Bitcoin's Four Hurdles: Part Three – Escrow

BitcoinEscrow

Bitcoin is revolutionary in that its transactions are untraceable and irreversible. But in a system as large as The Economy, large changes must come gradually. We are used to dealing with receipts, reversing transactions we’re not happy with, and similar things — so Bitcoin requires all those mechanisms for adoption. We need anonymous, trustable escrow.

You don’t want to build a house for someone based on nothing but trust. You want to see the funds there, ready to be paid out to you on completion and acceptance of your work. Similarly, the homeowner wants a receipt that she paid the funds, that the house is hers. The builder and future homeowner both need to trust a mutually trusted intermediary. This is lacking in the bitcoin ecosystem today.

BITCOIN’S FOUR HURDLES
This is an article in a series on what Falkvinge identifies as Bitcoin’s four hurdles, which will be followed by a series on Bitcoin’s four drivers. This is the third article, on escrow. The others are usability, transactions, and exchanges.

There are a few nascent escrows, like ClearCoin, but we need more, much more — and on more scales. Besides, none of the escrow services that exist have had any time whatsoever for building trust in the community. The escrows need to provide discretion and anonymity just like the bitcoin economy as a whole, and need to make safeguards that their clients are not exposed towards authorities and other entities capable of lawful violence.

The business case for escrow is obvious — it takes a small fraction of the transaction. Today’s credit card companies take about 5%. ClearCoin takes one-tenth of that. There’s the business case for merchants and escrows alike.

The escrow services are needed on three specific scales, and neither is met today.

The first escrow is the personal scale. You’re buying something from another person. I predict NFC will be the most user-friendly technology here: the use case would be that seller and buyer stand facing each other, and both raise their phones, placing them back to back, so that both see each other and their own screen. The seller enters a number on her phone. The buyer presses a button confirming the transaction. Immediately, the seller knows that the agreed amount of funds now belongs to her. Neither buyer nor seller risk loss of money from loss of phone. Neither buyer nor seller are personally identified. Over the next half-hour or so, the bitcoin network catches up, so it is possible that she can’t spend the funds immediately. That’s not relevant for the scenario. From what I know, nobody is yet working on this scenario for Android and/or iPhone.

The second escrow is the point-of-sale scale. This is quite similar to the personal scale from the buyer’s point of view, except he places his phone on a black surface at a point-of-sale. From a seller’s perspective, the seller asks the buyer to pay by authorizing the sale through the buyer’s phone, just like on the personal scale, but the sales clerk is likely to operate a touchscreen with an attached NFC communications surface. This escrow scenario is actively being worked on from several angles.

The third escrow is the international trade scale, where Letters of Credit are used today. Million-dollar deals, shipping several containers at a time. It takes much more than a website to become successful with this — understanding requirements for buyers and sellers on this scale goes beyond the scope of my experience, but trustable receipts, discretion, and protection from lawful searches is certain to be three of the requirements. ClearCoin goes a little bit towards this, but I believe much more is needed.

In two days, I will end this series with the last of Bitcoin’s hurdles, exchanges. After that, I will start being enthusiastic about Bitcoin’s four drivers. There are at least four drivers for Bitcoin, each of which is going to convert billions of euros and US dollars into Bitcoin if the hurdles are cleared.

Rick Falkvinge

Rick is the founder of the first Pirate Party and a low-altitude motorcycle pilot. He works as Head of Privacy at the no-log VPN provider Private Internet Access; with his other 40 hours, he's developing an enterprise grade bitcoin wallet and HR system for activism.

