Cross-Chain Swaps: How to Trade Crypto Across Different Blockchain Networks
Cross-chain swaps exchange crypto assets between different blockchain networks without relying on a centralized intermediary, such as an exchange or a custodian. Cross-chain swaps enable blockchain interoperability and crypto trading by allowing users to access a wider range of tokens, services, and opportunities across multiple chains.
Some of the benefits of cross-chain swaps are
- Speed: Cross-chain swaps can be faster than a centralized exchange, as they do not require depositing and withdrawing funds, waiting for confirmations, or dealing with network congestion.
- Security: Cross-chain swaps can be more secure than a centralized exchange, as they do not involve trusting a third party with your private keys, funds, or personal information. Cross-chain swaps use cryptographic mechanisms, such as hash time lock contracts (HTLCs), to ensure that the swap is atomic, meaning that either both parties receive their tokens or none of them do.
- Privacy: Cross-chain swaps can be more private than a centralized exchange, as they do not require disclosing your identity, location, or transaction history to anyone. Cross-chain swaps can also use privacy-enhancing technologies, such as zero-knowledge proofs, to hide the details of the swap from the public.
- Cost-efficiency: Cross-chain swaps can be more cost-efficient than a centralized exchange, as they do not incur fees for depositing, withdrawing, or trading. Cross-chain swaps can also reduce the gas fees and network congestion associated with transferring tokens between chains.
How do Cross-Chain Swaps Work?
Cross-chain swaps exchange crypto tokens between different blockchain networks without relying on a centralized intermediary, such as an exchange or a custodian. This allows users to access a wider range of tokens, services, and opportunities across multiple chains and enjoy the benefits of speed, security, privacy, and cost-efficiency. However, cross-chain swaps are difficult to implement, as blockchains have different consensus mechanisms, protocols, and architectures. Therefore, cross-chain swaps require some methods to enable communication and transfer of value between different chains, such as:
Hash Time Lock Contracts (HTLCs)
These smart contracts make the swap atomic, meaning both parties get their tokens, or none of them do. HTLCs use a secret and a time limit to create a payment that can only be claimed by revealing the secret. For example, Alice and Bob agree on a secret and swap 1 BTC for 100 ETH using HTLCs. They must reveal the secret within a certain time or lose their tokens.
These are ways of connecting different blockchain networks. Chain bridges can be centralized or decentralized, depending on the trust and security needed. For example, THORSwap is a decentralized cross-chain exchange that supports nine blockchains and 5,000+ tokens. THORSwap uses chain bridges to let users swap tokens across these chains without intermediaries, fees, or KYC.
This is how easily and quickly an asset can be bought or sold in a market. Liquidity is important for cross-chain swaps, as it affects the availability and efficiency of the swap. However, liquidity can be low or split across different chains, especially for new or niche tokens. Some ways to increase liquidity for cross-chain swaps are liquidity pools, providers, and aggregators. Liquidity pools are pools of tokens that provide liquidity for a pair of tokens. Liquidity providers offer liquidity for a token or pair of tokens for a fee or a spread. Liquidity aggregators are platforms or protocols that combine liquidity from multiple sources, such as pools, providers, or exchanges.
These blockchain networks are compatible with the Ethereum Virtual Machine (EVM), the environment for smart contracts on Ethereum. EVM chains can run the same code and use the same tools as Ethereum, such as Solidity, Web3, and MetaMask. EVM chains can make cross-chain swaps between Ethereum and similar blockchains easier using the same standards and protocols, such as ERC-20, ERC-721, and ERC-1155. Some popular EVM chains are Binance Smart Chain, Polygon, Avalanche, and Fantom.
How to Perform Cross-Chain Swaps?
The process of performing cross-chain swaps may vary depending on the platform or tool you use, but here are some general steps that you can follow:
- Choose a platform or tool that supports cross-chain swaps, such as THORSwap, Chainlink, or SwapSpace. You can compare their features, fees, and supported tokens to find the best option.
