A Hashed Timelock Contract (HTLC) is a class of smart contracts used to facilitate atomic swaps and conditional payments across different blockchain networks or between parties without requiring a trusted third party. It combines a cryptographic hashlock with a timelock to ensure that funds are either released to the intended recipient or returned to the sender after a specified period.
Mechanism
An HTLC operates by locking funds that can only be unlocked in two ways: either the recipient provides a secret preimage to a cryptographic hash within a specified time, or the sender reclaims the funds after that timelock expires if the secret was not revealed. This creates a conditional transfer; if one party reveals the secret to claim their funds on one chain, the other party can use the same secret to claim funds on another chain, thus guaranteeing atomic exchange.
Methodology
Implementing HTLCs for crypto investing systems, particularly for cross-chain atomic swaps or institutional RFQ settlements, involves careful design of the smart contract logic to define the hash puzzle and precise timelock parameters. The methodology ensures counterparty risk reduction by eliminating the need for trust in intermediaries, enabling secure, non-custodial asset transfers. It underpins decentralized exchanges and payment channels, providing a foundational primitive for secure, trustless interoperability and settlement across disparate blockchain environments.
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