Conditional Payment

The fundamental cryptographic primitive enabling conditional payments. An HTLC locks funds with two conditions:

• Payment Hash: Funds are released to the recipient upon presentation of a cryptographic secret (preimage) that hashes to a known value.
• Time Lock: Funds are refunded to the sender after a specified block height or timestamp if the secret is not revealed. This creates a trust-minimized escrow for atomic swaps and cross-chain transactions.

HTLCs enable peer-to-peer cryptocurrency exchanges without centralized intermediaries. The classic example is an atomic swap between Bitcoin and Litecoin:

1. Party A locks BTC in an HTLC on the Bitcoin chain.
2. Party B, seeing proof of this, locks LTC in a corresponding HTLC on the Litecoin chain.
3. Party A claims the LTC by revealing the secret, which automatically allows Party B to claim the BTC. The swap either completes atomically for both parties or fails entirely, eliminating counterparty risk.

The Lightning Network uses a network of bidirectional payment channels secured by HTLCs for instant, low-fee Bitcoin transactions. Conditional payments are the routing mechanism:

• A payment is split into multiple HTLCs across a path of connected channels.
• Each hop forwards the conditional payment upon receiving the hash.
• The final recipient reveals the preimage to claim funds, which propagates back, settling all HTLCs along the route. This enables scalable micropayments and complex payment flows.

Smart contracts on platforms like Ethereum generalize conditional payments beyond HTLCs by integrating external data via oracles. Payments can be made contingent on:

• Real-World Events: "Pay contractor if shipment arrival is verified by IoT sensor."
• Financial Data: "Release insurance payout if a flight is delayed (per API)."
• Other Blockchain States: "Release escrow if a specific transaction is confirmed on Bitcoin." Protocols like Chainlink provide the decentralized oracle infrastructure to resolve these conditions.

Conditional logic is used in decentralized escrow services and commerce platforms:

• Multi-Sig + Time Lock: A 2-of-3 multisig wallet can hold funds, releasable by buyer+seller consensus, or by a third-party arbitrator after a dispute period.
• Milestone Payments: In freelance platforms, funds are released upon client approval or after an arbitrator rules on submitted work.
• Proof-of-Delivery: Payment releases when a courier's GPS verifies location at the destination. This reduces fraud and builds trust in peer-to-peer marketplaces.

State channels extend the concept of payment channels to allow for complex, conditional off-chain interactions. Parties can execute a series of conditional state updates (e.g., turns in a game, incremental service delivery) off-chain, with the final net result settled on-chain. The security relies on the ability to submit the latest signed, conditional state to the blockchain in case of a dispute. This enables high-throughput applications for gaming, voting, and scaling DeFi.

The security of a conditional payment is often only as strong as its oracle data feed. Attackers can exploit centralized oracles or manipulate decentralized ones to trigger or block payments fraudulently. This is a single point of failure.

• Example: An attacker manipulates a price feed to trigger a liquidation payment on a lending protocol.
• Mitigation: Use decentralized oracle networks (e.g., Chainlink) with multiple data sources and cryptoeconomic security.

The smart contract code that defines the payment conditions is a primary attack surface. Bugs like reentrancy, integer overflows, or flawed business logic can lead to funds being stolen or permanently locked.

• Example: The DAO hack exploited a reentrancy vulnerability in its conditional withdrawal logic.
• Mitigation: Rigorous audits, formal verification, and using battle-tested libraries like OpenZeppelin.

A core risk is that the specified condition is never met, leaving funds locked in escrow indefinitely. This can occur due to ambiguous contract terms, unrealistic parameters, or external events that make fulfillment impossible.

• Example: A payment conditional on a stock reaching $200 fails if the company is delisted at $150.
• Mitigation: Implement clear expiration or timeout mechanisms and use dispute resolution protocols.

In public blockchain environments, pending transactions are visible in the mempool. This allows Maximal Extractable Value (MEV) searchers to front-run conditional payments, inserting their own transactions to profit at the user's expense.

• Example: A searcher sees a large conditional swap order and executes their own trade first, moving the price unfavorably.
• Mitigation: Use private transaction relays, commit-reveal schemes, or submit transactions directly to trusted validators.

Conditional payments often involve a third-party escrow agent or rely on a specific blockchain's continued operation. If the custodian is malicious or the underlying chain halts, funds can be lost.

• Example: A cross-chain conditional payment fails if the bridge contract is compromised.
• Mitigation: Use non-custodial, audited smart contracts and prefer payments on robust, decentralized Layer 1 networks.

The legal status of a conditional payment can be unclear. It may be classified as a derivative, a security, or fall under gambling regulations depending on jurisdiction. This creates compliance risk for platforms and users.

• Example: A prediction market using conditional payments for event outcomes may face regulatory scrutiny.
• Mitigation: Seek legal counsel to understand applicable KYC/AML and securities laws before deployment.

Self-executing code deployed on a blockchain that automatically enforces the terms of an agreement. They are the foundational technology enabling conditional payments, as they host the logic that determines when funds are released or returned.

• Key Role: Acts as the impartial, automated escrow agent.
• Example: An Ethereum smart contract can hold ETH until a delivery confirmation oracle reports a successful shipment.

A specific, widely-used form of conditional payment essential for atomic swaps and cross-chain transactions. They use cryptographic hashes and timeouts to create a "pay to reveal" or refund mechanism.

• Mechanism: Payee must provide the secret preimage of a hash to claim funds before a timeout.
• Primary Use: Enables trustless, atomic exchanges across different blockchain networks like Bitcoin and Ethereum.

A financial arrangement where a trusted third party holds and regulates payment of funds between two parties. Conditional payments automate this concept using smart contracts as trustless, programmable escrow agents.

• Traditional vs. On-Chain: Replaces human intermediaries with immutable code.
• Benefit: Eliminates counterparty risk and reduces fees associated with manual escrow services.

The "all-or-nothing" property of a transaction. In conditional payments, atomicity ensures that either all parts of a multi-step transaction succeed and settle, or the entire transaction is reverted as if it never happened.

• Importance: Prevents partial execution, which is a critical security feature for complex financial logic.
• Example: In a cross-chain swap, you either receive the counterparty's asset and they receive yours, or neither transaction occurs.