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Given that a participant of a hydra head posts an incorrect (not the latest) snapshot to close the head, does the hydra node automatically contest this? Or do we, the operator of that head, need to use the API to manually contest?

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The hydra-node will automatically Contest any transaction it sees on the chain that tries to Close (or Contest!) the head with an invalid or not up-to-date snapshot. There is no need for the operator to do anything, but it might be useful in some scenarios to be able to do so.

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