In essence, Atomic Swaps will enable interoperability between Bitcoin and altcoins without the need of centralized exchanges. At the moment, swapping one coin for another is mostly settled through the use of an exchange or by setting up a person to person transaction. P2P transactions involve the risk of one party not holding up their end of the bargain, and trusting an exchange is never ideal as they are fallible entities.
In comes the atomic swap. But first, a critical scaling layer called the Lightning Network must be implemented. In addition to instant confirmations and low fees, the Lighting Network promises to set the stage for trustless altcoin payment processors and decentralized altcoin exchanges. Once the LN is operating effectively on more than one blockchain, the atomic swap can occur.
How exactly does the atomic swap work? Simply put, it will serve as a connector between different Blockchains. If User A owns Bitcoin and User B owns Litecoin, they can securely complete a transaction with one another without holding the opposite parties currency, or using a centralized exchange platform. The Litecoin and Bitcoin Blockchains will link, via the atomic swap. This is accomplished using hashed time-locked contracts (HTLC) that are built into the scripting language found in cryptocurrencies such as Bitcoin, Litecoin and Vertcoin. Other cryptocurrencies can enable this function as well, but will require further scripting capabilities to make it possible. HTLCs are a combination of two technologies that allow specific conditions to be set on a multisignature transaction, which will serve as the third party that receives and distributes the coins being traded.
Each user will submit their coin to the appropriate Blockchain (i.e. User A to Bitcoin Blockchain and User B to Litecoin blockchain). The users will agree upon set conditions for the trade. Then each user will claim their respective coins by providing a secret number. The timelock part of the contract ensures that if the specific stipulations set by each party are not met within a certain period of time, the transaction will terminate and the coins will return to the original users.