Bitcoin Basics: What Is an Atomic Swap?

Atomic swap
Atomic swaps let you instantly convert altcoins to other coins with ease.

Investors, especially more adventurous ones, will sooner or later run into the problem of exchanging currency. You have to take a set of dollars and turn them into another set. It is expensive, it is obnoxious, it takes forever, and with altcoins, that may create a tax liability depending on where you invest, as you generally have to convert your altcoins to fiat currency, thus making them taxable income, before buying a set of other altcoins. But what if you could skip the fiat currency step?

That is the heart of “atomic swaps.” Instead of shuffling altcoins in and out of traditional currencies, you simply flip a switch, turning your bitcoin into litecoin, your litecoin into XRP, or whatever you wish. This is done via direct trading between members of the two networks, using a method called a hash time-locked contract. Essentially, if you want to directly trade your bitcoin for XRP, you would cut the deal, sign the contract, and then have a deadline to acknowledge receiving your coins. If you do not acknowledge that, the coins go right back to the sender. These are entered onto each coin’s respective blockchains by the people holding those coins.

This is still a rough, early technology, but it is an exciting one, not least because it decentralizes coin trading. That will both cut down on exchange fees and may limit tax liability, although any investor should look carefully at their jurisdiction’s tax law and what it demands before they buy any altcoin, let alone engage in trade contracts. To learn more about atomic swaps and other altcoin oddities, subscribe to the Bitcoin Market Journal newsletter today!

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