Atomic Swaps: The Practicality of Vitalik Buterin's Advice

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Vitalik Buterin recommends using atomic swaps and staying away from bridges. But how practical is this advice? 🧵

How do you swap between $BTC and $ETH? As a DeFi advocate, I find myself ironically using CEXs for native BTC<>ETH cross-chain transactions. So when @VitalikButerin recommended avoiding bridges and using atomic swaps instead, I got curious about how it actually works. twitter.com/DefiIgnas/status/1660509871505281025

Atomic swaps idea was first proposed by Tier Nolan in 2013, but the first successful atomic swap didn't occur until 2017. It's when @SatoshiLite, founder of Litecoin, "Did a cross-chain atomic swap with LTC/BTC!" (And made a 330% on this swap 😅) twitter.com/satoshilite/status/911328252928643072?lang=en

Here's the VERY simplified version of how atomic swaps work: They take place between two personal crypto wallets, using different blockchains in a peer-to-peer transaction mechanism. They're "atomic" - either they happen completely, or not at all.

Atomic swaps use Hash Time Locked Contracts (HTLCs), a two-way virtual safe that employs a hash function and sets a transaction deadline. If requirements aren't met within the deadline, the transaction cancels, ensuring no one loses.

Atomic swap technology is trustless, mitigates counterparty risk, allows ownership control until trade completion, and ensures private trades. But Atomic swaps never caught on. Check this @VitalikButerin's tweet from 3 years ago. twitter.com/VitalikButerin/status/1242553658195271681

Three years later, the situation has changed. Not for atomic swaps, but for bridging. Cross-chain bridges that pool assets and issue wrapped tokens (like wBTC) have grown in popularity. @DefiLlama reports that assets bridged across 14 bridges reached $4.8B USD last week!

Buterin has been critical of this bridging design: • Bridges pose security concerns due to wrapping • Even during a 51% attack, blockchains can preserve their guarantees, but bridged assets may devalue • So, holding native assets on their original chains is safer

As the number of chains and applications grow, potential systemic risk escalates, especially with the possibility of a 51% attack on any single chain. But how does this 'anti-network' effect play out?

This risk has become very real as rumors surfaced that the Multichain bridge team, who hold multisig keys, has been arrested. An analyst found that 40% of all Fantom assets, excluding its native $FTM token, are issued by Multichain - a high dependence on the bridge. twitter.com/DefiIgnas/status/1661720138406830080

Unfortunately, Multichain isn't the first or the last bridge to face trouble. The five largest bridge hacks have resulted in a loss of $1.9 billion USD. The lesson here is to follow Buterin’s advice: use atomic swaps for cross-chain transactions. Easier said than done.

Atomic swaps face multiple obstacles: • Different languages: Different blockchains use different scripting languages, so how to make them communicate together? • Limited functionality: BTC lacks ETH's smart contracts • Limited liquidity The list goes on...

Despite these challenges, 'atomic swap' exchanges are being explored. I say 'atomic swap' with quotes because the lines are blurred on whether they can truly be called atomic swaps in the strictest sense of the term.

Thorchain’s THORSwap is one of the well-known exchanges for native assets, enabling swapping of ETH, BTC, and other native tokens between 9 chains. But it still relies on liquidity pools, which could be targeted by hackers. Indeed, 2 years ago it was exploited. twitter.com/DefiIgnas/status/1552597343643799552

THORChain trades your ETH for RUNE in the ETH-RUNE pool, then trades that RUNE for BTC in the BTC-RUNE pool. Yet, it still relies on liquidity pools and doesn't perform true atomic swaps. It's still cool! It cost me $37 USD and took 9 minutes to swap ETH to BTC.

I asked to the THORSwap team member @paperX_Art about atomic swap feasibility. He explained that they had explored atomic swaps in 2018/19, but eventually moved to cross-chain liquidity protocol due to limited liquidity for atomic swaps.

@KomodoPlatform's AtomicDEX is a real pioneer in atomic swaps. It offers a 'secure and trustless trading' environment and can't freeze funds or stop orders. But the platform isn't easy to use: Metamask support isn't even live yet.

Also, the rate offered for swapping 2 $ETH for $BTC was 7% lower than on CEXes. Clearly, true atomic swap exchanges come with their own trade-offs.

Overall, I've been struggling to find pure atomic swap exchanges. As it stands today, true atomic swaps seem far from mass adoption. Or maybe impossible altogether? Especially for native ETH<>BTC swaps. Wonder which atomic swaps does Mr. @VitalikButerin use? twitter.com/alexeiZamyatin/status/1662398240703107074

Lastly, be on the lookout for new-gen cross-chain protocols such as @InterSwap_io, @orion_protocol, and @Chainflip You can also check out @Maya_Protocol, which is a friendly THORChain fork.

I originally shared this story on my blog. If you enjoyed this thread, I'm sure you'll love my blog as well! You can subscribe by following the link in the tweet below. twitter.com/DefiIgnas/status/1666807984150949891