Hashed Time Locked Contract
Enabling Cross-Border High Value Transfer using Distributed
Ledger Technologies
Hashed Time Locked Contract or HTLC is a type of smart contract that use hashlocks
and timelocks to require that the receiver of a payment either acknowledge receiving
the payment prior to a deadline by generating a cryptographic proof of payment or
forfeit the ability to claim the payment, returning it to the payer.
Cross-border payments generally involve a set of actions (updates to multiple separate
systems) that are not tightly synchronized, creating the possibility that one action will
succeed and another fail. This leaves the payment inconsistent, which essentially
creates a risk that one party will gain at another's expense. This specific risk may be
eliminated by ensuring all actions succeed or the transaction, in its entirety, is
cancelled. One way to accomplish this is to employ a third party acting as escrow to
the transacting parties; this third party will ensure commitment of the whole
transaction. Another way is to provide a technology-based means of ensuring this
commitment without a trusted third party.
HTLC uses smart contracts to synchronize all the actions making up a transaction so
that either they all happen, or none happens.
HTLC is a reliable way of passing messages between the two systems. Distributed
ledger platforms must support the basic constructs of HTLC: locking of the asset to be
transferred, secret disclosure to the counterparty to complete the acceptance process,
and a timeout mechanism to release the locked assets should the counterparty fail in
its acceptance process.
Hashed Time-Locked Contracts, two-party explanation
1. Alice opens a payment channel to Bob.
2. Alice wants to buy something from Bob for $1,000.
3. Bob generates a random number and generates its SHA256 hash. Bob gives that hash
to Alice.
4. Alice uses her payment channel to pay $1,000, but she adds the hash Bob gave her to
the payment along with an extra condition: in order for Bob to claim the payment, he has
to provide the data that was used to produce that hash.
5. Bob has the original data that was used to produce the hash (called a pre-image), so
Bob can use it to finalize his payment and fully receive the payment from Alice. By doing
so, Bob necessarily makes the pre-image available to Alice.
In 2016, BOC and MAS embarked on Project Jasper and Project Ubin,
respectively, to explore the use of Distributed Ledger Technology (DLT) for
the clearing and settlement of payments and securities. Jasper and Ubin
prototype networks, developed on different Blockchain platforms, were able to
interoperate, allowing for cross-border payments to be settled on central bank
digital currencies.
A fragmented world, with differing standards, processes, norms, and
regulations is the key challenge in cross-border payments today. DLT could
offer an easier and faster path towards adoption than a centralized approach
because it can leave the different jurisdictions involved in control of their
portion of the network while allowing for tight integration with the rest of the
network.
Issues in current cross-border payment arrangements: lack of transparency of payment
status, limited service availability, processing time, costs and operational risks.
.
The Jasper-Ubin technical project, supported by Accenture and JP Morgan,
began with a design and analysis of the different possible models of
connectivity between the two DLT networks—Quorum and Corda. The team
also successfully built a cross-border (Canada and Singapore), cross-
currency (CAD and SGD), cross-platform (Corda and Quorum) system for
atomic transactions based on HTLC.
