BitCoin Businesses and Reputation systems

[buzz123]

The anonymity and deregulation of BitCoins seems to me to obviously be both its biggest strength and its biggest flaw. The great advantages would be the lack of taxation and regulation, or interference of any kind by governments. There's also the lack of expensive fees for accepting payments to an online business, and the increasingly power-hungry companies like PayPal. This is of course also a disadvantage, because it turns everyone into the online equivalent of "a guy in a pub offering to sell you something." I have some interest in Anarcho-Capitalism and (while I'm not necessarily a full convert) I do think there's definitely something to be said for the ways in which such a system enforces contracts.

Generally this is largely through reputation, and overtly engaging in activities that require a lot of resources. Two examples of these systems working well are the reputation system on ebay, and the fact that banks often include a lot of marble in their internal décor. The reputation system generally won't prevent someone from getting burned once, but the feedback on the particular seller/service-provider will help to prevent people from being burned in future. The marble in banks is an extreme example of this "putting up a front of respectability" in order to earn your trust instinctively, but it's also gotten through many other means. Registering as a company within a particular jurisdiction, along with the responsibilities that that entails helps to prove that you are serious about conducting business in the long run. Communicating that desire to "be here for the long haul" helps persuade customers they aren't going to be ripped off, because that wouldn't suit a long-haul business model.

Now, if I can begin to get to my point, I'm wondering, what systems are in place currently to provide that "air of legitimacy" that businesses find so helpful to their profitability. I know that the black/grey market site "Silk Road" has quite a good reputation system, and I've heard of a few cases individually of reputation systems being internal to a particular site. I also heard of a BitCoin stock exchange (that has since closed down) that listed BitCoin-denominated companies and paid dividends in BitCoin. I'm intending to read a little more into why the bitcoin stock exchange shut down and will do some more searching.

My main question is though, how is the BitCoin economy currently solving the problem of verifying the legitimacy of the various locations offering goods and services for bitcoin?

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[hazek]

.. deregulation ..

What deregulation?! As far as I can tell this market is very tightly regulated strictly through consumption i.e. it is a free market.

[BlackLilac Jordan]

http://bitcoin-otc.com/

[marcus_of_augustus]

Definitely plenty of space for solutions to appear in this regard, and opportunity for clever minds that can come up with generalised solutions ... particularly solutions encoded into s/ware that can be installed and configured with ease.

Watch this space is all I can suggest. Having something like a true digital cash will bring many new opportunities, and lessons.

Innovate, evaluate, iterate.

[buzz123]

What deregulation?! As far as I can tell this market is very tightly regulated strictly through consumption i.e. it is a free market.

Haha I get what you're saying, and believe me you're preaching to the choir, I'm something of a Rothbardian. I merely meant "deregulation" as in "free from meddling and market distortions created by governments, but also free from 'The Shadow of the State.' By the latter I mean both the registration of companies and the enforcement of contracts." It's my goal to help solve this problem. Just saying "it's a free market" doesn't mean there's no problems, it just means that innovators have the freedom to solve those problems in the best, most efficient (and necessarily non-violent) ways.

[buzz123]

I have something of a vision of multiple competing versions of what we in the UK have called "Companies House" and the various US states have also. Listing requirements might include the provision of accounts, certainly a reputation system built in to allow people and businesses who've dealt with them to rate their experience in a variety of different criteria. The business would pay a small monthly fee in order to be listed. Company registration and proper enforcement of contracts are important problems to solve in a market place. The only way they can be solved with bitcoin is through reputation systems and trusted third parties who will expose scammers and fraudsters. This seems to be something that's lacking, and I intend to try and solve it. I'm just wondering whether you guys think that it is a service which, if done right, there would be a market for.

I'd love it if we could have BitCoin companies, registered with one of several competing private registries, the larger ones listed on a BitCoin stock exchange, and all completely free to exist as legitimate businesses but completely free of any geographical jurisdiction.

[n8rwJeTt8TrrLKPa55eU]

My main question is though, how is the BitCoin economy currently solving the problem of verifying the legitimacy of the various locations offering goods and services for bitcoin?

The problem with reputation systems is that they break down once the gain from stealing customer funds sufficiently exceeds the gains from keeping a clean reputation.  See: Pirate, Patrick Harnett, mybitcoin, etc.

Problem is not exclusive to Bitcoin; ratings and oversight entities similarly fail to prevent fraud in metaspace.  See: Madoff, MFGlobal, etc.

So rather than try to subjectively rate people, and provide a false sense of security, why not try a better approach, and create a system that mathematically removes incentives for vendors to steal your money?

Well, it turns out, we kind of have that: Bitcoin has escrow functionality built into the protocol.  Full support for that technology in miners, clients, and vendors will make it unprofitable for sellers to seal your funds.  For even greater security against dishonest buyers or totally suicidal sellers, human arbitration services can be layered on top.  Details, from the main man himself:

It's not implemented yet, but the network can support a transaction that requires two signatures.  It's described here:
http://bitcointalk.org/index.php?topic=750.0

It's absolutely safer than a straight payment without escrow, but not as good as a human arbitrated escrow, assuming you trust the human enough.

In this kind of escrow, a cheater can't win, but it's still possible for you to lose.  It at least takes away the profit motive for cheating you.  The seller is assured that the money is reserved for him, while the buyer retains the leverage that the seller hasn't been paid yet until completion.

