Atomic swaps allow you to trade tokens without exchanges by peer to peer trades via smart contracts interacting with two peoples wallets simultaneously.

This means normally to trade for example Bitcoin for Eth you send your Bitcoin from your Bitcoin wallet to the Binance exchange and essentially to their Bitcoin wallet, controlled by their keys. There your Bitcoin is traded via an order book for some Ether that someone else sent from their ether wallet to the Binance exchange and the Binance exchange ether wallet. Your crypto has left your wallet, which is secured by your private key, and now resides in the Binance wallet, secured by their keys. If they halt trading on Bitcoin or ether you can’t do anything until they give you permission to move your tokens.

Atomic swaps allow the tokens to remain in your wallets, and under your control via your private keys up until the time the trade actually happens. Then the tokens move from your Bitcoin wallet to their Bitcoin wallet, and from their ether wallet to your ether wallet simultaneously. 100% secure.

Atomic swaps require only that the two parties each process wallets for the tokens they wish to trade.

Thorchain originally was going to be a true decentralized exchange. But it has taken 3-4 years to develop their atomic swap capability and their other use cases. However the world has changed drastically. Three years ago there was no Uniswap, no AMM DEX, no MakerDao and definitely no Yield Farms.

You are right that Thorchain has also developed a AMM exchange whose code is different from Uniswap. I haven’t read about it for a few months, but I believe you are correct that they pay liquidity providers with transaction fees similar to uniswap, but also an additional fee is charged to large volume trades, and this additional fee is paid to liquidity providers to offset the losses they experience from impermanent loss. At the time it was proposed a few months ago it was clear that it provided negative incentive to whales. It was unclear if the exchange would be popular.

I am less certain about how Atomic swaps work in DeFi, and I need to read more. MetaMask has developed so much and DeFi has developed so much that it is unclear how revolutionary these projects like Thorchain are now, because they were built to solve problems which existed years ago, and those problems have been solved by other developments. Decentralized exchanges and especially AMM dexs have eliminated much of the need for central exchanges in a theoretical and practical sense, but people love their centralized exchanges because they are easy to use. And occasionally offer interesting tools.

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