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Thoughts on 2 party escrow system?

Thu Mar 03, 2016 4:02 am

I'd like to hear more people's thoughts on the two party escrow system described here: https://voluntary.net/bitmarkets/
It seems very interesting, but there is obviously a lot of game theory involved. Do people think this kind of system can work?
Why, or why not? Is it superior to a standard 3 party escrow?
The seller puts up 1x price of item as a deposit and buyer puts up 1x for deposit + 1x for payment. These can only be released when both agree on payment or refund. This keeps incentives aligned without the need for escrow agents or reputation systems.
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Re: Thoughts on 2 party escrow system?

Thu Mar 03, 2016 4:15 am

With rational players, I think this could work.

For a 'dark' marketplace, where a government with alterior motives would act 'irrationally' from the market's perspective, I am not sure.

Imagine this scenario:
You and I are making a trade. I am the "seller", you are the buyer. I am, in fact, a government agent intent on doing reputation damage to the system and I have no product and no intention to ship. You put up 2 BTC, and I put up 1 BTC. Then, I have a 2x multiplier, because you trusted me to have the product and to ship it.

If my motivation is to lock up funds and destroy trust in the marketplace, and if I did not care about resources, this system might not work.

I'm curious if there is some obvious reason that others see that makes this attack vector unlikely, or impossible to pull off?
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Re: Thoughts on 2 party escrow system?

Thu Mar 03, 2016 5:05 am

If my motivation is to lock up funds and destroy trust in the marketplace, and if I did not care about resources, this system might not work.
I'm curious if there is some obvious reason that others see that makes this attack vector unlikely, or impossible to pull off?
That's a good scenario to consider.

One solution is that sellers can choose to reuse an identity and people that have purchased from them could favorite them and avoid attacks by buying from sellers they've used before.

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Re: Thoughts on 2 party escrow system?

Thu Mar 03, 2016 5:25 am

One solution is that sellers can choose to reuse an identity and people that have purchased from them could favorite them and avoid attacks by buying from sellers they've used before.
True, you could use reputation systems. But I don't think that fixes the issue. Let's assume that these reputation systems are 100% perfect (ie the reputation rating cannot be gamed).

Now imagine there is a new seller. He has no reputation, yet. Unfortunately, just as in the example above, this "seller" has the same alterior motives. He is simply looking to lock up your funds, at a 50% discount to himself, to discredit the marketplace.

Ultimately, I think users will simply end up not trusting no-reputation sellers, if this attack is broad enough (if I have a 50% chance of doing business with a fake seller and losing 2x the purchase price without getting my purchase - would I even risk it?

All that takes is the same amount of fake accounts vs legitimate accounts for new sellers, for this 50% figure. Souds doable.

If users cannot trust new sellers, there is no healthy marketplace. Without a healthy marketplace, there is no real competition and service levels and quality of product are at risk. Existing high reputation sellers would have a virtual monopoly.

It may even make sense for the incumbants to "block access" for new sellers to the market, by opening fake accounts themselves and driving out new competitors by discouraging clients to do business with them.

But then again, maybe I am just missing the solution!
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Re: Thoughts on 2 party escrow system?

Thu Mar 03, 2016 6:12 am

For a 'dark' marketplace, where a government with alterior motives would act 'irrationally' from the market's perspective, I am not sure.

Imagine this scenario:
You and I are making a trade. I am the "seller", you are the buyer. I am, in fact, a government agent intent on doing reputation damage to the system and I have no product and no intention to ship. You put up 2 BTC, and I put up 1 BTC. Then, I have a 2x multiplier, because you trusted me to have the product and to ship it.

If my motivation is to lock up funds and destroy trust in the marketplace, and if I did not care about resources, this system might not work.
This is a pretty interesting scenario. I'm curious if you think the scenarios you mentioned are any *worse* than a 3-party escrow sytsem, where a government party, or well funded adversary, could lock up funds, or even harm your reputation by ensuring that you 'lose' on all your contracts as the 3rd party arbiter.

Additionally, I'd say that in the 2-party, or 3-party escrow system, if such an adversary were attempting to do this, wouldn't they quickly get a bad reputation. Most escrow-based markets seem to have a notion of reputation, even if they remain anonymous, there is some ID which can accumulate reputation. Of course an adversary could create lots of accounts and fraud people from different accounts, but then other 'legitimate' users would become ever more wary of accounts/Identities with no reputation at all, and the value of good reputation would go up even more, so as to ensure that almost no one does business with those adversaries over time. Wouldn't this be possible to play out in the 2-party or 3-party escrow system?

Thoughts?

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Re: Thoughts on 2 party escrow system?

Thu Mar 03, 2016 6:14 am

I think the solution is not that difficult: allow the market to decide the correct ratio's for funding the escrow transactions.

A new seller would have to take a risk, but he could take a risk with a buyer that has a high reputation. The (new) seller could take more risk than the (reputable) buyer. For a low value item that is not an issue, it is called marketing.

The problem, as I see it, would be to attempt to define the escrow ratio's through central planning. The soltion, is to let the market do that.
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Re: Thoughts on 2 party escrow system?

