🔐HTLC (hash-time locked contract)

HTLC is an agreement (smart contract) between 2 parties (A & B) consisting of hashlock & timelock. HTLC is created with 2 parameters: hash P & timelock T

Hashlock

Enables A to claim the funds from the smart contract if he is able to provide a valid secret S that hashes to pre-specified hash P, such that P = H(S). This is used for happy path (e.g. the lightning network payment was successful).

Timelock

Allows B to claim the funds from the smart contract once the timelock T expires. This is used for sad path (e.g. when the counterparty doesn't cooperate) and makes sure the funds are returned to the original sender.

Cooperative close

It is also possible to cooperatively close the contract together (but both A & B must agree on the closing terms of the contract).