update 22 September 2021

What Really Happens When Swapping Crypto?

The process of swapping crypto can be somewhat complex. Sometimes, you may end up lacking the exchange assets you need. For instance, you may want to exchange BTC for ZIL. Generally, there are very few exchanges that support direct BTC to ZIL exchanges.

Therefore, in many scenarios, an individual will have to find a BTC trading pair. Exchange the BTC to another pair connected to ZIL, then complete by exchanging the second asset to Zil. Generally, following the whole exchange process involves two transactions. The above means that a user pays multiple transaction fees just to complete a single exchange.

However, in the crypto world arose another system that quickly helps exchange the assets, Swapping. But, what is Swapping, and how does it work? 

Crypto Swapping (Atomic Swapping)

Crypto swapping, also known as Atomic Swapping, is a system that involves the direct conversion of one asset to another. Such swaps mainly deal with assets from different chains, like Bitcoin and Zilliqa. 

It’s not possible to exchange between such assets without either using an exchange platform or Atomic Swap. However, crypto swaps are simple since they involve only one pair. It streamlines the entire two-part process to a single step, or just click and sell and later confirm. So, how does crypto swapping work?

How Does It Work? 

The process of swapping crypto involves moving the crypto from one wallet to another wallet without middle pairs. There are multiple steps in the Process of Swapping cryptos. This section is going to look at what the investor and the system do. 

STEP 1: Create A Transaction

The first step is the creation of a contract or transaction. At this point, you can use Swapping smart contracts, which makes things easy. 

When creating a transaction, a user needs to put all the details. For instance, you must feed in;

  • The cryptocurrency assets you are ready to Swap in and out. In this case, you are Swapping BTC to ZIL. 
  • The correct amount of cryptocurrency; the BTC you want to swap out.
  • Put your ZIL wallet address on the platform.

The system continuously and automatically calculates the amount of ZIL you will receive based on the prevailing rates. Confirm the transaction by verifying all the necessary details and automatically send. 

STEP 2: The Process Within

HTCL Creation

When you create a transaction, the HTCL automatically appears. So, what is the HTCL?

Hash Timelock Contract is a system that consists of two keys, the hash lock key and the time lock key. The hash lock key mainly sends the crypto asset to both traders. This happens as soon as they confirm their part in the contract. 

The second key, timelock, set a time limit within which both parties confirm the transaction. If the contract does not receive confirmation after the preset period, the timelock refunds the assets to the sender.

Creating the Preimage

Immediately after creating the HTCL address, another secret code comes up, the preimage. This preimage undergoes a process called hashing, which involves locking the preimage. 

This hashed preimage is the main thing in the Swapping Process. The smart contract will automatically send the preimage to the second party’s address. At this point, the other trader must confirm and verify the details and the amount deposited. 

STEP 3: The Final Process

This final process involves the second trader from the second blockchain creating a similar trade. This means they automatically deposit the number of assets needed. Remember, in this case, we were swapping BTC for ZIL. The second trader is the one selling off the ZIL. 

Therefore, the second trader creates a trade with the ZIL and writes the sender’s newly created wallet address. One good thing about this new address is its connection to the same hash as the original transaction. 

Once they send the required amount, each of the parties can now unlock their received assets. The first party uses the secret passcode in the first trade to unlock. Meanwhile, the second party now unlocks their amount. This is the final point of exchanging/swapping. 

Would it Be Possible to Swap Between CBDCs?

The short answer is YES. It would be possible to Swap between CBDCs. This is especially important now when many countries, including the USA, China, Canada, Japan, Spain, are introducing CBDCs. It will be possible to Swap between the Yen, Yuan, CAD, and all digital sovereign currencies. But how?

Generally, this would require developing top international infrastructure similar to Swapping smart contracts(Atomic Swaps). The process should be pretty identical to the above-discussed process. However, since it involves national currencies, there could be some bits of centralization. 

Some platforms have been working on creating the interconnection of CBDCs using Atomic Swaps. Therefore, CBDSs will also be able to use the Swap system; FOREX will not die with the introduction of CBDCs. 

Final Word – Swapping Crypto

This guide has been analyzing the entire Process of Swapping cryptos between the two parties. It has discussed what traders on both sides often do and also what the system does. Generally, the traders create a transaction that generates an HTCL. This HTCL, in turn, makes the preimage, which goes to the second party’s account for verification. 

Once the second party verifies, they create their trade using the same hash of the first trade. The process ends with both parties unlocking the amounts.  

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As the world strives to turn digital, CBDCs seem to be the future of the global economy. CBDCs will streamline FOREX trading since investors will complete every step while at home.

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