P2P construction contracts using Bitcoin, Taproot/MuSig2 and DLCs

[felipo]

Hi I'm exploring the design of an open-source, peer-to-peer protocol/application for construction contracts, particularly for environments where traditional escrow, arbitration and contract enforcement are expensive or unreliable.

The basic idea is to have no central server, custodian or marketplace. Clients would communicate directly over Tor/DHT and exchange the contractual information P2P: scope of work, milestones, deadlines, drawings/specifications, commercial terms, payment schedules, contractor guarantees, etc. The complete technical and commercial specification would be committed to through hashes.

Once the owner and contractor agree, the application creates a Bitcoin contract using Taproot/MuSig2. Funds would be compartmentalized per milestone rather than putting the entire project into a single pool. The contract would define the possible states and transitions in advance: milestone completion and partial payment, mutual agreement, disagreement, partial completion, abandonment, timeout, guarantee release/return, and potentially arbitration.

The normal path would be cooperative settlement using MuSig2. An arbitrator would not be a normal signer; instead, arbitration would be available through an alternative Taproot branch after predefined conditions or timeouts. The idea is that most disputes should ideally be resolved directly between the parties, with arbitration acting as a last resort.

The documents, communication and evidence would remain off-chain, while Bitcoin would primarily be used for settlement and enforcement of the economic consequences defined by the contract.

I'm also exploring an optional second layer using DLCs for foreign-exchange risk. For example, a contractor could hedge the exchange-rate exposure of a Bitcoin-denominated contract with a third party, using multiple independent oracles.

The goal is not to operate a marketplace, custody funds, charge fees, run an oracle, or maintain any centralized infrastructure. The intention would be to publish the protocol and a reference implementation in Rust under the MIT license, potentially with desktop and Android/F-Droid clients.

I'm not looking for implementation advice yet; I'm primarily looking for protocol-level criticism.

I'd particularly like to know:

Does the fundamental contract model make sense from a Bitcoin/cryptography perspective?

Are there obvious problems with the Taproot/MuSig2/state-machine approach?

Does the incentive and dispute model actually work? In particular, guarantees, partial completion, strategic defaults and the use of an arbitrator as a last resort.

Is this useful in practice? Or are there fundamental economic, legal, UX, privacy, or technical problems that make this approach impractical?

[Cinexa]

Hi - solid direction overall. But a couple of issues on the protocol level.

1. The Bitcoin network cannot actually implement your state machine; every transition(partial pay, abandon, timeout, arb, release guarantee,etc...) will needs to be a specific spend path that pre-fund before being possible, because not defined outcomes in the hash tree, like (fuzzy constructs) cannot be retroactively inserted.

2. Silence is an attack. This relies on both users to be co-signing using MuSig2; timeouts provide a fallback, but one could just refuse to collaborate using silence unless Refund/Bond path make it cost-prohibitive.

3. The Arbiter cannot "see" a jobsite. The scripts move money on the Blockchain without knowledge if the task has been completed correctly. If the arbiter is not automated, has discretion, and operates out-of-band, this only provides the familiar pattern of escrow with slightly better crypto, make sure that the arbitration selection and objective criterion process are well chosen when designing.

4. DLCs for FX - treat them as peripheral collateral, not integrating them with your main task construction escrow and the use of an oracle for quality control etc.

5. Practicability - will reduce risk of theft/non-delivery on contexts where current escrow mechanisms are insufficient. Will not resolve quality/change orders/other subjective dispute and are likely going to fall flat on key management or simply for less savvy users.

Thus: the contract protocol is sound for the use case crypto-wise but the non-objective subjective disputes, inability for incomplete states, griefing with silence are your critical issues.