What are Hashed Timelock Contracts (HTLC)?
Hashed Timelock Contracts (HTLCs) are groundbreaking smart contracts designed for blockchain applications. They mitigate counterparty risk through a time-based escrow mechanism that requires a cryptographic passphrase to unlock the funds.
Why HTLCs Matter
In simple terms, HTLCs ensure that the recipient of a transaction must take specific actions to access the funds: enter the correct passphrase and claim the payment within a designated timeframe. Failure to do either results in forfeiture of the payment.
Key Benefits
- Reduced Counterparty Risk: HTLCs eliminate the risk of one party reneging on the transaction.
- Time-Based Security: The contract requires timely action to complete payments, enhancing security.
- Efficient Payments: They streamline blockchain transactions, greatly benefiting systems like the Lightning Network.
Deep Dive into Hashed Timelock Contracts
Hashlock Mechanism
The hashlock is the first critical element of an HTLC. It involves creating a cryptographic hash—a scrambled version of a public key generated by the transaction initiator. The associated private key is then used to decode the original hash.
Upon initiating an HTLC, the sender generates a key and hashes it. This hash is stored in a “pre-image” revealed only when the final transaction takes place. The HTLCs expire after a set period or the generation of a specific number of blocks, creating known termination criteria.
Timelock Constraints
HTLCs employ two types of timelocks:
- CheckLockTimeVerify (CLTV): Uses a specified time or block height to lock and release funds. The constraints are hardcoded, meaning coins are only released at a predefined time or block height.
- CheckSequenceVerify (CSV): Relies on the number of blocks generated to set transaction finalization.
How HTLC Transactions Work
Transaction Flow Example
Imagine Alice wants to exchange her Bitcoin for Bob’s Litecoin. Their HTLC transaction proceeds as follows:
- Hash Generation by Alice: Alice creates a hash from her Litecoin private key and sends it to Bob, also generating a nominal transaction’s pre-image for validation.
- Bob’s Hash Creation: Bob generates a hash from his Litecoin key and shares it with Alice, also creating his pre-image for security.
- Mutual Transaction Signing: Upon receiving Bob’s Litecoin, Alice signs off using her key from the pre-image. Bob does likewise with his private key.
- Execution: Both parties enter their keys and authorize the transaction, making it immutable and secure.
Extended Insights
Clarifications on Timelock Contracts
Timelock contracts are smart contract features embedded in a blockchain that adhere to specific execution times. They are integral to HTLCs and play a vital role in structured payment channels.
Evolution of Bitcoin with Smart Contracts
Though Bitcoin initially lacked smart contract capability, the Taproot upgrade in 2021 introduced this feature, marking a significant milestone.
Understanding Smart Contracts
Smart contracts are automated programs stored on a blockchain, executing when predefined conditions are met. Their deployment costs on platforms like Ethereum depend on complexity measured in Gwei, a smaller unit of ether.
Related Terms: smart contracts, Bitcoin, Ethereum, cryptographic passphrase, atomic swaps.
References
- Builder’s Guide to the LND Galaxy. “Hashed Timelock Contract (HTLC)”.
- Liquality. “Hash Time Locked Contracts (HTLCs) Explained”.
- Builder’s Guide to the LND Galaxy. “Timelocks”.
- Monika, Bhatia and et al.“Hash Time Locked Contract Based Asset Exchange Solution for Probabilistic Public Blockchains”. Cluster Computing, vol. 25, December 2022, pp. 4189–4201.
- Bitcoin Magazine. “Understanding Taproot in a Simple Way”.
- Wood, Gavin. “Ethereum: A Secure Decentralised Generalised Transaction Ledger”, Page 27.
