday, January 25, 2018

Atomic Swaps: Giving New Power to Bitcoin and Possibly Nuking Competitors

Yesterday I wrote about the news that the Lightning Network is essentially here and it is growing as a solution to Bitcoin's scaling problem. It will return Bitcoin to the days of being able to buy a cup of coffee with it again, because the reduced on-chain traffic will tremendously reduce transaction fees while also speeding up transactions.

There's another capability that Lightning is bringing to the Bitcoin ecosystem that will further bolster the use case of Bitcoin, as well as several other cryptocurrencies: atomic swaps.

An atomic swap is an exchange of one crypto for another without the need for a third party. So, for example, you could trade Bitcoin for Litecoin with someone else, or convert some of your Bitcoin to Litecoin without the need for an exchange, a conversion service like, etc. What's more, this all happens in one transaction and it does not require multiple steps with a counterparty that may not come through on their end of the deal. The transaction either completes in-full, or not at all, eliminating the possibility that one party might run off with the other's coins.

On that last point, that's where the term, "atomic swap" comes from: the process of the trade and its end result are all one event, a whole that cannot be divided.

This does not work for all cryptos, however, and this is where I think some big changes could occur as a result of the mass adoption of Lightning on the Bitcoin blockchain and the ability for crypto holders to do these swaps.

I think this could trash the value of a lot of alt coins that do not use the SHA-256 hash algorithm.

That is the hashing algorithm that Bitcoin operates on, as does Litecoin, fork coins that came from Bitcoin such as Bitcoin Cash, and a few lesser-known types that have successfully completed atomic swaps with Bitcoin, such as Vertcoin and Decred.

Basically, I think what will happen is that the appeal and utility of trustless swap functionality between different coins within the SHA-256 "universe," plus the first mover advantage that Bitcoin has as the best known, most widely accepted crypto for every day purchasing (not to mention its prominence in elements of traditional finance, futures contracts, representation by the stock, GBTC, availability via Bitcoin ATMs, etc. ) will draw interest away from alt coins outside of this grouping to the point that many of them will be abandoned. After all, coins not operating on SHA-256 will then require third parties to exchange back and forth with what will be the largest, most liquid, most accepted, and most active crypto universe, instantly making them cumbersome by comparison, less appealing, and thereby severely hampering, if not completely destroying, their value proposition.

I have no idea how long it might take for this to become a widespread, every day kind of thing. All I can say is that I see it on the horizon, and because of that I have even less of an interest in most altcoins than I did before. I already don't think the future is bright for many of them as most of them solve no unique problem and have none of the name recognition, appeal, and use that Bitcoin does. Now, I think their future is even dimmer (and approaching faster). I see most of them as pointless "also rans" that are just copycats that will fade. For coins within Bitcoin's orbit and sharing its hashing algorithm, however, I think this could benefit them greatly, perhaps increasing their value as the addition of Lightning on top of the Bitcoin blockchain increases its value.

I already own some Litecoin. I could see myself swapping some of the Bitcoin that my Hashflare mining contracts are yielding for more Litecoin, especially if its potential as a 4-to-1 complement to Bitcoin begins to be reflected in its U.S. dollar price...

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