Hashed Time Lock Contracts (HTLC)

Written by Regan Grishaber

Introduction

A Hashed Timelock Contract (HTLC) is a construct that permits secure peer-to-peer transactions used in the Lightning Network to route payments outside of one’s direct channel.

HTLCs are used in various forms of atomic swaps, or peer-to-peer transfers that do not rely on an intermediary. An on-chain swap takes place between two different currencies in a cross-chain transaction and records the transfer directly on each chain, while an off-chain swap requires an off-chain platform such as Lightning to facilitate transfers of the native currency. Use of an HTLC ensures that both parties in an atomic swap fulfill their side of the trade by requiring proof of payment within a specified deadline.

In Lightning, an HTLC achieves a global state across nodes by encumbering payments with a hash that requires knowledge of the 20-byte random input data used to generate the hash, called a pre-image. The SHA256 hash is generated by the ultimate receiver, who provides it to the original sender. The sender uses their payment channel to make the first payment to their channel counterparty. Recipients are responsible for producing this pre-image within a set number of block confirmations, else the funds are returned to the sender. To route payments across a network of nodes, each transaction is encumbered with the same HTLC. Only the final recipient can unlock the funds by producing knowledge of the pre-image. Transactions are made revocable off-chain by embedding RSMCs in the output.

Suggested Reading

What Are Hashed Timelock Contracts (HTLCs)? Application In Lightning Network & Payment Channels by Arnav Vohra

What is a Hashed Timelock Contract? by JP Buntinx

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