Escrow

[satoshi]

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.

[Tilka]

Cryptography at its finest

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

[jgarzik]

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

[aceat64]

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).

[jgarzik]

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).

That's how online escrow operates today.  Buyer and seller agree to let a 3rd party physically hold the money.  Buyer and seller both agree to rules that the neutral 3rd party will follow, for transaction resolution / redemption.  The neutral third party is the one who disburses funds to one party or the other.

This is a pretty decent overview: https://www.escrow.com/solutions/escrow/process.asp

Some people might choose to use the bitcoin-specific signed escrow method...  but I think the "burn the money" recourse serves as a incentive to avoid bitcoin escrow entirely, rather than an incentive to use bitcoin escrow honestly.

[aceat64]

I like Olipro's suggestion is this thread: http://bitcointalk.org/index.php?topic=645.0

The buyer and seller both an equal amount of bitcoins into escrow and the seller can't retrieve both sets until the buyer signs off on it. Optionally if both parties agree the funds are returned to their original owners or both sets are transfered to an agreed upon arbitrator. I deviate from his suggestion that the arbitrator only have control over the buyers half, I think they should have control of both so that both parties still have a bitcoin stake in the issue.

[nimnul]

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

[jgarzik]

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.

[nelisky]

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.

[satoshi]

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.

[Inedible]

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

[nelisky]

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.

[ribuck]

...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.

[nelisky]

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.

This should cover all the problems in low value transactions, I guess. If I'm to sell my $1500 for 20.000BTC, I, the seller, may not have that much in BTC, so that's where I, again, would depend on either trusting the other party or some human escrow.

[Inedible]

How about this:

1) A offers to sell laptop for 2000 bitcoins, and escrows 2500 bitcoins as security
2) B offers to buy and escrows 2500 bitcoins
3) A confirms that item is sent but never sends it
4) B never receives it so never release the bitcoins
5) 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.

That sounds promising.

Am I right in saying after step 3, both parties are committed and if either defaults, BOTH parties are on the hook for 2500?

Let's assume it's B whom is fraudulent. Although B has gained nothing more (in fact paid 500 over the asking price), he's still managed to defraud A of 4500 - a great way to put the opposition out of business if you have the capital to do so.

[ribuck]

Am I right in saying after step 3, both parties are committed and if either defaults, BOTH parties are on the hook for 2500?

Yes that assumption is correct. Both parties have a financial incentive to complete the transaction successfully. Forfeited escrowed coins could be burned, or could be used to fund the operation of the escrow service.

But yes, the ability to put your opposition out of business in a leveraged way makes the system unusable as I described it.

Let's see if this tweak works:

1. A offers to sell laptop for 2000 coins, and escrows 2500 coins as security.
2. B offers to buy and escrows 2500 coins as security.
3. B pays 2000 coins to A.
4. If A refuses to send the laptop, both A and B have lost 2500 coins. Therefore, A has an
     incentive to send the laptop, and B can't use this system to put A out of business.
5. A sends the laptop to B.
6. If B refuses to acknowledge receipt of the laptop, both A and B have lost 2500 coins.
     Therefore, B has an incentive to acknowledge receipt of the laptop.

[Inedible]

1. A offers to sell laptop for 2000 coins, and escrows 2500 coins as security.
2. B offers to buy and escrows 2500 coins as security.
3. B pays 2000 coins to A.
4. If A refuses to send the laptop, both A and B have lost 2500 coins. Therefore, A has an
     incentive to send the laptop, and B can't use this system to put A out of business.
5. A sends the laptop to B.
6. If B refuses to acknowledge receipt of the laptop, both A and B have lost 2500 coins.
     Therefore, B has an incentive to acknowledge receipt of the laptop.

Maybe one day in the future when plentiful bandwidth is ubiquitous, the escrow company will also be the delivery company but the delivery person will have a live camera to show what is being picked up and can spend time checking things to the purchaser's satisfaction.

With this in place, there wouldn't need to be a burning of any monies as the product and monies are always safe with the delivery/escrow company.

Anyone want to start Delescrow Ltd. with me? 

[Anonymous]

Nice system!

[vess]

This is a nice system, but it slows commerce down significantly, as sellers need cash as well as goods.

On the other hand, no escrow at all is clearly slowing bitcoin down, so I'm thumbs up on the idea in general. I'm working on a few bitcoin things, and escrow has been on my mind.. I'll keep you guys posted.

[throughput]

Satoshi,
+100

I think, the idea of two-party escrow is brilliant and it opens another use case for Bitcoin.
People will convert their dollars to Bitcoin just to use that feature, IMHO.

But what is the techical details?