Explained: Understanding Hashed Timelock Contracts in Blockchain Applications
Hashed Timelock Contracts (HTLCs) can secure cross-chain cryptocurrency transactions between two parties, but certain vulnerabilities may require attention.
Timelock Contracts
Cryptocurrencies, a newcomer to the financial world, come with hidden or lesser-known features that, when utilized, can protect funds from losses. One such feature is the Hashed Timelock Contract (HTLC). An HTLC is a time-bound smart contract that permits the transfer of crypto funds only after the recipient enters a secret, predetermined cryptographic passphrase. By using an HTLC during a crypto transfer, it can guarantee that no third party can access the funds, thereby ensuring the security of the transaction.
To finalize an HTLC transaction, the recipient must enter the passphrase within a predetermined timeframe. Failure to meet either of these conditions results in the transaction not being executed.
How are HTLCs Implemented?
HTLCs consist of two main components – Hashlock and Timelock.
According to a report from Investopedia, a hashlock is a cryptographically derived form of a public key. The sender of the funds is responsible for creating hashlocks, which function as private keys. These hashlocks are initially uploaded as pre-images and are later revealed during the financial transaction.
Conversely, a timelock is incorporated to introduce a temporal aspect to HTLCs. Every HTLC contract includes two timelocks to define the specific duration during which the receiving party must enter the cryptographically generated passphrase to execute the transaction.
Where are HTLCs Utilized?
Bitcoin and Ethereum, along with various other blockchains, support HTLC transactions. These smart contracts enhance the interoperability of the blockchain industry by facilitating cross-chain transactions without the need for a centralized exchange, as per a report by Faster Capital.
However, it’s worth noting that HTLCs are vulnerable to various threats, with bribery attacks being particularly significant. In a bribery attack, the attacker offers a higher transaction fee to blockchain miners to encourage them to access an HTLC transaction unlawfully.
Another type of vulnerability that can impact the successful execution of an HTLC contract is the Malleability attack. In this scenario, the attacker can manipulate the transaction ID of the HTLC, leading to the failure of the transaction entirely.
