Escrow

Here’s an outline of the kind of escrow transaction that’s possible in software.  This is not implemented and I probably won’t have time to implement it soon, but just to let you know what’s possible.

The basic escrow: The buyer commits a payment to escrow. The seller receives a transaction with the money in escrow, but he can’t spend it until the buyer unlocks it. The buyer can release the payment at any time after that, which could be never. This does not allow the buyer to take the money back, but it does give him the option to burn the money out of spite by never releasing it. The seller has the option to release the money back to the buyer.

While this system does not guarantee the parties against loss, it takes the profit out of cheating.

If the seller doesn’t send the goods, he doesn’t get paid. The buyer would still be out the money, but at least the seller has no monetary motivation to stiff him.

The buyer can’t benefit by failing to pay. He can’t get the escrow money back. He can’t fail to pay due to lack of funds. The seller can see that the funds are committed to his key and can’t be sent to anyone else.

Now, an economist would say that a fraudulent seller could start negotiating, such as “release the money and I’ll give you half of it back”, but at that point, there would be so little trust and so much spite that negotiation is unlikely. Why on earth would the fraudster keep his word and send you half if he’s already breaking his word to steal it? I think for modest amounts, almost everyone would refuse on principle alone.

Cryptography at its finest 😎

Could you explain how this would work on a technical basis?

Buyer not having recourse except burning the money will limit the utility, I think.

Buyer not having recourse except burning the money will limit the utility, I think.

Perhaps we could work in a way to do arbitration. If both the buyer and seller agree, the money can be diverted to a 3rd party. That person could then arbitrate and either return the money to the buyer, give it to seller or steal it (obviously you’d want to choose a trustworthy arbitrator).

The Satoshi solution is good, because if customer can take money back, it will be a big problem to sellers. See current situation with internet credit card payments and chargebacks. Chargebacks are major PITA for sellers, bitcoin must avoid that at all cost 😊

The Satoshi solution is good, because if customer can take money back, it will be a big problem to sellers. See current situation with internet credit card payments and chargebacks. Chargebacks are major PITA for sellers, bitcoin must avoid that at all cost

Ask some real-world business owners if they want to tell their customers about the chance of the money being lost forever, unrecoverable by either party.

Regardless of what the technical options are, I think that an escrow will always need to be, by definition, a trusted entity. I can see the automated workflow being easy enough when things go well:

• Buyer sends btc to escrow, stating the recipient address
• Seller sees btc in escrow, marked to send to his address
• Buyer can release funds to seller
• Escrow will automatically do so after x days
• Both parties can open a complaint

And that’s all I would automate. When things go bad, both parties should have a fee to pay to the escrow (that fee may be paid in advance to open account there?) so everyone looses something. Then the escrow will just have to mediate.

Because there’s a fee and a human intermediary, the chances of successful fraud will probably not be economically interesting in the long run. Someone already trusted would make the ideal person for this, and maybe for a small fee some of us ‘common guys’ could help assert allegations from either side, if we are local to them.

But the money burning solution, while great at preventing economically viable fraud, does nothing to prevent revenge and actually makes everyone loose if one side is dishonest. I would certainly not endorse that.

Ask some real-world business owners if they want to tell their customers about the chance of the money being lost forever, unrecoverable by either party.

That makes it sound like it might somehow get lost and the parties can’t get it even if they want to cooperate.

When you pay for something up front, you can’t get it back either.  Consumers seem comfortable with that.  It’s no worse than that.

Either party always has the option to release it to the other.

But the money burning solution, while great at preventing economically viable fraud, does nothing to prevent revenge and actually makes everyone loose if one side is dishonest. I would certainly not endorse that.

Then you must also be against the common system of payment up front, where the customer loses.

Payment up front: customer loses, and the thief gets the money. Simple escrow: customer loses, but the thief doesn’t get the money either.

Are you guys saying payment up front is better, because at least the thief gets the money, so at least someone gets it?

