Using bitcoin protocol to run uncheatable blind (sealed bid) auctions/tenders

[SJC]

This may well have been suggested elsewhere, but I haven't seen it.

Problem:
  - A blind auction is one where everyone submits secret bids and then after the auction they are opened and the best bid wins.
  - Examples include some property (real estate) sales (highest bidder wins), as well as bids on contracts (where the lowest bidder wins)
  - This clearly relies on a trustworthy auctioneer.
  - An untrustworthy auction manager can cheat.  Examples include:
      a) sneaking a peek at all the bids and letting another bidder know all the bids so far
      b) claiming that a winning bid was not received in time
  - In contract tenders, it's not unknown for insiders to tip off a preferred bidder with the values of other bidders shortly before the close of the tender period.


Solution:
  - The auction manager publicises a different bitcoin address for each auction, the "auction address"
  - Anyone wishing to bid constructs a transaction involving two payments, one to the auction address and one to the bid address.
  - The payment to the auction address could be a tiny amount as proof of entry, or a larger amount as an entry fee.
  - The bid address is determined as follows:
    a) the bidder constructs a "bid string" consisting of the bid amount and a long random string.
    b) the bid string is entered into a bitcoin address generator similar to the brain wallet generator at bitaddress.org
    c) the address thereby generated is the bid address.
  - Once the bidding period is over, bidders reveal the amount they bid to the auction manager by submitting the string that generated the bid address
  - Whoever controls the private key of the account that made the payments to the auction address and the bid address of the highest bid is the winner without any possible argument (that I can think of)
  - Since the bidder didn't reveal his/her bid amount until after the close of the auction, it's not possible for anyone to sneak a peek
  - Since all bids were made by making a payment to the auction address, no-one can claim a bid was not received in time.
  - The bid string and bid address could be generated on an offline computer, preventing any virus or other malware peeking at the bid and notifying others over the internet.
 
This could obviously be expanded to use a hash of a bid document as the bid string rather than a simple numeric amount.