Understanding Hashed Timelock Contract (HTLC)
A hashed timelock contract (HTLC) is a time-locked escrow feature commonly used in smart contracts to facilitate modifications in payment channels.
An HTLC is an agreement where the recipient must confirm the receipt before a predetermined deadline.
Failure to do so results in the loss of the ability to claim the payment.
The receiver is required to acknowledge the payment within the specified timeframe.
There are two essential elements in a hashed timelock contract:
- Timelock: This function restricts any transaction from the contract’s funds until the receiver affirms the payment before the pre-decided time. Bitcoin commands enable this feature. If the receiver fails to acknowledge the payment, the paying party can claim a refund.
- Hashlocks: These are passphrases used to claim the funds. The recipient must input the correct passphrase to access the funds.
The hashed timelock contract feature ensures secure transfers through bidirectional and routed channels without requiring trust from either party involved.
How Does the Hashed Timelock Contract Work?
The hashlocks and timelocks are the fundamental components that govern the operation of an HTLC.
Firstly, the paying party generates a code or password and hashes it, creating the hashlock.
This hashlock acts as a restriction mechanism and remains protected until the final transaction occurs.
Next, the timelock mechanism comes into play.
A set of timelocks is established to restrict future transactions.
One of the timelocks, Check Lock Time Verify, sets a base time for releasing and limiting the funds.
The other timelock, called Check Sequence Verify, keeps track of the number of locks created to aid in finalizing the transaction.
Application of Hashed Timelock Contract
HTLC is primarily utilized in the Bitcoin Lightning network to enable users to transact through interconnected channels.
In peer-to-peer transactions, trust can be a challenge.
HTLC addresses this issue by eliminating the need for trust from either party.
It allows two users to transact indirectly through a payment channel known as network routing.
The hashlock and timelock prevent interference from other users during the transaction.
Advantages
- Reduced Risk: HTLC mitigates counterparty risk by using hashlock and timelock mechanisms, enhancing the security of transactions.
- Atomic Swaps: With hashed timelock contracts, atomic swaps enable smart contracts to facilitate peer-to-peer exchanges without intermediaries or exchanges.
- Reduced Delays: The timelock mechanism ensures that contracts are settled by a predetermined deadline, eliminating the potential for delays in a contract settlement.