- Connect your wallet to the platform or tool. You may need to use different wallets for chains, such as MetaMask for Ethereum and EVM chains or Ledger for Bitcoin and other native chains. Make sure you have enough funds and gas fees in your wallet to complete the swap.
- Select the tokens and the amount you want to swap. You can choose from a list of available tokens or enter a custom address. You can also see the exchange rate, the estimated time, and the network fees for the swap.
- Confirm the swap details and approve the transaction. You may need to sign multiple transactions with your wallet, depending on your method and chain. For example, if you use HTLCs, you may need to sign a transaction to lock your tokens in an HTLC address and another transaction to claim your tokens from another HTLC address.
- Wait for the swap to be completed. You can track the progress of the swap on the platform or tool or a blockchain explorer. You can also see the transaction hash and the receipt for the swap. Once the swap is done, you can check your wallet balance and see your swapped tokens.
What are the Risks and Limitations of Cross-Chain Swaps?
Cross-chain swaps are a promising technology enabling blockchain interoperability and crypto trading. Still, they also come with some risks and limitations that users should know. Some of the potential drawbacks or challenges of cross-chain swaps are:
- Technical complexity and compatibility issues: These challenges arise from the difficulty of designing and coordinating multiple components and steps that are required for cross-chain swaps, such as HTLCs, chain bridges, liquidity pools, and EVM chains. For example, some blockchains may not support the features that are needed for cross-chain swaps, such as smart contracts, time locks, or hash functions.
- Security and trust assumptions: These risks stem from the reliance on certain rules or conditions that may not be always true or verifiable for cross-chain swaps, such as the security and trust of the parties, the platforms, or the tools involved.
- For example, HTLCs depend on both parties revealing the secret within the time frame, or the time lock expiring correctly.
- Chain bridges rely on the honesty and security of the bridge operators or validators, or the verification of the bridge state by the users.
- Liquidity pools require the pool contracts to be bug-free and audited, or the users to be able to withdraw their tokens at any time.
- EVM chains assume the EVM compatibility to be maintained and updated, or the users to be able to access and use the same tools as on Ethereum.
- Scalability and performance trade-offs: These trade-offs result from the limitations or costs of the method or the chain used for cross-chain swaps, such as the speed, capacity, or efficiency of the network, the platform, or the tool.
- For example, HTLCs may suffer from network congestion, high fees, or long confirmation times, especially on blockchains with low throughput or high demand.
- Chain bridges may introduce additional latency, complexity, or overhead, especially for cross-chain transfers that involve multiple hops or intermediaries.
- Liquidity pools may experience slippage, impermanent loss, or front-running, especially for large or volatile swaps.
- EVM chains may encounter bottlenecks, forks, or attacks, especially for chains that have low security or decentralization.
- Regulatory and legal uncertainty: These uncertainties arise from the lack of clarity or consistency of the laws and regulations that apply to cross-chain swaps, depending on the jurisdiction and the compliance of the platform or tool used. For example, some countries may ban or restrict cross-chain swaps, or require users to register or report their transactions. Some platforms or tools may violate or bypass the existing laws or regulations, or expose users to legal risks or liabilities. Some tokens or assets may have unclear or disputed ownership, taxation, or governance, or be subject to sanctions or seizures.
Cross-chain swaps are a technical innovation and a game-changer for the crypto world. They allow us to trade crypto across blockchains without intermediaries, fees, or KYC. They also open up new possibilities and opportunities for blockchain interoperability and crypto trading. However, cross-chain swaps have challenges and risks, such as technical complexity, security and trust issues, scalability and performance trade-offs, and regulatory and legal uncertainty. That’s why we must be informed and careful when performing cross-chain swaps and use the best platforms and tools that suit our needs and preferences. In this blog, we have introduced you to some platforms and tools enabling cross-chain swaps, such as THORSwap, Chainlink, and SwapSpace. Thank you for reading, and happy swapping!