A solution to enable secure transactions without wait for confirmations

[casascius]

I thought of a way to make transactions instantly settled without the need for waiting for confirmations.

Alice pays bitcoins to Bob.  Meanwhile, Alice has a few bitcoins on deposit at MyBitcoin, and MyBitcoin provides a transaction guarantee service for profit.

For Bob to be assured that he will not lose to a double-spend, as soon as Bob's client hears about the unconfirmed incoming transaction, he makes an API call to MyBitcoin asking them to guarantee Alice's transaction, providing the transaction ID N as a parameter, along with a one-time password provided by Alice, so MyBitcoin knows whose funds are backing the guarantee.

MyBitcoin confirms that it has enough of Alice's funds to make sure that it can charge any double-spend back to Alice.  It puts Alice's funds on hold for 6 blocks, and then delivers a digitally-signed promise to Bob, that if transaction N later becomes invalidated, it pays the claim.

Bob now feels comfortable delivering his product instantly.

MyBitcoin charges merchant Bob a small fee for the convenience (since this is a service that insured the merchant in the first place).  It's a free service to Alice.  And if Alice paid from her MyBitcoin balance, the guarantee is granted automatically without holding any additional funds, because MyBitcoin already knows that nobody can invalidate her transaction other than themselves... yet it still makes a profit for MyBitcoin.

If the API is kept generic enough, any trusted party can be substituted for MyBitcoin.  Other trusted parties could hedge their risk in other ways besides requiring balance on deposit (e.g. to those with good credit, etc.)

[Yankee (BitInstant)]

Great Idea.

It'a already in the works, www.BitInstant.com

Partnering up with Moneybookers, Liberty Reserve, and paypal to provide instant transfers of USD to your exchange account.
We're working closely with Mt.Gox, TradeHill, and a few smaller ones as well.

We're in late development, and early testing at this point.

Will keep you updated.

[Stephen Gornick]

Partnering up with Moneybookers, Liberty Reserve, and paypal to provide instant transfers of USD to your exchange account.

While that is very, very cool and I look forward to seeing that being made available, I think casascius was referring to the method for someone who already has bitcoins to transact with someone else without waiting for confirmations.

If the API is kept generic enough, any trusted party can be substituted for MyBitcoin.

I've seen this discussed, but cannot find the thread.  Here's the closest -- Mt. Gox describing an agreement between exchanges to act peer-to-peer.  That would allow me to spend to your ewallet instantly because your ewallet provider trusts my ewallet provider.
http://forum.bitcoin.org/index.php?topic=7212.0

We're really trying to make bitcoin be something it isn't though.  Bitcoin wasn't meant to provide instant transactions, and moving us over to "centralized" ewallet systems to get that is not ideal.

If Open Transactions truly works the way fellowtraveler describes it, then with the audit protocol, that really is the right way to do this (see #4):
 - http://forum.bitcoin.org/index.php?topic=20425.0

[willphase]

bitcoin transaction validation takes time because of the decentralised nature of the system.

immediately you add a central authority then it 'solves' this problem, and it becomes trivial/easy to have instant transactions, at the expense of having a central authority which could be taken down or crash or be hacked or... or...

I do, however, see the future of bitcoin being centralised to some extent - if only to offer services that the average consumer (who doesn't care about anonymity or decentralisation) wants such as instant payments, online account access, trusted escrow.  Whoever sets up these services and gets big business to start using them is probably going to make some money out of bitcoins (more than the people who start mining now, anyway).

Will

[Stephen Gornick]

I do, however, see the future of bitcoin being centralised to some extent

Queue google wallet, ..

or something like
 http://www.tabbedout.com
  adding bitcoin as a payment method at restaurants who wish to accept bitcoins

[qualia8]

Centralization in ewallets is no threat to the underlying distributed structure of bitcoin.  Mining is still decentralized.  Also, you can keep as much cash in your own private local wallet.  It would just make things sooo convenient to do instant payouts.

If this were widespread, I'd keep smallish amounts in an online wallet and having my savings in various offline local wallets.  I'd love that.

[casascius]

immediately you add a central authority then it 'solves' this problem, and it becomes trivial/easy to have instant transactions, at the expense of having a central authority which could be taken down or crash or be hacked or... or...

Such a thing isn't central, nor vital to commerce.  As time goes on, there could be plenty of sites like MyBitcoin, and any/all of them could compete in providing the exact same service of "I promise to guarantee this transaction".  Worst case, if those services are down, merchant is exposed to no more of a risk of receiving a double spend than he is today, which is already pretty low.

[giszmo]

Mining is still decentralized.

... except for it being controlled by 3 pools.

But ... back to the topic: For many cases the confirmations are not as important as people think. If for example I want to pay my burger at my fav restaurant, what is the risk of double spending? The unconfirmed transaction is almost instant already and will have one conf before I've finished eating.

Not getting any confirmations either means the pools decided to introduce a mandatory fee for all transactions ... sorry .... wrong topic ... or it means I spent money I didn't have and that's fraud I could get sued for. Any small payment that is not completely anonymous is not subject to a double spending risk.