Table of Contents
- What Is a Hashed Timelock Contract (HTLC)?
- Key Takeaways
- Understanding Hashed Timelock Contracts (HTLCs)
- Hashlock
- Timelock
- The Process in a Hashed Timelock Contract
- What Is a Timelock Contract?
- Does Bitcoin Have Smart Contracts?
- What Is a Smart Contract?
- How Much Does a Smart Contract Cost?
- Investment Disclaimer
What Is a Hashed Timelock Contract (HTLC)?
Let me explain what a hashed timelock contract, or HTLC, really is—it's a type of smart contract you'll find in blockchain setups, designed specifically to cut down on counterparty risk. Think of it as a time-sensitive escrow that demands a cryptographic passphrase to release funds.
In practice, if you're the one receiving funds in a transaction, you have to do two things to get them: input the right passphrase and claim the payment before the clock runs out. Get the passphrase wrong or miss the deadline, and you forfeit the funds entirely.
Key Takeaways
As I see it, the core of an HTLC is how it minimizes counterparty risk in decentralized smart contracts by setting up a time-based escrow tied to a cryptographic passphrase. You, as the receiver, must acknowledge and claim the payment within a set period, or it's gone. These contracts make payments conditional, which boosts efficiency in blockchain transactions and positions HTLCs as a key building block for things like the Lightning Network.
Understanding Hashed Timelock Contracts (HTLCs)
When you dive into HTLCs, you'll notice they pull from standard cryptocurrency transaction elements, like using multiple signatures with private and public keys to verify everything. But what sets them apart are the hashlock and the timelock—those are the game-changers.
Hashlock
First off, the hashlock is essentially a cryptographically scrambled version of a public key that the transaction initiator creates. You use the matching private key to unlock it. In an HTLC, the initiator generates this key, hashes it, and stores it in a pre-image that's revealed only at the end. These contracts are built to expire after a set time or a certain number of blocks, giving you a clear end point. Remember, to pull off an HTLC transaction, both parties need to open channels, typically through a wallet or exchange.
Timelock
Then there's the timelock, which comes in two flavors to impose time limits on these contracts. The first is CheckLockTimeVerify (CLTV), which locks and releases crypto based on actual time—hardcoding constraints so coins only move at a specific date, time, or block height. You'll see HTLCs powering atomic swaps for trading across different blockchains, and they're also central to Bitcoin's Lightning Network. The second type is CheckSequenceVerify (CSV), which skips time altogether and tracks by the number of blocks generated to decide when to wrap things up.
The Process in a Hashed Timelock Contract
Let's walk through a real example: say Alice wants to swap her Bitcoin for Bob's Litecoin using an HTLC. She starts by generating a hash from her Litecoin private key and sends it to Bob, along with a pre-image from a small transaction to validate later. Bob mirrors this by creating his own hash and pre-image in Litecoin, sending them to Alice. Once Alice gets Bob's transaction, she signs it with her original key from the pre-image, and Bob does the same on his side. When both input their keys and agree, the smart contract kicks in and executes—neither can back out or alter it, eliminating any chance of foul play.
What Is a Timelock Contract?
A timelock contract is simply a smart contract on a blockchain that triggers a transaction at a predetermined time. You'll encounter them in HTLCs and payment channels where timing is critical for payments.
Does Bitcoin Have Smart Contracts?
Bitcoin's blockchain didn't support smart contracts at first, but the 2021 Taproot upgrade changed that, allowing them in transactions now.
What Is a Smart Contract?
At its core, a smart contract is a program on a blockchain that runs automatically when conditions are met.
How Much Does a Smart Contract Cost?
On Ethereum, deploying a smart contract requires gas paid in Gwei, a fraction of ether. Costs can climb to billions of Gwei for complex ones, but simpler swaps are far cheaper.
Investment Disclaimer
Investing in cryptocurrencies and ICOs carries high risk and speculation, and this isn't advice from me or Investopedia to jump in. Your situation is unique, so consult a qualified professional before any financial moves. We make no guarantees on the accuracy or timeliness of this info.
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