Discussion

  1. Falkvinge: Bitcoin’s Four Hurdles: Part Three – Escrow http://bit.ly/kdoYBU

  2. Falkvinge: Bitcoin’s Four Hurdles: Part Three – Escrow http://bit.ly/kdoYBU

  3. on #infopolicy: Bitcoin’s Four Hurdles: Part Three – Escrow http://goo.gl/fb/3LVi6

  4. Continuing my series on the four hurdles of #bitcoin, part three is about ESCROW. http://is.gd/P9zxv4

  5. Bitcoin’s Four Hurdles: Part Three – Escrow http://bit.ly/kdoYBU

  6. ajehals (@ajehals)

    ♺ @Falkvinge: Continuing my series on the four hurdles of #bitcoin, part three is about ESCROW. http://is.gd/P9zxv4

  7. Falkvinge on Infopolicy: Bitcoin’s Four Hurdles: Part Three – Escrow:
    Bitcoin is revolutionary in that it… http://tinyurl.com/3kucbke

  8. Rassah

    Reading briefly through Bitcoin’s wiki, there is apparently already something for these types of contracts built into the protocol https://en.bitcoin.it/wiki/Contracts

    1. Rassah

      P.S. Bitcoin keeps amazing me every time I learn more about it’s technical details.

    2. Rick Falkvinge

      Very interesting!

  9. Zbigniew Lukasiak

    There is one problem with the personal escrow as you describe it – with the plain bitcoin protocol it would require that the buyer and seller wait until the transaction is written to a block or two (that is about 10 to 20 minutes). Otherwise there is a big risk that the seller has already spent his money previously.

    1. Rick Falkvinge

      This is exactly the problem I am describing, and the problem that escrow will have to solve.

      The buyer (I am assuming you mean the buyer) will have to have placed the money with, or in, escrow in advance of the transaction.

    2. jooj

      The risk is not so big for small transactions. Pulling off the double spend attack is very tricky and demands massive ressources (51% of the hash power). Not likely to be set in motion for a small transaction between two individuals.

  10. Mats Henricson

    ClearCoin is run by Gavin Andresen, the current maintainer of the Bitcoin codebase. That must be as much trust as you ever get. If you don’t trust Gavin, then who would you trust?

    1. Rick Falkvinge

      It is not a matter of whom I trust, but who large-scale traders trust.

      If I hadn’t trusted the codebase, I would not have put money into bitcoin in the first place. But escrow trust takes time to build up.

      Having ClearCoin in a subdomain doesn’t help — that way, it looks like a summer-of-code project rather than a place where you would escrow the equivalent of millions of dollars.

      It may be the best we have today, but it’s far from enough.

  11. http://bit.ly/k46v1K Bitcoin’s Four Hurdles: Part Three – Escrow: Bitcoin is revolutionary in that it its transa… http://bit.ly/lTezFK

  12. unemployed

    Dear Sir,
    I read your series of articles carefully, and have implemented this:
    Bitcoin Tool extension for Firefox and Chrome
    http://userscripts.org/scripts/show/104381
    http://forum.bitcoin.org/index.php?topic=13464.0

    1. Rick Falkvinge

      Impressive, and a good piece of work towards advancing the ecosystem!

      My hat off to you, Sir!

  13. ctb

    https://github.com/FellowTraveler/Open-Transactions/wiki

    Also listen to the interviews on agorist radio.

  14. Rassah

    Mr Falkvinge
    I’ve written some ideas/opinions on some other “hurdles” I keep hearing surrounding bitcoin here http://goo.gl/LIFCz . Would love to hear your opinion on the first one at least.

    1. Rick Falkvinge

      Dear Rassah,

      I agree completely with your opinion that the first “hurdle” is a major driver. Not long ago, bank secrecy in Europe was total and included secrecy against authorities.

      This is actually one of four drivers for Bitcoin that I have identified. People simply like to know that their money is theirs and neither can be watched nor seized.

      The second hurdle, benefiting early adopters… yes, it’s true, but how does that make it an obstacle? We’re not angry with Mark Zuckerberg of Facebook because he’s as rich as a gold-hoarding dragon, we don’t actually care about that. We’re angry with him because he abuses trust.

      1. Rassah

        I’m sorry, the point of my post was that these “hurdles” are not actually hurdles, but can in fact be drivers for Bitcoin. Others complaint that they are hurdles. I point out how those hurdles can actually be drivers.

