What Is an Atomic Swap?

An atomic swap is an exchange of cryptocurrencies from separate blockchains. The swap is conducted between two entities without a third party’s involvement. The idea is to remove centralized intermediaries like regulated exchanges and give token owners total control.

The term atomic derives from the term “atomic state” in which a state has no substates; it either happens or it doesn’t—there is no other alternative. This refers to the state of the cryptocurrency transaction; it happens or it doesn’t.

Most atomic swap-enabled wallets and blockchains use smart contracts. Smart contracts are programs within blockchains that execute when certain conditions are met. In this case, the conditions are that each party agrees to the transaction before a timer runs out. Using a smart contract in the trade prevents either party from stealing a cryptocurrency from the other.

Atomic swaps are also called cross-chain atomic swaps.

Understanding Atomic Swaps

Each cryptocurrency is supported by a blockchain, designed only to accept transactions in specific tokens. For example, Bitcoin (BTC) has a blockchain, and ETH (ether) has another. You cannot easily exchange BTC and ETH without first converting to fiat currency then buying the other; another technique is to convert between cryptocurrencies and exchanges multiple times to get the one you want. Atomic swaps allow you to exchange tokens from different blockchains in one trade.

Decentralized exchanges can conduct atomic swaps for you. A decentralized exchange (DEX) has no central authority regulating it; it is a platform you can trade on without third parties. You can also choose from cross-chain swap providers, where you transfer your digital assets into another wallet, conduct the swap, and transfer them back out.

History of Atomic Swaps

The concept was conceived shortly after altcoins—cryptocurrencies other than Bitcoin—materialized. The creation of altcoins meant some cryptocurrency owners became interested in moving capital between coins. This type of token swap first appeared in September 2017, when an atomic swap between Decred and Litecoin was conducted.

Since then, startups and decentralized exchanges have implemented swaps and allowed users the same facility. For example, Lightning Labs, a startup that uses Bitcoin’s lightning network for transactions, has conducted off-chain swaps utilizing the technology.

Special cryptocurrency wallets have also been developed that are capable of cross-chain atomic swaps—Liquality has developed a wallet that will swap Bitcoin, ETH, and more.

Atomic Swap Process

In an atomic swap, two token owners agree to exchange their tokens for any amount they agree on. The smart contract program sees that they both agreed to it, so it executes the trade for them. The transaction is recorded in the blockchain and validated by the network nodes, and then a new block is opened for another transaction.

The transaction cannot be reversed. Both parties must agree to another transaction to exchange the tokens again if they would like them back.

Atomic swaps use Hash Timelock Contracts (HTLC) to automate the exchange of tokens. As its name denotes, HTLC is a time-bound smart contract between parties that involves generating one cryptographic hash on each end.

HTLC requires both parties to acknowledge receipt of funds within a specified timeframe. If one party fails to confirm the transaction within the timeframe, then the entire transaction is voided, and funds are returned. This eliminates counterparty risk, or the risk that one party will accept the offered coins and decline the transfer of their coins.

For instance, suppose Jane wants to convert 1 BTC to an equivalent number of Litecoins with John. She submits the transaction through an atomic swap-capable wallet. A cryptographic hash function generates a hex number to encrypt the transaction during this process. The process is repeated at John’s end.

Both Jane and John unlock their respective funds using their encrypted numbers. They have to do this within a specified timeframe, or the transfer will not occur. The HTLC within the blockchains then executes the trade.

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What Is a 51% Attack?

A 51% attack is an attack on a cryptocurrency blockchain by a group of miners who control more than 50% of the network’s mining hash rate. Owning 51% of the nodes on the network gives the controlling parties the power to alter the blockchain.

The attackers would be able to prevent new transactions from gaining confirmations, allowing them to halt payments between some or all users. They would also be able to reverse transactions that were completed while they were in control. Reversing transactions could allow them to double-spend coins, one of the issues consensus mechanisms like proof-of-work were created to prevent.

Understanding a 51% Attack

A blockchain is a distributed ledger—essentially a database—that records transactions and information about them and then encrypts the data. The blockchain’s network reaches a majority consensus about transactions through a validation process, and the blocks where the information is stored are sealed. The blocks are linked together via cryptographic techniques where previous block information is recorded in each block. This makes the blocks nearly impossible to alter once they are confirmed enough times.

The 51% attack is an attack on the blockchain, where a group controls more than 50% of the hashing power—the computing that solves the cryptographic puzzle— of the network. This group then introduces an altered blockchain to the network at a very specific point in the blockchain, which is theoretically accepted by the network because the attackers would own most of it.