BTW blockchain.info apparently already supports (and has a nice UI for) 3-way multisig, which would accommodate a buyer + a seller + an arbitrator.  Check out:

https://blockchain.info/wallet/escrow

So what we really need in Bitcoinland aren't ratings agencies, but vendors offering a multisig option to buyers + cheap 3rd party arbitration services.

[Matthew N. Wright]

My main question is though, how is the BitCoin economy currently solving the problem of verifying the legitimacy of the various locations offering goods and services for bitcoin?

The problem with reputation systems is that they break down once the gain from stealing customer funds sufficiently exceeds the gains from keeping a clean reputation.  See: Pirate, Patrick Harnett, mybitcoin, etc.

Problem is not exclusive to Bitcoin; ratings and oversight entities similarly fail to prevent fraud in metaspace.  See: Madoff, MFGlobal, etc.

So rather than try to subjectively rate people, and provide a false sense of security, why not try a better approach, and create a system that mathematically removes incentives for vendors to steal your money?

Well, it turns out, we kind of have that: Bitcoin has escrow functionality built into the protocol.  Full support for that technology in miners, clients, and vendors will make it unprofitable for sellers to seal your funds.  For even greater security against dishonest buyers or totally suicidal sellers, human arbitration services can be layered on top.  Details, from the main man himself:

It's not implemented yet, but the network can support a transaction that requires two signatures.  It's described here:
http://bitcointalk.org/index.php?topic=750.0

It's absolutely safer than a straight payment without escrow, but not as good as a human arbitrated escrow, assuming you trust the human enough.

In this kind of escrow, a cheater can't win, but it's still possible for you to lose.  It at least takes away the profit motive for cheating you.  The seller is assured that the money is reserved for him, while the buyer retains the leverage that the seller hasn't been paid yet until completion.

BTW blockchain.info apparently already supports (and has a nice UI for) 3-way multisig, which would accommodate a buyer + a seller + an arbitrator.  Check out:

https://blockchain.info/wallet/escrow

So what we really need in Bitcoinland aren't ratings agencies, but cheap arbitration services on top of vendors offering a multisig option to buyers.

Interesting perspective. I have to say I agree with most of what you said, but even a million signatures doesn't solve the problem of scamming or else being President would make you honest (lots of signatures required for that!). What would be a good way to handle the then theoretically minuscule amount of scammers?

[n8rwJeTt8TrrLKPa55eU]

Interesting perspective. I have to say I agree with most of what you said, but even a million signatures doesn't solve the problem of scamming or else being President would make you honest (lots of signatures required for that!). What would be a good way to handle the then theoretically minuscule amount of scammers?

The key parameter for fraud prevention through escrow isn't the quantity of signatures; two approvals are always enough to resolve any dispute, guaranteed.  No need for millions.  If the buyer and seller are satisfied, they vote "yes" and the funds automatically clear.  The third (i.e. predetermined arbitrator) signature is only used in case the buyer and seller don't agree, in order to break the tie.  So basically all bases are covered, and the maximum "votes" needed to achieve a fair result is 3, with 2 being sufficient for the majority of transactions where no fraud is involved.

Politics is a wholly different topic, unfortunately not subject to math...there is no easily implementable multisig solution that can be used to restrict political fraud

[Matthew N. Wright]

Interesting perspective. I have to say I agree with most of what you said, but even a million signatures doesn't solve the problem of scamming or else being President would make you honest (lots of signatures required for that!). What would be a good way to handle the then theoretically minuscule amount of scammers?

The key parameter for fraud prevention through escrow isn't the quantity of signatures; two approvals are always enough to resolve any dispute, guaranteed.  No need for millions.  If the buyer and seller are satisfied, they vote "yes" and the funds automatically clear.  The third (i.e. predetermined arbitrator) signature is only used in case the buyer and seller don't agree, in order to break the tie.  So basically all bases are covered, and the maximum "votes" needed to achieve a fair result is 3, with 2 being sufficient for the majority of transactions where no fraud is involved.

Politics is a wholly different topic, unfortunately not subject to math...there is no easily implementable multisig solution that can be used to restrict political fraud

I see politics in its simplest form as being the science of dealing with more than 2 people. Wouldn't it be impossible to be absolutely fair with 3 signatures as 1 person could also be influenced?

[human]

have a look at colored bitcoins. with them nested and trusted economies in the total bitcoin economy are possible (as far as i understand them).

[buzz123]

The problem with pure arbitration is this:

"I sent the goods"
"I didn't receive the goods"

Then what? It assumes the arbitrator has perfect knowledge. This isn't a problem specific to bitcoin, but out in the fiat economy there are solutions for dealing with it, and reputation plays an important role (even if just as complimentary system to the existing legalo,r in bitcoin's case technical, solutions).

[n8rwJeTt8TrrLKPa55eU]

The problem with pure arbitration is this:

"I sent the goods"
"I didn't receive the goods"

Then what? It assumes the arbitrator has perfect knowledge. This isn't a problem specific to bitcoin, but out in the fiat economy there are solutions for dealing with it, and reputation plays an important role (even if just as complimentary system to the existing legalo,r in bitcoin's case technical, solutions).

Agreed. Unfortunately, there is no perfect automated math-based solution in all cases, there will always be a minority of situations where human research and judgement is required.  But the good news is exactly that: fraud is a minority, and most transactions will go through without problems.  And at least in the multisig case, the arbitrator is chosen in advance by the two parties, which means that he is trusted by both people to do competent discovery/investigation/decision.  We'd be moving to a model where reputation is more important for arbitrating agencies than for the individuals doing transactions.