Thread by @JohnCantrell97

If you’ve done any research on the lightning network you’ve probably heard about Hash Time Locked Contracts (HTLCs):

What exactly are they?
Why do we need them?
How do they enable trustless payments?

I’ve been working with lightning for years, let me break it down for you 👇

Hash Time Locked Contracts are a way of doing conditional payments using smart contracts on Bitcoin.

As the name implies they use both a hashlock and a timelock to enable this functionality.

So what exactly are hashlocks and timelocks?

A hash refers to the output of a hash function like SHA256.

The important property to understand is that the hash provides no info about the input used to generate it.

A hashlock is a payment that is conditional on the recipient knowing the input that generates the hash

A time lock comes in a few forms in Bitcoin but generally it is a condition placed on an UTXO so that it cannot be spent by the recipient until a certain time or block height.

It means Alice can send Bob some money that he cannot spend until some specified time.

We can use these constructs to enable trustless routing of payments over the lightning network.

Let’s imagine a scenario where Alice has a channel with Bob and Bob has a channel with Carol.

Alice wants to pay Carol but doesn’t want to open a channel. How do HTLCs help?

Carol can generate a random number called the payment secret and use a hash function to get a hash we’ll call the payment hash.

She gives the payment hash to Alice.

Alice tells Bob that she wants to route a payment to Carol and that I know you have a channel open with her.

Let’s say Alice wants to pay Carol 10K sats.

Alice uses a hash lock to pay Bob 11K sats that he can only receive if he has the secret used to generate the hash Alice got from Carol.

Bob wants to earn the 1K sats fee and knows he can get the secret from Carol.

Bob then does the same thing with Carol.

He uses a hash lock to pay Carol the 10K sats knowing she can only claim the payment if she provides the payment secret.

He’s okay doing this because if he gets the secret he can use it to claim 11K sats from Alice.

Carol wants the 10K sats so she gives the secret to Bob and claims her 10K sats.

Bob uses the secret to claim the 11K sats from Alice. Alice has paid Carol 10K sats and Bob earned 1K sats for routing the payment for Alice.

This is how trustless lightning payments work.

Wait but what about the time lock?

The time lock is used so that participants can get their sats back if anyone disappears.

So Alice’s payment to Bob really has two conditions:

1) Pay Bob 11K sats if he has the secret.
OR
2) Pay Alice 11K sats after some timeout.

This means if Bob bails or can’t get the secret for some reason then Alice’s funds are not lost.

She will be able to get them back after the time lock expires.

It also means Bob has a limited amount of time to get the secret from Carol.

I hope this helped you understand Hash Time Locked Contracts (HTLCs) and why they are fundamental building blocks to the lightning network.

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