Hashed Timelock Contract (HTLC) Definition
A Hashed Timelock Contract (HTLC) is a type of smart contract protocol that is used in the cryptocurrency world to eliminate counterparty risk. It achieves this by enforcing two key rules: that the recipient of a transaction must acknowledge receiving payment within a certain timeframe by providing a cryptographic proof, and if they fail to do so, the transaction is reversed and funds are returned to the sender.
Hashed Timelock Contract (HTLC) Key Points
- A HTLC is a class of payments referred to as “conditional payments”.
- It uses a cryptographic hash function and a timelock to execute transactions on a blockchain.
- HTLC is used to eliminate counterparty risk in transactions.
- It promotes privacy and allows transactions to be conducted securely across different blockchains.
What is the Hashed Timelock Contract
HTLC combines hashlock and timelock security measures to create a type of smart contract. In the cryptocurrency world, it is often used in Lightning Network payment channels, which allow instantaneous, off-chain transactions to occur. The hashed aspect means that the transaction is concealed until it is completed, thereby promoting privacy. The timelock means that the transaction must be completed within a certain period, or it is cancelled and the funds are returned to the original sender.
How does HTLC work
HTLC uses a methodology that locks a transaction with a cryptographic hash function. The party who is on the receiving end of a transaction must provide a proof in a specified time to confirm that the receipt of the transaction has happened. This is the ‘receipt’, which is the hashed form of a secret number. If the receiver fails to confirm the receipt of the transaction within a specified period, the transaction is cancelled and the locked funds are returned to the sender.
When do you use HTLC
HTLC is used primarily when transacting over the Lightning Network or other off-chain solutions. It can also be used in Atomic Cross Chain Trades, where transactions across different public blockchains need to be secured i.e., when you want to exchange Bitcoin for Litecoin.
Why is HTLC important
HTLC is important because it provides security, privacy and speed in cryptocurrency transactions. It helps ensure that the funds you’re sending will only be received by the intended party, and if not, they’ll be returned to you. It is essential for enabling trustless, instant payments across different blockchains.
Where is HTLC used
HTLC is used within the blockchain technology where transactions are conducted. Most notably, this smart contract mechanism is used within the framework of Lightning Network for Bitcoin transactions. It is also relevant in cases of cross-chain Atomic Swaps, allowing for secure exchange between different cryptocurrencies.
Who uses HTLC
HTLC is employed by cryptocurrency traders and users who want to benefit from instant, secure and private transactions. It is also used by Bitcoin Lightning Network, and any other blockchain project or cryptocurrency that supports smart contract protocols.