Thu Mar 03, 2016 6:22 am

This is a pretty interesting scenario. I'm curious if you think the scenarios you mentioned are any *worse* than a 3-party escrow sytsem, where a government party, or well funded adversary, could lock up funds, or even harm your reputation by ensuring that you 'lose' on all your contracts as the 3rd party arbiter.
I am not attempting to compare the two systems side-by-side. I am brain-dumping my first thoughts on the subject ;) But you are of course correct that the solutions offered by this system should be weighed against the competition and not considered in isolation.

A 3-party system has challenges of its own. I recognize that and of course this is why a 2 party system was designed.

I might like the 2-party system better with the tiny change I mentioned in my last post AND combined with a very good reputation system.
Additionally, I'd say that in the 2-party, or 3-party escrow system, if such an adversary were attempting to do this, wouldn't they quickly get a bad reputation.
No. Because you would not re-use identities. As such, all new identities are 'unreliable' and 'risky'. But that is solved by letting the market decide the required escrow ratios. In a normal market, these ratios would be different than a market that is 'under attack'.
Most escrow-based markets seem to have a notion of reputation, even if they remain anonymous, there is some ID which can accumulate reputation. Of course an adversary could create lots of accounts and fraud people from different accounts, but then other 'legitimate' users would become ever more wary of accounts/Identities with no reputation at all, and the value of good reputation would go up even more, so as to ensure that almost no one does business with those adversaries over time. Wouldn't this be possible to play out in the 2-party or 3-party escrow system?

Thoughts?
Exactly. And that is a barrier to entry to the market for legitimate users with no reputation. Barriers to entry are an obstacle to free markets.
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Re: Thoughts on 2 party escrow system?

Thu Mar 03, 2016 8:06 am

Exactly. And that is a barrier to entry to the market for legitimate users with no reputation. Barriers to entry are an obstacle to free markets.
Yeah, that is interesting. Even with no abuse, there is *some* barrier to entry. If you have 0 reputation, you are always going to have to sacrifice something else to begin the process of building up your reputation, to attract people to give you a chance. So maybe to build reputation, you have to take less escrow (than say the 50%, or whatever), giving the buyer an advantage/incentive to using you. I think the market would find an equillibrium there that works, over just freezing in place with only the existing reputation-holders being able to facilitate transactions in the system with no competition.

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Re: Thoughts on 2 party escrow system?

Thu Mar 03, 2016 8:14 am

This is true. The goal should not be equality for all users. New sellers have something to prove compared to the existing sellers. This is true in any business, in any market (unless it has been distorted beyond recognition). This is a barrier to entry for sure. But it is a natural barrier.

The goal, I think, should be to not impose artificial barriers to entry. The natural ones are solvable by entrepreneurs offering a better product for a better price or with better service. Through marketing. Etc.
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Re: Thoughts on 2 party escrow system?

Thu Mar 03, 2016 9:45 pm

I'd like to hear more people's thoughts on the two party escrow system described here: https://voluntary.net/bitmarkets/
It seems very interesting, but there is obviously a lot of game theory involved. Do people think this kind of system can work?
Why, or why not? Is it superior to a standard 3 party escrow?
The seller puts up 1x price of item as a deposit and buyer puts up 1x for deposit + 1x for payment. These can only be released when both agree on payment or refund. This keeps incentives aligned without the need for escrow agents or reputation systems.
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Re: Thoughts on 2 party escrow system?

Tue Mar 08, 2016 7:57 am

One solution is that sellers can choose to reuse an identity and people that have purchased from them could favorite them and avoid attacks by buying from sellers they've used before.
True, you could use reputation systems. But I don't think that fixes the issue. Let's assume that these reputation systems are 100% perfect (ie the reputation rating cannot be gamed).
No "reputation system" was suggested outside of buying from a seller you've already done business with. A government could start with proxy attacks on sellers but now it gets into mass selling of illegal items (assuming they are attacking sales of items banned in their territories e.g. banned books in a police state), and this leads us to the question of how likely any of this is.

A given marketplace wouldn't be on anyone's radar until it is big (say, $1B/year in sales). At that point, an attack might require hundreds of millions of dollars. Can you imagine the dialog of a government agency meeting deciding if it should spend it's budget in this way and who will be the responsible party? The same questions were raised about governments doing 51% attacks on the Bitcoin network.
Last edited by stevedekorte on Tue Mar 08, 2016 8:11 am, edited 4 times in total.

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Re: Thoughts on 2 party escrow system?

Tue Mar 08, 2016 8:01 am

Slick software!

Is it not possible to make this web-based?
Thanks. We're working on a Javascript port. It won't run in a browser because the whole idea is that this is a decentralized app and not something connecting to centralized web servers, but the port will allow us to have a single code base that runs on OSX, Windows and Linux..

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Re: Thoughts on 2 party escrow system?