Imagine someone stole something from you.  You can’t get it back, but if you could, if it had a kill switch that could be remote triggered, would you do it?  Would it be a good thing for thieves to know that everything you own has a kill switch and if they steal it, it’ll be useless to them, although you still lose it too?  If they give it back, you can re-activate it.

Imagine if gold turned to lead when stolen.  If the thief gives it back, it turns to gold again.

It still seems to me the problem may be one of presenting it the right way.  For one thing, not being so blunt about “money burning” for the purposes of game theory discussion.  The money is never truly burned.  You have the option to release it at any time forever.

This is a definite improvement over no escrow. It’s just a shame there’s nothing that can be done to mitigate malicious intent by offering to sell something, only to ‘burn’ the payment and never send the goods (assuming they even existed).

This would just be a case of spite but a very real threat none the less.

E.g.

A offers to sell laptop B offers to buy and escrows 2000 bitcoins A confirms that item is sent but never sends it B never receives it so never release the bitcoins A doesn’t care because their intent was to make B ‘spend’ their bitcoins with no recompense

Quote from: nelisky on August 10, 2010, 8:20:36 PM UTC

But the money burning solution, while great at preventing economically viable fraud, does nothing to prevent revenge and actually makes everyone loose if one side is dishonest. I would certainly not endorse that.

Then you must also be against the common system of payment up front, where the customer loses.

Not at all, satoshi. I do a lot of business in the local auctions and I’m all for paying up front, but only when the feedback mechanism provides me with some insight on the previous trades for the buyer / seller. Failing that, I sell and buy using COD, which is almost like an escrow, except there’s no way of asserting the goods are what was previously agreed upon before paying. But I do get the option of putting forward a complaint with witnesses (the post office clerk) which helps somehow.

So, this escrow as I’ve put it would be someone trusted in the community, effectively removing 75% of the fraud opportunities a) Say I’ll pay but don’t b) Say I’ll send but don’t and collect money c) Send some bogus item and collect money d) Say I’ve not receive (money / goods) but did

So d) is the one place where the human escrow will need to dig into the trade and assert who’s saying the truth. All other are (more or less) easy to prove. The automated escrow service as you describe it would end up in burning money on all 4 situations.

Again, if you are to trust the other party, then cash up front works very well. If you are working under anonymous aliases and there’s no previous trade trace, well, I personally prefer to not buy at all, if there’s a chance I’ll loose both money and goods.

…It’s just a shame there’s nothing that can be done to mitigate malicious intent by offering to sell something, only to ‘burn’ the payment and never send the goods (assuming they even existed).

This would just be a case of spite but a very real threat none the less.

E.g.

A offers to sell laptop B offers to buy and escrows 2000 bitcoins A confirms that item is sent but never sends it B never receives it so never release the bitcoins A doesn’t care because their intent was to make B ‘spend’ their bitcoins with no recompense

How about this:

A offers to sell laptop for 2000 bitcoins, and escrows 2500 bitcoins as security B offers to buy and escrows 2500 bitcoins A confirms that item is sent but never sends it B never receives it so never release the bitcoins A now cares because he has 2500 bitcoins in escrow as security

In this scenario, it’s in A’s interest to send the laptop, otherwise he loses his BTC 2500 security. It’s also in B’s interest to confirm receipt of the laptop, otherwise he loses his BTC 500 “excess”.

The awkward situations are going to arise if both A and B are honest, but an uninsured delivery service loses or breaks the laptop, or if one of the participants dies before releasing the escrow.

Returning to satoshi’s outline scheme:

…The buyer can’t benefit by failing to pay.

The buyer can’t benefit by failing to pay, that’s true, but it’s also true that the buyer has no incentive to “get around to” releasing the payment.

Suppose you send a laptop to a buyer. The buyer receives the laptop and forgets to release the payment, so you have to chase them up. Or the buyer says “yeah I got the laptop, but I need to check that it works OK before I release the payment”. Then later they say “I’ll release the payment if the laptop is still OK at the end of the guarantee period”.

The seller is pretty-much powerless in this case, and the buyer has no reason to want to release the payment, other than their repuation. But if we’re successfully tracking reputation, then why not cut the escrow out of this situation?