Written by: Ignas, DeFi Research
Compiled by Bai Ze Research Institute
How do you convert BTC to ETH? Or BTC to ATOM?
Like many people, I usually deposit ETH on a centralized exchange (CEX), trade it for BTC, and then transfer the BTC to an on-chain wallet.
This puts me in a rather ironic situation: while advocating the use of DeFi, I myself am using CEX to conduct these so-called “cross-chain transactions”.
In fact, Ethereum co-founder Vitalik Buterin has repeatedly emphasized “keeping assets on the chain where they originated and using atomic swaps to transfer value between chains.”
It sounds simple, but the reality is far from that.
What exactly are atomic swaps? How do they work, and can they truly replace centralized exchanges?
Let’s find out in this article.
Atomic Swaps: From Idea to Implementation
The idea of atomic swaps was first proposed by Tier Nolan in a Bitcointalk forum post in 2013. However, the first atomic swap wasn’t successfully completed until 2017, when Litecoin founder Charlie Lee shared on Twitter: “Completed a cross-chain atomic swap of LTC/BTC!” (It was a good trade, by the way: he made 330% on the trade)
How does atomic swap work? We can understand it simply like this:
Atomic swaps occur between two crypto wallets without any intermediary to facilitate the transaction. They are "atomic" in the sense that atoms are indivisible, either the trade is completed successfully and each trader receives the other's funds, or nothing happens and both traders only have the funds they had before the trade.
The atomic swap mechanism relies on the Hash Time Lock Contract (HTLC), which can be understood as a virtual safe with two special safeguards: “HashLock” and “TimeLock”:
Hash Locking: Ensures that funds are locked in the contract before the transaction initiator sends the key used to unlock the HTLC contract to the other party.
Time lock: If the transaction is not completed within a specified period of time, the traded cryptocurrency is returned to the trader.
Once both parties submit their contract keys, the transaction is complete.
If neither party submits within the stipulated time, the transaction will be cancelled, ensuring that no one loses money.
Atomic Swaps vs Cross-Chain Bridges
Of course, atomic swap technology is far more complex than this explanation and is still evolving, but the benefits it can provide include:
Trustless: No trusted third party involved
Mitigate counterparty risk: if one party fails to meet transaction requirements, the other party will not lose assets
Ownership control: You retain control of the asset until the transaction is completed
Privacy: Transactions are private and only known to the parties involved.
Although many technology giants experimented with atomic swaps in the early days, it seems that it has never been truly applied.
This is what Vitalik tweeted 3 years ago: We should be putting resources into a proper (trustless, serverless, maximally Uniswap-like UX) ETH<->BTC DEX. It’s embarrassing that we still can’t easily and trustlessly transfer value between the two largest crypto ecosystems.
Three years later, the situation is different. I am not referring to atomic swaps, but cross-chain bridges.
Over the past three years, cross-chain bridges that pool user assets and issue pegged coins (or wrapped tokens, such as wETH on Fantom) have become increasingly popular.
According to DefiLlama, the total assets of 14 cross-chain bridges reached 4.8 billion US dollars in the past 7 days!
Vitalik is very critical of the design of cross-chain bridges. A year ago, he shared on Reddit why he was pessimistic about cross-chain bridges. Here are the highlights:
Although a multi-chain ecosystem provides diversity advantages, cross-chain bridges can pose security issues due to contract vulnerabilities.
Even if attacked by a 51% attack, the blockchain can still maintain its rules, keep user balances intact and ensure the consistency of transactions.
However, during a 51% attack, if the cross-chain bridge’s smart contract loses control, then cross-chain assets could depreciate.
Therefore, it is safer to keep native assets on their original chain than to move them across chains.
Cross-chain activity exhibits a “reverse network effect”: the more it is used, the greater the risk, especially when the cross-chain bridge holds a large amount of assets.
As of this writing, the risk of a “reverse network effect” has become very real, with rumors circulating that the Multichain development team holding the multi-signature keys have been arrested.
As a reminder, Multichain’s cross-chain bridge uses an asset pool model to issue anchor coins on supported chains.
For example, BTC on Fantom is actually wBTC that has been “packaged” and then “packaged” again and issued by Multichain.
An Ape Prologue, an on-chain analyst, conducted research on Multichain. He found that 40% of Fantom assets, except for the native token FTM, were issued by Multichain. These anchored assets amounted to $650 million, indicating that Fantom is highly dependent on cross-chain bridges.