      2. Rassah

        By the way, someone pointed out to me that taxes are not paid the same way in Netherlands, and likely other countries, as they are in USA. Apologies for being an egocentric American. In summary, here in the States, every employee’s ID number (Social Security #) is associated with the payroll tax payment that a company processes. At the end of the year, the company sends a list of all payments it did for every id number, be it an employee or another company. When employees file their taxes with their numbers, the government checks every number for amounts reported by the company and by the individual to make sure there are no discrepancies. It’s a very heavy paperwork-oriented system. At least here, in the states, a lot of that overhead can be eliminated with Bitcoin.

  15. BlueTemplar

    Trust. It’s all about trust.
    The Silk Road is functioning mainly on trust – there are no possible paybacks. So, you don’t really NEED escrows (for most, daily, small, transactions) as long as there is a flourishing trust “market”.
    Whuffie anyone? http://en.wikipedia.org/wiki/Whuffie
    I’m going to predict that this kind of global trust market will appear soon.

    1. Rick Falkvinge

      Very insightful.

  16. Bitcoin’s Four Hurdles: Part Three – by the founder of the Pirate Party http://bit.ly/itRZgg #bitcoin

  17. BlueTemplar
  18. BlueTemplar

    Oh, and also I think that sadly there’s a problem seeing how the BitCoin system (any system?) works : Trust (linked to a single BitCoin address) is incompatible with Anonymity : increasing trust by linking several BitCoin addresses together will directly decrease anonymity.

    1. Tomas Kronvall

      Ah, but in escrow, if I understand it right, the only one that needs to be trusted – by both buyer and seller) is the escrow agent. Who doesn’t need anonymity.

      1. Anonymous buyer trusts escrow agent enough to put a relevant amount of Bitcoin in their care. This amount is verified in a few block counts of the Bitcoin system.
      2. Anonymous seller trusts escrow agent enough to believe they won’t double-spend the buyer’s funds, which the agent controls.
      3. Sale happens. Buyer and seller agree to tell escrow agent to transfer x amount of Bitcoin to the seller’s Bitcoin address. That this is the buyer’s wish is verified by use of his private Bitcoin key.
      4. ???
      5. Profit!

      1. BlueTemplar

        Yes, but the problem is that you have to trust the escrow agent not to reveal the information about the transactions to a fourth party. So you’re back to the trust/anonymity relationship problem.

  19. BlueTemplar

    Damn, I hate you can’t edit your comments here!

    In the same logic, increased trust by using multiple transactions with the same BitCoin address will also decrease anonymity.

    1. Tomas Kronvall

      Yes, but. The escrow agent, having no use for anonymity, can maximize its trust – and with the amount of trust they amass, they can fill up the trust requirement of the transaction, leaving the buyer and seller to maximize their anonymity. Ish.

  20. Whuffie + BitCoin = World Domination – http://t.co/B0NBvIG /c @Falkvinge

  21. BlueTemplar

    Trust encompasses every aspect of our lives : http://twitpic.com/4d29s6
    (Ok, I’ll stop spamming now, I promise 😉

  22. Falkvinge.net – Bitcoin’s Four Hurdles: Part Three – Escrow http://dlvr.it/Vdwmc

  23. Razak

    I made mention of escrow being enforce in the system in my earlier comment and I agree with this post because trust is everything and if bitcoin is able to achieve this on large scale will boast international acceptance and if not anything for the faith that my money is safe and when I buy something will get it and is good for both parties that is the seller and the buyer if truly there are in for real business and not for fraud.

  24. David N

    Did someone say anonymous bitcoin escrow?
    http://bitcoin-escrow.i2p

    or if you don’t have i2p, use the proxy (uncheck the “remove cookies”)
    https://www.awxcnx.de/tor-i2p-proxy2-en.htm

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  29. […] Four Hurdles: Part One – Usability, Part Two – Transactions, Part Three – Escrow, Part Four – Exchanges. Una serie de artículos de Rick Falkvinge sobre las dificultades a las […]

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