Changing historical blocks—transactions locked in before the start of the attack—would be extremely difficult even in the event of a 51% attack. The further back the transactions are, the more difficult it is to change them. It would be impossible to change transactions before a checkpoint, where transactions become permanent in Bitcoin’s blockchain.

Attacks Are Prohibitively Expensive

A 51% attack is a very difficult and challenging task on a cryptocurrency with a large participation rate. In most cases, the group of attackers would need to be able to control the necessary 51% and have created an alternate blockchain that can be inserted at the right time. Then, they would need to out-hash the main network. The cost of doing this is one of the most significant factors that prevent a 51% attack.

For example, the most advanced application-specific integrated circuit (ASIC) miner is the Bitmain S19 XP Hydro. It costs more than $19,800 and has a hash rate of 255 terahashes per second (TH/s).

The top three mining pools by hashrate are:

• FoundryUSA, at 54.42 exahashes per second (EH/s); 23.75% of the total Bitcoin network hashrate
• AntPool, at 41.49 EH/s; 18.12% of the total Bitcoin network hashrate
• Binance Pool, at 34.48 EH/s; 15.06% of the total network hashrate

Combined, these three pools make up 56.93% of the network hashrate, a whopping 130.4 EH/s (1.304 million TH/s). To equal that hashrate, the attackers would need more than 511,373 S19 XP Hydros—which would put fixed costs close to $10.13 billion, plus a building to host the equipment, maintenance staff, electricity, and cooling.

Major cryptocurrencies, such as Bitcoin, are unlikely to suffer from 51% attacks due to the prohibitive cost of acquiring that much hashing power. For that reason, 51% attacks are generally limited to cryptocurrencies with less participation and hashing power.

After Ethereum’s transition to proof-of-stake, a 51% attack on the Ethereum blockchain became even more expensive. To conduct this attack, a user or group would need to own 51% of the staked ETH on the network. It is possible for someone to own that much ETH, but it’s unlikely; according to Beaconchain, more than 13.8 million ETH were staked at the end of September 2022. An entity would need to own more than 6.9 million ETH (more than $9 billion worth) to attempt an attack.

Once the attack started, the consensus mechanism would likely recognize it and immediately slash the staked ETH, costing the attacker an extraordinary amount of money. Additionally, the community can vote to restore the “honest” chain, so an attacker would lose all of their ETH just to see the damage repaired.

Attack Timing

In addition to the costs, a group that attempts to attack the network using a 51% attack must not only control 51% of the network but must also introduce the altered blockchain at a very precise time. Even if they own 51% of the network hashing rate, they still might not be able to keep up with the block creation rate or get their chain inserted before valid new blocks are created by the ‘honest’ blockchain network.

Again, this is possible on smaller cryptocurrency networks because there is less participation and lower hash rates. Large networks make it nearly impossible to introduce an altered blockchain.

Outcome of a Successful Attack

In the event of a successful attack, the attackers could block other users’ transactions or reverse them and spend the same cryptocurrency again. This vulnerability, known as double-spending, is the digital equivalent of a perfect counterfeit. It is also the basic cryptographic hurdle blockchain consensus mechanisms were designed to overcome.

Successful 51% attackers may also implement a Denial-of-Service (DoS) attack, where they block the addresses of other miners for the period they control the network. This keeps the “honest” miners from reacquiring control of the network before the dishonest chain becomes permanent.

Who Is at Risk of 51% Attack?

The type of mining equipment is also a factor, as ASIC-secured mining networks are less vulnerable than those that can be mined with GPUs; they are much faster. Cloud services such as NiceHash—which considers itself a “hash-power broker”—theoretically make it possible to launch a 51% attack using only rented hash power, especially against smaller, GPU-only networks.

Bitcoin Gold has been a common target for attackers because it is a smaller cryptocurrency by hashrate. Since June 2019, the Michigan Institute for Technology’s Digital Currency Initiative has detected, observed, or been notified of more than 40 51% attacks—also called chain reorganizations, or reorgs—on Bitcoin Gold, Litecoin, and other smaller cryptocurrencies.

What Is Adjusted EBITDA?

Adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) is a measure computed for a company that takes its earnings and adds back interest expenses, taxes, and depreciation charges, plus other adjustments to the metric.

Standardizing EBITDA by removing anomalies means the resulting adjusted or normalized EBITDA is more accurately and easily comparable to the EBITDA of other companies, and to the EBITDA of a company’s industry as a whole.

