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The Need For Bitcoin Integrated Escrow

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bitcoin-escrowOne of the characteristics unique to Bitcoin as compared to other forms of payment such as credit card, is that Bitcoin payments are unidirectional and irrevocable. Once the Bitcoin transaction has reached its destination it cannot be revoked or recalled. From a fraud perspective, this feature is a double-edged sword. 

Under the existing card and banking system, fraud is rife, especially when it involves the likes of eBay and Paypal for example. 

A very pervasive scam for example on eBay and elsewhere is to order expensive goods and when they are received file a non-received or "goods not as described" to obtain a refund from Paypal or bank. while keeping the original goods. Paypal almost always sides with the buyer, not believing the buyer to be honest, but knowing that the buyer can bypass Paypal and go directly to the card issuer and obtain a charge-back at the sellers expense.

There is a huge and very real potential for fraud using Bitcoin, which is happening now and will almost certainly increase by orders of magnitude as Bitcoin gains in popularity. A buyer of goods with Bitcoin has no recourse against Bitcoin if goods genuinely are faulty or fail to arrive. It would be for the supplier of the goods or services to accept responsibility and return the Bitcoin. While any reputable merchant would no doubt happily comply, less reputable merchants as for example might be found on eBay may well not be willing to return Bitcoin against faulty or non-delivered goods. 

Another fraudulent situation that has happened numerous times already and doubtlessly will in the future are when people are purchasing Bitcoins for cash in a peer to peer transaction as might for example take place on Local Bitcoins. Peer to peer transactions such as this almost always expect the buyer of Bitcoin to send the cash by means of an irrevocable bank transfer before sending the Bitcoins - which is reasonable because the seller of the Bitcoins has noway of retrieving them if the buyer fails to send the cash. However, the potential for fraud is rife where dishonest people advertise Bitcoin for sale, a buyer sends the funds by bank transfer and then never received the Bitcoin. The seller can easily claim they have been sent and there would be little or no recourse.

Of course one of the great benefits of Bitcoin is the very open and public blockchain were transactions, or lack of transactions can be easily verified. However, even if it could be verified that a Bitcoin seller did not send the Bitcoin, the only recourse the buyer has is through the legal system which would be very costly and which would never understand Bitcoin or the blockchain anyway.

Another reason for buyer/seller protection is where very large amounts of Bitcoin are involved for purchasing expensive items such a homes, cars, jewellery for example where hundreds of Bitcoin could be sent by the buyer but the seller denies receiving the Bitcoin and fails to deliver the goods. 

And this is simply the tip of the iceberg of potential for fraudulent transactions involving Bitcoin.

Regulation is not the answer and would be very negative for Bitcoin. Bitcoin is by the people, for the people, free of external government, bank etc interference, but at the same time must accept full responsibility for security, fraud prevention, consumer protection etc, through technological means.

Why Bitcoin Escrow Is Crucial to Mainstream Acceptance

One proven solution to these issues is using an escrow system. Wikipedia defines escrow thus:

 

An arrangement made under contractual provisions between transacting parties, whereby an independent trusted third party receives and disburses money or documents for the transacting parties, with the timing of such disbursement by the third party dependent on the fulfilment of contractually agreed conditions by the transacting parties.

 

 As far as Bitcoin is concerned there are two possibilities for escrow implementations:

1. Through a third party escrow service that acts as an intermediary between buyer and seller.

2. Implementing and integrating escrow within the Bitcoin protocol itself through the blockchain. 

It is clearly always optimum and most efficient to keep as many Bitcoin related services and functions as tightly and seamlessly integrated with the blockchain as possible, as well as fully peer to peer. The bitcoin protocol and blockchain has the full potential to incorporate and facilitate Bitcoin based escrow and therefore must be the way forward using for example a multi-signature type system.

The basis of a Bitcoin counter-party system could be a Bitcoin function called "OP_RETURN" which could originally support an additional 80 bytes of data, but has now been reduced to 40 bytes.

It would seem that at least one Bitcoin core developer, Jeff Garzick, feels that the blockchain is not the place to store such data when he explained on the Bitcoin Talk forum:

 

It is called a free ride.  Given that the overwhelming majority — >90% — application for the bitcoin blockchain is currency use, using full nodes as dumb data storage terminals is simply abusing an all-volunteer network resource.

 

Throughout the history of computer and the Internet the programmers doing the coding tend to be purists who are extremely involved with the code and its literal functionality, but without much or any regard for the actual usefulness of the code in actual real-world applications and this is a typical example. To Jeff apparently allowing 80 bytes of OP_RETURN is contrary to the purity of the blockchain, Bitcoin protocol and Bitcoin as a conveyor of value, is more important than the wider, practical application of OP_RETURN and how it could actually enhance the value of Bitcoin as a whole. This makes Bitcoin a religion as opposed to a solution.

Core Bitcoin developer Mike Hearn has another idea that involved implementing a pointer to a third party PTP data storage pool using the "distributed hash table" - "DHT"

 

That way it doesn’t matter how much data you want to store, the impact to the block chain is always the same. Nobody is against that – it’s why OP_RETURN is sized to allow for hashes. DHTs come in conveniently reusable libraries so it’s hardly a big engineering challenge. Instead they turned it into some kind of stupid political fight.

 

Well of course everyone is entitled to an opinion, but Bitcoin, if is to succeed, required a cohesive and ongoing roadmap for the future that takes into account both the developers and commercial, practical, applicability sides of the discussion, and not the developers alone. After all, what would Satoshi Nakamoto him/her/their self have wanted and envisioned?

Perhaps what is needed for the future is a "steering committee" elected by the Bitcoin community as a whole to encompass every aspect of Bitcoin, technical to commercial, with input from the community as a whole as so often happens with open source software.

That discussion aside, it is clear that the future of Bitcoin must involve some form of closely integrated escrow system, otherwise rampant fraud will certainly compromise its future in the mainstream.

 

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