Hashed Timelock Contract (HTLC)

A Hashed Timelock Contract (HTLC) is a specialized smart contract that facilitates conditional payments by requiring the recipient to provide a cryptographic proof of payment (hash preimage) within a specified time window, or else the funds are returned to the sender. This creates a cryptographic condition enforced by the blockchain, enabling trustless interactions between parties who do not need to rely on a central intermediary. HTLCs are the foundational building block for atomic swaps and payment channels in networks like the Lightning Network.

The core mechanism relies on two timelocks: a hashlock and a timelock. The hashlock is a condition where payment is only released upon the presentation of the secret data (the preimage) that generates a known cryptographic hash. The timelock, typically implemented via OP_CHECKLOCKTIMEVERIFY in Bitcoin or block.timestamp in Ethereum, sets a deadline. If the preimage is not revealed before this deadline expires, the contract logic allows the locked funds to be refunded to the original sender, preventing funds from being locked indefinitely.

HTLCs are most famously applied in cross-chain atomic swaps, allowing for the direct peer-to-peer exchange of cryptocurrencies across different blockchains without centralized exchanges. In this process, Party A locks funds in an HTLC on Chain A. To claim them, Party B must use the preimage, an action which simultaneously reveals it, allowing Party A to claim the funds locked in a corresponding HTLC on Chain B. This ensures the swap either completes entirely for both parties or not at all, guaranteeing atomicity.

Beyond swaps, HTLCs are the critical component for routing payments in Layer 2 networks like the Lightning Network. Here, a payment is routed through a path of connected payment channels. Each hop in the path is secured by an HTLC, where each intermediary node can only claim funds from the upstream node if they can produce the preimage, which they learn by paying the next node downstream. This creates a secure, trustless multi-hop payment system where no single participant can steal funds.

While powerful, HTLCs have limitations. They introduce liquidity locking along the payment route for the duration of the timelock and are susceptible to hash collision attacks if a weak hash function is used (though SHA-256 is considered secure). Furthermore, the requirement for a global timelock can lead to capital inefficiency in routing networks. Newer constructions, such as Point Time-Locked Contracts (PTLCs), aim to improve upon HTLCs by using cryptographic adaptor signatures, which offer greater privacy and efficiency.

A Hashed Timelock Contract (HTLC) is a specialized smart contract that facilitates conditional payments by requiring the recipient to provide a cryptographic proof of payment (preimage) within a specified time window, or else the funds are returned to the sender. This mechanism creates a secure, self-enforcing agreement that does not rely on a trusted intermediary. The contract's logic is governed by two primary constraints: a hashlock, which locks funds until the correct preimage is revealed, and a timelock, which defines an expiration deadline for the transaction.

The process begins when the sender creates a cryptographic hash (the hashlock) from a secret preimage and embeds it into the HTLC. Funds are locked in this contract with the condition that to claim them, the recipient must present the secret that produces the agreed-upon hash. This creates a cryptographic proof of payment that is verifiable on-chain. Concurrently, the contract includes a CLTV (CheckLockTimeVerify) or CSV (CheckSequenceVerify) timelock, setting a block height or time after which the sender can reclaim the funds if the secret is not revealed.

HTLCs are the foundational building block for cross-chain atomic swaps and payment channel networks like the Lightning Network. In an atomic swap between two blockchains, Party A locks funds in an HTLC on Chain A. To claim them, Party B must reveal the secret, which then allows Party A to claim funds from an HTLC on Chain B using the same secret, ensuring the swap either completes entirely for both parties or not at all. This eliminates counterparty risk without a central custodian.

Within a Lightning Network payment channel, HTLCs enable multi-hop routing. A payment is broken into a chain of HTLCs across multiple nodes. Each intermediary node forwards the payment by creating a new HTLC for the next hop, with a slightly earlier timelock. This creates a hashed timelock contract chain where the revelation of the final recipient's preimage unlocks funds backwards along the route, ensuring intermediaries get paid only if the payment is successful.

The security of an HTLC hinges on the one-way property of the hash function and the deterministic finality of the timelock. The hash function (commonly SHA-256) makes it computationally infeasible to derive the preimage from the hashlock. The timelock, enforced by blockchain consensus, guarantees the sender a guaranteed refund path. However, risks include timelock griefing, where a participant delays revelation to pressure others, and the necessity for precise time synchronization across network hops to avoid fund loss.

An HTLC atomic swap is a multi-step cryptographic protocol that allows two parties to exchange different cryptocurrencies without a trusted intermediary, ensuring the trade either completes entirely for both sides or fails entirely for both. The process is secured by two core components: a cryptographic hash lock and a timelock. The hash lock ensures only the party who knows the secret preimage can claim the funds, while the timelock guarantees funds can be refunded to their original owner if the swap is not completed within a specified period. This creates the atomicity—the all-or-nothing property—that defines the swap.

The swap begins when Party A, wanting to trade Bitcoin for Party B's Litecoin, creates an HTLC on the Bitcoin blockchain. This contract locks A's Bitcoin with two conditions: it can be claimed by anyone who presents the correct cryptographic secret (the preimage of a published hash), or it can be refunded back to A after a set time window expires. Party A then sends the hash of the secret to Party B. Crucially, at this point, Party B cannot claim the Bitcoin because they do not yet know the secret preimage, only its hash.

Upon seeing the hash on the Bitcoin chain, Party B creates a corresponding HTLC on the Litecoin blockchain, locking their Litecoin with the same hash and a shorter timelock. This timelock must be shorter than the one on A's initial contract to prevent a race condition. When Party A sees B's Litecoin HTLC, they can claim the Litecoin by revealing the secret preimage on the Litecoin chain. This act of claiming automatically publishes the secret to the public blockchain.

Finally, with the secret now publicly visible on the Litecoin ledger, Party B can use it to claim the Bitcoin from the original HTLC on the Bitcoin chain. The swap is complete. If at any point a party fails to act—for instance, if B never creates the Litecoin HTLC—the timelocks will eventually expire, and all locked funds will be refunded to their original owners. This elegant sequence ensures trustlessness; neither party can steal funds or be left in a state where they have paid but not received.

Visualizing this flow highlights key requirements for cross-chain atomic swaps: both blockchains must support compatible hash functions (like SHA-256) and a scripting language capable of enforcing HTLC logic (e.g., Bitcoin Script). While powerful for direct peer-to-peer trading, HTLCs have limitations, including timelock coordination complexity and capital being locked during the process. They remain a foundational cryptographic primitive enabling more complex decentralized finance (DeFi) constructs like the Lightning Network for off-chain payments.