What is a Hashed TimeLock Contract?
A Hashed TimeLock Contract (HTLC) is a smart contract that lets two parties exchange crypto safely without trusting each other. It uses a time-based escrow and a secret code.
To receive the funds, the recipient must enter the correct pre-image (a secret matching a hash) within a set time limit. If they fail, the funds go back to the sender.
How HTLCs Work?
At its core, an HTLC functions on the same underlying principle as a conditional transaction. The process involves two key elements: a hashlock and a timelock.
Both these mechanisms are essential in ensuring the intended level of security and efficiency in transactions.
Hashlock: This feature locks the transaction with a cryptographic hash. To unlock it, the recipient must present the pre-image of the hash, effectively acting as a digital key.
Timelock: The timelock adds a temporal constraint, which means the transaction must be completed within a pre-defined time frame. If the conditions aren't met within this period, the transaction is reversed, and the funds are returned to the sender.
Applications of Hashed TimeLock Contracts
HTLCs are primarily employed in scenarios where trustless operations are necessary. Some common use cases include:
Atomic Swaps: An important feature in decentralized exchanges, atomic swaps leverage HTLCs to enable cross-chain cryptocurrency exchanges without needing a trusted third party. This process ensures that both parties can trade assets safely, only proceeding with the transfer if both agree and deliver the required pre-images.
Lightning Network: Instead of relying on high hashrate like Bitcoin’s base layer, the Lightning Network uses HTLCs for instant, trustless payments.
