What is a Hash Time-Lock Contract (HTLC)?

What is a Hash Time-Lock Contract (HTLC)

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A hash time-lock contract (HTLC) is a type of smart contract that allows two parties to transact on a blockchain network in a trustless manner. It uses a cryptographic hash function and a time lock to ensure that the transaction can only be completed if certain conditions are met.

It works because the sender generates a random value (the “preimage”) and uses it to create a cryptographic hash. They then send the hash to the receiver along with the transaction amount and a time lock. The receiver can then redeem the transaction by providing the preimage to the smart contract within the time lock period. If the preimage is provided, the transaction is completed, and the funds are released to the receiver. If the preimage is not provided within the time lock period, the transaction is canceled, and the funds are returned to the sender.

HTLC is often used in payment channels in the blockchain network, such as the lightning network in bitcoin. It enables the off-chain transaction to be secured by the on-chain transaction, allowing for faster and cheaper transactions.

Other similar contracts to Hash Time-Locked Contracts include:

  • Atomic Swaps: These smart contracts allow two parties to trade different cryptocurrencies directly without needing a trusted intermediary. They use a similar mechanism to HTLCs, where a preimage and a time lock are used to ensure that the transaction can only be completed if certain conditions are met.
  • Payment channels allow two parties to transact on a blockchain network without creating a new transaction for every payment. Instead, they create a single transaction that establishes a channel between them, and then they can transact with each other by updating the channel’s state. This is used in the lightning network, which allows for faster and cheaper transactions in bitcoin.
  • State channels are similar to payment channels but allow for more complex interactions between parties. They allow multiple parties to transact with each other on a blockchain network without creating a new transaction for every interaction. This is used in, for example, the Raiden Network for Ethereum.
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These contracts are designed to increase scalability and privacy and reduce the cost of transactions on a blockchain network.

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