What Is a Hashed Timelock Contract (HTLC)?
Hashed timelock contracts (HTLCs) are blockchain smart contracts. Using a cryptographic passcode to unlock a time-based escrow decreases counterparty risk.
In practice, this means the recipient of funds must input the correct passphrase and claim payment within a specific deadline. They forfeit the payout if they input an erroneous password or don’t claim the money in time.
Learning Hashed Timelock Contracts
Hashed Timelock Contracts (HTLCs) incorporate aspects of existing Bitcoin transactions. HTLC transactions employ private and public key signatures to verify and authenticate transactions. HTLC differs from regular Bitcoin transactions with smart contracts due to the hashlock and time contract.
Hashlock
The hashlock comes first. Hashlocks are cryptographically scrambled versions of public keys issued by the transaction initiator. To unlock the original hash, use the accompanying private key.
The initiator produces and hashes HTLC keys. Final transactions expose the hash from a pre-image. HTLCs expire after a particular duration or number of blocks, establishing a termination date and time.
Both parties must open channels for HTLC transactions. This usually involves a wallet or exchange.
Timelock
Another critical component of HTLC is a timer. Contracts produced with HTLC have two timelocks. CheckLockTimeVerify is the first. It locks and releases cryptocurrency with time. Time limits are hardcoded, so coins are distributed only at a particular time, date, or block height.
HTLCs enable atomic swaps—cross-chain cryptocurrency trading. Additionally, Bitcoin’s lightning network (LN) uses HTLCs.
Second, check sequence verification (CSV). It tracks the number of blocks created to decide whether to finish a transaction, not time.
The Hashed Timelock Contract Process
Imagine Alice wants to trade Bitcoin for Litecoin from Bob. HTLC transactions between them often go like this:
- Alice sends Bob her Litecoin private key hash. She creates a nominal transaction to pre-image the hash. She can confirm and complete the purchase using this pre-image.
- Bob also provides Alice with his crucial hash. He also prepares a pre-image with a nominal Litecoin transaction.
- Alice uses her pre-image key to sign Bob’s Litecoin transaction. Bob unlocks Alice’s transaction using his private key.
- Intelligent contracts perform transactions once Alice and Bob submit their keys and agree. Since neither can modify the transaction after it runs, neither can mislead the other by immediately canceling the trade.
Definition of a Timelock Contract
Timelock contracts are blockchain-based smart contracts that execute transactions at certain times. Hashed timelock contracts and payment channels utilize them for defined payment timings.
Does Bitcoin have intelligent contracts?
Initially, Bitcoin’s blockchain couldn’t execute smart contracts. In 2021, Taproot upgraded to support smart contracts in blockchain transactions.
What’s a smart contract?
With certain conditions, a blockchain-stored smart contract runs.
What is the cost of a smart contract?
Smart contracts on Ethereum require gas, which costs Gwei. Intelligent contracts can cost billions of Gwei to deploy, depending on complexity. Simple contracts, like exchanges, are inexpensive.
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Conclusion
- A hashed timelock contract (HTLC) creates a cryptographic passphrase-based time-based escrow in decentralized smart contracts, reducing counterparty risk.
- This intelligent contract forces payment recipients to acknowledge or forfeit payments within a defined timeframe.
- Conditional HTLC payments improve blockchain transaction efficiency. HTLCs are essential to lightning networks because of this characteristic.
