A hashed timelock contract (HTLC) is a type of smart contract used in blockchain applications. It reduces counterparty risk by creating a time-based escrow that requires a cryptographic passphrase for unlocking. In practical terms, this means that the person receiving the funds in a transaction has to perform two actions to access the funds: enter the correct passphrase and claim payment within a specific timeframe. If they enter an incorrect passphrase or do not claim the funds within the timeframe, they lose access to the payment.