Wed Mar 09, 2016 12:14 am

No "reputation system" was suggested outside of buying from a seller you've already done business with. A government could start with proxy attacks on sellers but now it gets into mass selling of illegal items (assuming they are attacking sales of items banned in their territories e.g. banned books in a police state), and this leads us to the question of how likely any of this is.
No, they would not need to sell anything. They would only need to pretend to sell something. They only need to offer it for sale, and wait for someone to buy. This happens all the time in "real life", where undercover agents posing as dealers make a deal - and when the customer confirms the deal to the point that a judge would accept intent, they arrest the guy. They never actually sell anything. This attack vector is no different.

I also do not share your optimism that a government would never do something that is illegal for regular citizens to do. They do this all the time, and use different words for it. Stealing is illegal. But if you are a government and call it taxation it is legal. Couterfitting is illegal, but if you are a government and call it quantitative easing it is legal. Locking someone up in a cage is illegal. But if you are a government and arbitrarily call that person a terrorist, it suddenly becomes legal.

If your line of defense requires a government (that writes the rules!) to stick to it's own rules without making an exception for themselves, I fear you are making a big assumption that could bite you in places you rather not ;)
A given marketplace wouldn't be on anyone's radar until it is big (say, $1B/year in sales). At that point, an attack might require hundreds of millions of dollars. Can you imagine the dialog of a government agency meeting deciding if it should spend it's budget in this way and who will be the responsible party?
I think this premise is probably accurate. But look at how the government went after the Silk Road. If they consider this a treat, it might not take a billion dollars per year in sales to put it on their to do lost.

I really do not think this attack is anywhere near hundreds of millions of dollars for a 1 billion dollar market. Let's take the lower end of your claim and say that the government would have to spend 200 million in this special project to kill a 1 billion marketplace. That is 20%! That's crazy.

If all they need to do is stop the inflow of new sellers, they would simply offer an arrangement of items for sale. Nobody is going to spend thousands of dollars with a new seller. Most likely, it will be tens or a hundred dollars. That's all the government would risk. Per seller. Let's assume it is 1000 dollars (which I highly doubt). For 200 million dollars, you could make 200.000.000 / 1.000 = 200.000 fake sales a year. You don't need that many fake sales to destroy all trust in new sellers, and you would not have this much money per first sale with a seller with no reputation.
The same questions were raised about governments doing 51% attacks on the Bitcoin network.
This is a completely different argument. I fail to see the connection.
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Re: Thoughts on 2 party escrow system?

Wed Mar 09, 2016 1:45 am

I prefer 3rd party escrow. There is scammers on sellers and buyers side. Sometimes real persons view as 3rd party is needed
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Re: Thoughts on 2 party escrow system?

Wed Mar 09, 2016 2:49 am

I prefer 3rd party escrow. There is scammers on sellers and buyers side. Sometimes real persons view as 3rd party is needed
Two questions:

1) How does a 3rd party fairly resolve a dispute if they only have one party's word against another?

2) In a pseudonymous reputation system, how can you be sure that the agent and other party are not the same entity?

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Re: Thoughts on 2 party escrow system?

Wed Mar 09, 2016 2:54 am

No, they would not need to sell anything. They would only need to pretend to sell something. They only need to offer it for sale, and wait for someone to buy. This happens all the time in "real life", where undercover agents posing as dealers make a deal - and when the customer confirms the deal to the point that a judge would accept intent, they arrest the guy. They never actually sell anything. This attack vector is no different.
In which case users sticking to sellers they've already used avoids the attack. I suggested the proxy attack as a way of a government avoiding this defense.
I also do not share your optimism that a government would never do something that is illegal for regular citizens to do.
I didn't make that claim, only that it's long been suggested that a government would stage a 51% on the Bitcoin network, yet it doesn't appear to have happened so far. Can we assume you've chosen to avoid using bitcoin because of the possibility of such an attack or have you come to think of it as an unlikely scenario and if so, for what reason if not the one's I've mentioned?

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Re: Thoughts on 2 party escrow system?

Wed Mar 09, 2016 4:53 am

I have the feeling I am thinking a few steps further along the road here.
In which case users sticking to sellers they've already used avoids the attack.
Yes! They would. And this is the core of the problem.

All an attacker would have to do, is to ensure that new sellers are no longer trusted. That's it. The market will destroy itself.

If there is no longer the option for new sellers to compete with existing sellers, there is no longer a free market. A market with a limited number of sellers will eventually decrease quality and increase costs. That is a negative spiral that will destroy the trust in the marketplace.

This negative spiral can get started by blocking new sellers. The existing sellers will - given enough time - do the rest. Just look at any industry where competition is not allowed to start.
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Re: Thoughts on 2 party escrow system?

Wed Mar 09, 2016 6:39 am

I prefer 3rd party escrow. There is scammers on sellers and buyers side. Sometimes real persons view as 3rd party is needed
Two questions:

1) How does a 3rd party fairly resolve a dispute if they only have one party's word against another?

2) In a pseudonymous reputation system, how can you be sure that the agent and other party are not the same entity?
You can be never sure.
But if person ie worked year(s) for their status and would loose it to not be fair as being 3rd party of some deal.. IMO looks safe.

Of course people DO get into trouble, get loans but at least this makes the risk smaller - but not 100% sure.

Im sure there must be some better way than 3rd party person but for now i dont see it. At least from my experience :)

But of course i can be wrong, im just stating what i think
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