What is Hash Time Locked Contracts (HTLC)

Hash Time Locked Contracts (HTLCs) are a type of smart contract that enable trustless, conditional cryptocurrency payments between parties using two cryptographic mechanisms: a hash lock (requiring the recipient to reveal a secret to claim funds) and a time lock (returning funds to the sender if unclaimed by a deadline). HTLCs are the foundational technology enabling the Bitcoin Lightning Network and cross-chain atomic swaps.

THE TWO LOCKING MECHANISMS

Hash Lock: The sender locks funds with the cryptographic hash of a secret (called a preimage). The recipient can only claim the funds by revealing the original secret, proving they know the preimage without the sender having to trust them to claim.
Time Lock: If the recipient has not claimed the funds by a specified block height or timestamp, the sender can reclaim their funds. This prevents funds from being locked indefinitely if the recipient fails to act.

HOW HTLC ENABLES TRUSTLESS EXCHANGE

Alice wants to send 1 BTC to Bob without trusting an intermediary. Bob generates a secret S and sends Alice the hash H(S). Alice locks 1 BTC in an HTLC: "pay to Bob if he reveals S within 24 hours; otherwise return to Alice." Bob, knowing S, reveals it to claim the Bitcoin. If Bob never claims, Alice gets her Bitcoin back after 24 hours.

THE BITCOIN LIGHTNING NETWORKHTLCs

make the Lightning Network's payment channels possible. When you open a Lightning channel, funds are locked in an HTLC-based multi-signature contract. Payments route through chains of HTLCs across multiple channels. Alice pays Bob through Carol without trusting Carol. Carol can only claim her routing fee by forwarding the payment correctly. If she fails or cheats, the HTLCs time out and funds return to their rightful owners.

ATOMIC SWAPS: CROSS-CHAIN HTLCSHTLCs

enable atomic swaps, direct exchange of cryptocurrencies on different blockchains without an exchange intermediary. Alice locks BTC on Bitcoin with H(S). Bob locks equivalent ETH on Ethereum with H(S). Alice reveals S to claim the ETH, simultaneously revealing S to Bob who uses it to claim the BTC. Either both swaps complete, or both time out, it is atomic (indivisible).

Terms in addition to the Hash Time Locked Contracts (HTLC)

Blockchain

A blockchain is a subset of a distributed database. The Bitcoin inventors originally prototyped the system in 2008. This modern database is made up of separate blocks that are connected together in a chronological chain. Blockchains may be used to store a wide range of data types. It has mostly been utilized as a public ledger for bitcoin transactions to date. A peer-to-peer network comprised of independent nodes uses a consensus process to ensure the blockchain's security and legitimacy. Each node in the network keeps a public and immutable copy of the data.

2 Factor Authentication (2FA)

2 Factor Authentication is a security measure with two layers. It is used by the majority of cryptocurrency exchanges. To log in, you must provide not only a password, but also a code obtained, for example, from the Google authenticator.

Airdrop

An airdrop is a method of distributing coins. End users can typically obtain coins for free or in exchange for doing a small task, such as subscribing to a newsletter, sending a tweet, or inviting others via a personal affiliate link. Cryptocurrency airdrops — the act of depositing cryptocurrency into public crypto wallets — are utilized as a marketing, liquidity creation, and network bootstrapping technique for many different types of blockchain initiatives.

Altcoin

Altcoin - "alternative coin" - is any kind of digital currency other than Bitcoin. Since the launch of Bitcoin, the world's first digital currency, many altcoins (as well as supporting blockchains) have been created. Altcoin digital currencies share many similarities to Bitcoin, but consistently and have significant differences. There are about 20,000 altcoins, and this number is expected to grow significantly in the coming years. Altcoins often develop Bitcoin features. Ethereum, currently the most widely used blockchain, supports digital contracts and separate applications where Bitcoin does not. Altcoins are also often created to cater to the needs of different users. The Litecoin blockchain, for example, can process payments quarterly for the duration of Bitcoin.

Cold Storage

Cold storage is the way to store cryptocurrency offline. The word refers to the use of offline wallets that are not connected to the internet. Cold storage is the most secure way to keep cryptocurrencies since an offline currency becomes less likely to be hacked and stolen. Paper wallets, printed renditions of private keys, and offline hardware and software wallets are all examples of cold storage.