The Formula for Adjusted EBITDA Is


$\begin{aligned} ∋+IT+DA=EBITDA\\ &EBITDA +\!\!/\!\!-A = \text{Adjusted }EBITDA\\ &\textbf{where:}\\ ∋\ =\ \text{Net income}\\ &IT\ =\ \text{Interest \& taxes}\\ &DA\ =\ \text{Depreciation \& amortization}\\ &A\ =\ \text{Adjustments} \end{aligned}$​NI+IT+DA=EBITDAEBITDA+/−A=Adjusted EBITDAwhere:NI = Net incomeIT = Interest & taxesDA = Depreciation & amortization​

How to Calculate Adjusted EBITDA

Start by calculating earnings before income, taxes, depreciation, and amortization, i.e. EBITDA, which begins with a company’s net income. To this figure, add back interest expense, income taxes, and all non-cash charges including depreciation and amortization.

Next, either add back non-routine expenses, such as excessive owner’s compensation or deduct any additional, typical expenses that would be present in peer companies but may not be present in the company under analysis. This could include salaries for necessary headcount in a company that is under-staffed, for example.

What Does Adjusted EBITDA Tell You?

Adjusted EBITDA is used to assess and compare related companies for valuation analysis and for other purposes. Adjusted EBITDA differs from the standard EBITDA measure in that a company’s adjusted EBITDA is used to normalize its income and expenses since different companies may have several types of expense items that are unique to them. Adjusted EBITDA, as opposed to the non-adjusted version, will attempt to normalize income, standardize cash flows, and eliminate abnormalities or idiosyncrasies (such as redundant assets, bonuses paid to owners, rentals above or below fair market value, etc.), which makes it easier to compare multiple business units or companies in a given industry.

For smaller firms, owners’ personal expenses are often run through the business and must be adjusted out. The adjustment for reasonable compensation to owners is defined by Treasury Regulation 1.162-7(b)(3) as “the amount that would ordinarily be paid for like services by like organizations in like circumstances.”

Other times, one-time expenses need to be added back, such as legal fees, real estate expenses such as repairs or maintenance, or insurance claims. Non-recurring income and expenses such as one-time startup costs that usually reduce EBITDA should also be added back when computing the adjusted EBITDA.

Adjusted EBITDA should not be used in isolation and makes more sense as part of a suite of analytical tools used to value a company or companies. Ratios that rely on adjusted EBITDA can also be used to compare companies of different sizes and in different industries, such as the enterprise value/adjusted EBITDA ratio. 

Example of How to Use Adjusted EBITDA

The adjusted EBITDA metric is most helpful when used in determining the value of a company for transactions such as mergers, acquisitions or raising capital. For example, if a company is valued using a multiple of EBITDA, the value could change significantly after add-backs.

Assume a company is being valued for a sale transaction, using an EBITDA multiple of 6x to arrive at the purchase price estimate. If the company has just $1 million of non-recurring or unusual expenses to add back as EBITDA adjustments, this adds $6 million ($1 million times the 6x multiple) to its purchase price. For this reason, EBITDA adjustments come under much scrutiny from equity analysts and investment bankers during these types of transactions.

The adjustments made to a company’s EBITDA can vary quite a bit from one company to the next, but the goal is the same. Adjusting the EBITDA metric aims to “normalize” the figure so that it is somewhat generic, meaning it contains essentially the same line-item expenses that any other, similar company in its industry would contain.

The bulk of the adjustments are often different types of expenses that are added back to EBITDA. The resulting adjusted EBITDA often reflects a higher earnings level because of the reduced expenses.

EBITDA Adjustments

Common EBITDA adjustments include:

• Unrealized gains or losses
• Non-cash expenses (depreciation, amortization)
• Litigation expenses
• Owner’s compensation that is higher than the market average (in private firms)
• Gains or losses on foreign exchange
• Goodwill impairments
• Non-operating income
• Share-based compensation

This metric is typically calculated on an annual basis for a valuation analysis, but many companies will look at adjusted EBITDA on a quarterly or even monthly basis, though it may be for internal use only.

Analysts often use a three-year or five-year average adjusted EBITDA to smooth out the data. The higher the adjusted EBITDA margin, the better. Different firms or analysts may arrive at slightly different adjusted EBITDA due to differences in their methodology and assumptions in making the adjustments.

These figures are often not made available to the public, while non-normalized EBITDA is typically public information. It is important to note that adjusted EBITDA is not a generally accepted accounting principles (GAAP)-standard line item on a company’s income statement.