Hashed Timelock Contract (HTLC)

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December 11, 2023

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A Hashed Timelock Contract (HTLC) is a crucial concept in cryptocurrencies, particularly in blockchain networks that support smart contracts, like Bitcoin’s Lightning Network and platforms like Ethereum.

An HTLC is a mechanism that enables secure and trustless transactions between parties across different blockchain networks. It utilizes cryptographic hash functions and time locks to facilitate conditional payments.

Components of Hashed Timelock Contract

Hash Function

  • An HTLC involves the use of a cryptographic hash function. Typically, a hash of a secret is generated, and the knowledge of this secret is required to claim the funds.

Timelock

  • The contract includes a time lock, which specifies a predetermined period during which the contract conditions must be fulfilled. If the conditions are not met within the specified time, the funds can be refunded to the original sender.

Conditional Payment

  • The HTLC allows for conditional payments. For example, Party A can send funds to Party B, but B can only claim the funds if they reveal the preimage of the hash (the secret) before the timelock expires.

Multi-signature Wallets

  • HTLCs often involve multi-signature wallets. Multiple parties, such as the sender, the recipient, and potentially an intermediary (if using a multi-hop network like Lightning), may need to provide their signatures to initiate or claim the funds.

How Hashed Timelock Contracts Work

Initiation

    • Party A initiates the HTLC by creating a hash of a secret and locking the funds in the contract. The hash and the time lock condition are shared with Party B.

Claiming Funds

    • Party B must reveal the hash’s preimage (the secret) to claim the funds before the timelock expires. This can be done directly or by bypassing the secret to an intermediary in a multi-hop network.

Refund

    • If Party B fails to reveal the preimage within the specified time, Party A can claim a refund of the locked funds. This ensures that the funds are not indefinitely locked in the contract.

Use Cases

Cross-Chain Atomic Swaps: HTLCs enable cross-chain atomic swaps, allowing users to trade cryptocurrencies across different blockchain networks without needing a trusted intermediary.

Lightning Network Transactions:  HTLCs are used for off-chain transactions in the Lightning Network. Participants in a payment channel use HTLCs to securely and incrementally update the channel balance without requiring on-chain transactions for every payment.

Secure Intermediary Payments: When many parties are involved in a transaction (e.g., in a multi-hop Lightning Network payment), HTLCs provide a secure way for intermediaries to forward payments while ensuring that funds are only released upon fulfilling specified conditions.

Advantages

  • Trustlessness: HTLCs eliminate the need for trust between parties, as the funds are either claimed according to the agreed-upon conditions or refunded.
  • Cross-Chain Compatibility: HTLCs facilitate interoperability between blockchain networks, enabling secure transactions across disparate platforms.
  • Conditional Payments: Payments are conditional upon fulfilling specific criteria, adding a layer of security to the transaction process.

Challenges

  • Complexity: Implementing and understanding HTLCs can be complex, especially for non-technical users.
  • On-Chain Fees: Depending on the blockchain network, initiating or settling an HTLC may incur on-chain transaction fees.

Conclusion

Hashed Timelock Contracts are pivotal in enabling secure and trustless transactions, providing a foundation for innovative solutions in blockchain and cryptocurrency.