Unfortunately, Multichain is not the first nor the last cross-chain bridge to run into trouble. The five largest cross-chain bridge hacks have resulted in $1.9 billion in losses.
As Vitalik puts it: “Keep assets on the chain they originated from, and use atomic swap protocols to transfer value between chains.”
Despite the risks of cross-chain bridges, atomic swap protocols are currently rare, mainly due to these 5 obstacles:
Different languages: Different blockchains use different languages, which makes direct atomic swaps difficult.
Limited functionality: Bitcoin’s language lacks the smart contract capabilities of Ethereum’s Solidity, which makes it complicated to implement certain atomic swap conditions.
Different consensus mechanisms: Bitcoin uses proof of work, while Ethereum has transitioned to proof of stake. This difference can complicate the atomic swap mechanism.
Complexity and Risk: Atomic swaps require multiple steps and carry the risk of losing funds if not performed correctly.
Liquidity requirements: An effective atomic swap requires sufficient liquidity on both chains, otherwise, exchange rate fluctuations will occur in the transaction.
An attempt at “atomic swaps”
Finally, can we really use the "atomic swap" protocol?
There are currently at least 15 related protocols using different exchange mechanisms.
However, what really matters to me is the ability to swap native assets between chains, especially when it comes to swapping between native BTC and ETH, which is the holy grail in my opinion.
Thorswap by Thorchain
Thorswap is probably the most famous multi-chain asset trading protocol. It facilitates the exchange of ETH, BTC, and other native tokens between 9 chains.
In the image below, I swapped ETH for BTC, which took 9 minutes and cost me $37 in fees (mostly from the Bitcoin network).
The core of the THOR system is the liquidity pool, each of which contains 50% of THORChain's native token RUNE and 50% of other assets such as BTC or ETH.
When you want to exchange ETH for BTC, the protocol exchanges your ETH for RUNE from the ETH-RUNE pool, and then exchanges that RUNE for BTC from the BTC-RUNE pool.
Therefore, THORChain still relies on liquidity pools, which could be targeted by hackers, meaning it is not a true atomic swap.
In fact, I reached out to the THORSwap team to explain why they moved away from atomic swaps. This is what their operations manager, paperX, said:
Due to limited liquidity, THORChain had to abandon atomic swaps. If we want to provide a decentralized cross-chain trading protocol that can replace CEX, we must provide competitive trading quotes.
THORChain had investigated atomic swaps as a technical option as early as 2018/2019, but ultimately turned to building a decentralized cross-chain liquidity protocol that uses the Tendermint consensus engine, the Cosmos-SDK state machine, and the GG20 threshold signature scheme (TSS). It does not anchor or "wrap" assets, it manages funds directly in an on-chain treasury.
Komodo (AtomicDEX)
Komodo is one of the pioneers in the field of atomic swaps.
Their decentralized exchange, AtomicDEX, uses atomic swap technology to provide “secure and trustless multi-chain trading.” Komodo proudly asserts, “We cannot freeze funds or stop trading.”
Unfortunately, the platform is not easy to use on both mobile and desktop. Currently, it does not support Metamask or Keplr and only allows connection via mnemonics or hardware wallets.
Additionally, BTC conversions are capped at 2 ETH, offering an exchange rate that is 7% lower than centralized exchanges (CEX).
This may be the trade-off that users need to make when choosing between using a cross-chain bridge or a true atomic swap protocol.
Summarize
Implementing an atomic swap of BTC<>ETH is challenging.
If using decentralized applications is not a problem and you want to do cross-chain transactions, you can also try using SWFT AllChain Bridge, Maya Protocol (a branch of THORChain).
In addition, there are three new generation cross-chain protocols worth trying:
InterSwap - Full-chain AMM with unified liquidity.
Orion Protocol - Users can trade between major CEX/DEX using DeFi wallets. No KYC required.
Chainflip - Enable cross-chain swaps with extremely low slippage to replace centralized exchanges.
(Note: The above are the author’s personal opinions and do not constitute investment advice, DYOR)
In any case, I wonder which protocols Vitalik favors when he advises staying away from cross-chain bridges and using atomic swaps.
However, it is clear that true atomic swaps seem far from achieving mass adoption.
