Sunday, March 24, 2024

Hashed Timelock Contract (HTLC)

by Hideo Nakamura
Hashed Timelock Contract (HTLC)

Hashed Timelock Contract (HTLC) is a type of transaction used in cryptocurrency networks to enable secure and trustless transactions between two parties. It works by having one party send funds to another, but the recipient must provide a cryptographic proof of payment within a certain time frame or the funds are returned to the sender.

The name “Hashed Timelock Contract” comes from combining two concepts: hashlock and timelock. A hashlock requires that some piece of data be provided before an output can be spent; for example, this could require knowledge of a secret phrase or private key associated with the output. A timelock ensures that an output cannot be unlocked until after a certain amount of time has passed. Together, these two elements ensure that both parties have incentives to cooperate during a transaction because if either fails to do so, they will forfeit their share of the funds.

HTLCs have become popular in cryptocurrency networks such as Bitcoin and Ethereum due their ability to provide increased security compared to traditional methods while still allowing for fast and efficient transactions between participants who may not know each other or fully trust one another. The use cases vary depending on which network it is being used on but common uses include atomic swaps (allowing users to exchange different coins without needing an intermediary), decentralized exchanges (allowing users trade coins securely without relying on third-party custodians) and lightning networks (enabling fast payments between users).

An HTLC appears similar in conceptually idea as an escrow service where someone holds onto money until both sides agree that conditions are met – however unlike those services which depend on trusting someone else with your money, HTLCs eliminate middlemen altogether using cryptography instead guaranteeing trustlessness between participants involved in any given transaction.

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