Cryptocurrency enthusiasts paint a picture of digital currency and interoperable blockchains as the future of finance. They envisage a day where blockchain utilities like blockchain explorers, wallet software, and peer-to-peer exchanges support a melange, digital ecosystem in which blockchains are compatible at the technical level.
Atomic Cross-Chain Trading & Blockchain Interoperability
Indeed, interoperability might be 2017’s Bitcoin buzzword. One way of achieving interoperability, in a way which steers clear of third party trust and single points of failure, is via atomic cross-chain trading. The transaction method entails two parties, controlling different cryptocurrencies (Litecoin as usual suspect), securely exchanging the cryptocurrencies sans intermediary.
In computer programming, atomic denotes a unitary action or object that is indivisible, unchangeable, whole, and irreducible. “An ‘atomic’ exchange should either fully complete, or be canceled, with the money ending up back where it started. In particular, it shouldn’t be possible for half of the exchange to go through and one party end up with all the money,” according to cryptocurrency programmer Thomas Young, who wrote on the concept as early as 2014. Atomic cross-chain trading could technically be executed per an Ethereum smart contract, say proponents of that public blockchain.
Such transactions could be submitted to two different blockchains, so long as both are based on the bitcoin blockchain or other code considerations are made, and a private key (called ‘revealing secrets of contract’) is required to receive. The transactions, although originated on two different blockchains, are linked. Hash time-locked contracts ensure transactions are claims in a timely manner.
Problem: Transaction Malleability
Transaction malleability, how Bitcoin signs transactions, means the transaction ID of bitcoin transactions can be slightly modified.
“In the atomic exchange process… transaction malleability means that a base transaction can potentially be ‘mutated’ during the submission process, changing its transaction ID and invalidating that previously signed refund,” wrote Mr. Young. Atomic swaps could use hash time-locked contract and multisignature addresses and time-locks to combat attacks based thereupon.
R&D or In Production?
The idea was introduced by Tier Nolan, who has worked on Bitcoin-related projects like Shamir secret key algorithm, a Bitcoin deterministic wallet for offline storage, Bitcoin Armory and Bitcoin Improvement Proposals (BIP). Celebrated Bitcoin developer Jeff Garzik complimented a BIP by Mr. Nolan on Twitter in 2014.
In one version of atomic cross-chain trading, Thomas Young created a Litecoin and Bitcoin live testnet embedded protocol, SwapBill, wherein embedded value tokens can be used as an intermediary step for a cross-chain transaction.
The Lightning Network, which is being designed to allow high-frequency and low-value microtransactions in bitcoin via blockchain smart contracts, enables instant payments without block confirmations, which are atomic.
“Cross-chain atomic swaps [which] can occur off-chain instantly with heterogeneous blockchain consensus rules,” the project states on its website. “So long as the chains can support the same cryptographic hash function, it is possible to make transactions across blockchains without trust in 3rd party custodians.” The project released last week its Alpha software for testing.
“The daemon is a full implementation of Lightning, capable of: opening channels with peers, closing channels, completely handling all cooperative and non-cooperative channel states, maintaining a fully authenticated and validated channel graph, performing pathfinding within the network, passively forwarding incoming payments, and sending outgoing onion-encrypted payments through the network,” according to Lightning developers.
Blockstream Strong Federations
Blockstream, which facilitated the first Lightning Network bitcoin transaction, addressed this week “multi-party smart contracts”, a continuation of the blockchain company’s dialogue on its Pegged Sidechains concept.
In Strong Federations: An Interoperable Blockchain Solution to Centralized Third Party Risks, which was published Tuesday, Blockstream discusses its ‘federated peg’ concept.
“Strong Federations facilitate movement of any asset among disparate markets, without requiring centralized trust,” Blockstream states. “They provide commercial privacy with support for transactions where asset types and amounts are opaque while preserving the public verifiability inherent to Bitcoin.”
The San Francisco company describes its first Strong Federation implementation, which it calls ‘Liquid.’ “This new construction establishes a security profile inherently superior to existing methods of rapid transfer and settlement among exchanges and brokerages, and is directly applicable to other problems within existing financial institutions,” Blockstream explains.
Strong Federations builds on previous work, like Blockstream co-founder Gregory Maxwell’s Confidential Values concept, whereby “networks utilizing Confidential Transactions can make guarantees about the privacy of their transactions, where certain information about individual transactions is visible only to the parties participating in a given trade.”
Blockstream adds: “We believe that success is dependent on the portability of information and avoiding the siloed systems that often emerge from enterprise endeavors.”
The cryptocurrency software company addressed atomic cross-chain exchange in its sidechains white paper. “Once a sidechain is operational, it is possible for users to exchange coins atomically between chains, without using the peg. In fact, this is possible with altcoins today, though the independent prices make it harder to organise,” states Blockstream. “…As we have seen, direct use of the peg requires fairly large transactions (with correspondingly large fees) and long wait periods. To contrast, atomic swaps can be done using only two transactions on each network, each of a size similar to ordinary pay-to-address transactions.”
The Future of Finance
“Atomic cross chain exchange is possible, given support for certain fundamental transaction semantics, and ‘pay on reveal secret’ seems like a good basis for this,” writes Mr. Young. “Standardising the secret hashing function makes this work across arbitrary currency pairs. There are implementation issues in Bitcoin, currently, but these aren’t fundamentally hard to resolve.” The programmer says there exist workarounds with embedded protocols, such as his SwapBill.
Mr. Young concludes: “Personally I think that this is the future of cryptocurrency exchange. If you’re an exchange operator, I think you should already be looking into what will be involved in building convenient exchange services on top of atomic exchange.”
While cross-chain trading could be initiated by those with the coding talent, there’s no verifiable confirmation an atomic swap has ever occurred across multiple live blockchains.
Update Jan 22, 2017: This article claims “there’s no verifiable confirmation an atomic swap has ever occurred across multiple live blockchains.” According to Komodo, this is incorrect. SuperNET and its core coin Komodo reached out to let us know that such swaps are a core part of their technology. More information available here.
What do you think about atomic cross-chain exchange? Let us know in the comments below.
Images via Shutterstock, and Crypto-graphics.com
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