What is Hashed Timelock Contract?

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A hashed timelock contract (HTLC) is a type of smart contract used in blockchain applications. It reduces counterparty risk by creating a time-based escrow that requires a cryptographic passphrase for unlocking.In practical terms, this means that the person receiving the funds in a transaction has to perform two actions to access the funds: enter the correct passphrase and claim payment within a specific timeframe. If they enter an incorrect passphrase or do not claim the funds within the timeframe, they lose access to the payment.

Definition

A Hash Time-Locked Contract (HTLC) is a type of smart contract used in blockchain applications. It reduces counterparty risk by creating a time-based escrow. To unlock the contract, a cryptographic passphrase is required. This means that the recipient of the funds must enter the correct passphrase and claim the payment within a specific timeframe, or they will lose access to the funds.

Origin

The concept of HTLC originated in the Bitcoin network to address counterparty risk issues. As blockchain technology evolved, HTLCs have been widely used in cross-chain transactions and the Lightning Network to enhance transaction security and efficiency.

Categories and Features

HTLCs are primarily used in two scenarios: cross-chain transactions and the Lightning Network. In cross-chain transactions, HTLCs allow asset exchanges between different blockchains without the need for a trusted third party. In the Lightning Network, HTLCs enable fast and low-cost Bitcoin transactions. Key features include: 1. Time lock: Specifies that the transaction must be completed within a certain timeframe. 2. Hash lock: Requires a passphrase to unlock the transaction.

Case Studies

Case Study 1: In a cross-chain transaction between Bitcoin and Ethereum, HTLCs are used to ensure that both parties can safely exchange assets without trust. Case Study 2: In the Bitcoin Lightning Network, HTLCs are used to facilitate instant payments, allowing users to complete transactions in seconds without waiting for block confirmations.

Common Issues

Common issues include the loss of the passphrase, which can result in funds being irretrievable, and improper time lock settings leading to transaction failures. Investors should ensure the security of the passphrase and set the time lock duration appropriately.

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