DT Intro: Much transactional commerce is built on trust. The form and the force of that trust is reflected in various ways, deposits, contracts, a handshake, a fax... In e-tailing Particl is pioneering a new form of adjustable escrow that addresses the new reality.
A review of distributed marketplace environments, Particl Marketplace’s very own two-of-two escrow system, and a deep dive into its specifications and benefits.
Particl is, first and foremost, an ecosystem of privacy-first, decentralized applications. This is the case for its Particl Marketplace, which allows anyone in the world to buy and sell goods and services, physical or digital, in total privacy.
The marketplace dApp uses a mix of P2P and blockchain technologies, meaning that it is run in an entirely distributed way from start to finish — no third-party or intermediary ever has any sort of centralized role or control over its network.
This, by design, ensures the highest levels of privacy and security for the network as a whole and is radically resistant to censorship. Particl Marketplace’s unique and sophisticated escrow system abides by these same principles, presenting many users with substantial benefits.
The Need for an Escrow model
A staple of online market environments is the presence of an escrow system: when trading with strangers, users need to be confident that the other party will keep their end of the agreement and act in good faith throughout. That is why contract security and enforcement are essential when trading goods and services in any marketplace.
One common solution eCommerce platforms and payment processors use is a mutually-trusted third party — in other words, an escrow agent or “issue resolution center”. In the context of a decentralized marketplace, this incurs a critical problem: the introduction of a centralized moderating entity. It also attracts its own privacy issues as well as some economic drawbacks. Let’s explore what this means for Particl Marketplace.
Common Issues With Traditional Escrow Models
With traditional escrow, a third-party (the escrow agent) holds onto an asset and releases it when the transaction is completed (i.e., the purchased item is delivered). That role is generally assumed by the marketplace or exchange itself (i.e., Amazon, Openbazaar), a payment processor (i.e., Paypal, Visa), or third-party escrow services (i.e., a bank or a financial institution). This allows potential disputes or issues to be safely settled, but it also carries important issues.
Firstly, running escrow or issue resolution services incurs a heavy cost reflected in the platform's fees. When added to every link of a supply chain, this fee ends up substantially impacting retail prices and making up a large portion of the final price of nearly all products we buy daily.
Additionally, when an issue arises, it is usually settled according to a very rigid set of policies rather than being dealt with on a case-by-case basis. This allows for more issues to be resolved quickly and efficiently but can also lead to biased resolutions that benefit the operator's own bottom line. In turn, scammers have perfected the art of defeating these hard-set policies to steal money, products, or both, from rule-abiding users and sellers. Online merchants are well aware of this problem and hedge their exposure to this risk through their prices, an unfortunate reality that the customer is ultimately led to bear the costs.
Finally, and perhaps most importantly, these solutions offer no privacy at all to their users and incur intrusive data requirements due to the operator needing to be aware of every detail related to a single transaction to fulfill its role. This gives them complete oversight and insight over all the sensitive and, at times, confidential, personal, professional, financial, and commercial data collected from the platform's users — which they, in turn, can use in accordance with their interests, often to the detriment of the individuals and businesses using the platform.
Particl’s Two-Party Online Escrow Solution
Particl adopts a radically different escrow model which addresses the issues mentioned above. Often dubbed a “two-party escrow", or "MAD escrow", it involves only two parties; the buyer and the seller, with no one else in between.
Instead of requiring a third party to hold the payment on behalf of two transacting parties, both participants are required to provide collateral by making an equal security deposit into a smart-contract. This security deposit can be adjusted from 0 to 100% of the total value of the item or service sold and is automatically refunded, in its entirety, once both parties mark the transaction as completed. Notably, this form of decentralized escrow is infinitely scalable, as there are no operating costs associated with running these types of cryptographically-enforced contracts and no escrow agents required for it to function.
If a dispute or issue arises, both parties need to mutually agree on a satisfying resolution for the transaction to be marked as complete. Because the two parties have a security deposit locked into the escrow smart-contract, they are naturally forced to collaborate and reach a reasonable resolution for both. This method of escrow allows the Particl marketplace to preserve the privacy of everyone involved in every instance.
Mutually Assured Destruction Game Theory
By definition, game theory simply refers to the study of mathematical models of strategic interaction among rational decision-makers. In other words, it incentivizes rational decision-making and simultaneously disincentivizes irrational/dishonest behavior.
To accomplish that desired outcome within the context of a two-party escrow system, Particl leverages the Mutually Assured Destruction (MAD) game theory in a financial context. “MAD” is a military doctrine “based on the theory of deterrence, which stipulates that the threat of using strong weapons against the enemy prevents the enemy’s use of those same weapons. The strategy is a form of Nash equilibrium in which, once armed, neither side has any incentive to initiate a conflict or to disarm” (Wikipedia).
By combining Particl’s implementation of BIP 65 , which allows a transaction output to be made unspendable until some point in the future, with the advanced trustless data transmission capabilities of the SMSG network, the marketplace’s two-party escrow system locks funds in a secure multi-signature smart-contract until all parties sign off on the transaction. This also encourages communication and negotiation between buyers and sellers if a transaction goes wrong.
The result: Enabling Total Privacy in the Business World
One of Particl’s two-party escrow’s unique functionality resides in how it keeps all aspects of every transaction private-by-default. When you protect a marketplace trade with the escrow system, you ensure that all data and information related to the transaction and its participants remain anonymous to outside observers. This is made possible by the complete absence of third-parties involved, as well as the escrow’s smart contract itself being built with some of the latest privacy technologies to guarantee anonymity down to the protocol level.
Indeed, as we’ve mentioned above, Particl’s two-party escrow system leverages a combination of its unique SMSG network as well as the BIP 65 proposal originally implemented on Bitcoin. But that in itself is not enough to offer a satisfactory level of privacy; it merely allows trustless escrow transactions to take place.
To provide the escrow contract with the required privacy, payments and security deposits are sent as “Confidential Transactions”, a transaction type that hides the transferred amounts. To hide the identity of the participants as well, a RingCT transaction is then directly chained into the initial Confidential Transaction’s outputs, ultimately hiding all information about both the transacted amounts and participants to anyone not involved with the transaction. This offers the highest level of transactional privacy possible, one not remotely possible with traditional escrow models such as those we see on the most popular online marketplaces and payment processors.
Notably, this form of anonymous escrow smart-contract is an impressive feat considering that RingCT transactions are very rigid and not even supposed to be able to interact with smart-contracts. You can learn more about the creative methods the Particl team used to make that possible here.
Two-Party Escrow Contracts; Making Possible a Myriad of Use-Cases
Two-party escrow contracts open up a ton of use-cases and advantages unique to its model. Some of them are due to its commitment to trustless privacy, the absence of commissions or escrow fees, or the MAD system’s inherent resistance to abuse.
While all those advantages stand on their own, they particularly shine in the contexts of:
Providing unstoppable, uncensorable eCommerce gateways for otherwise censored individuals or blocked regions.
There are many cases of individuals running online stores getting censored or shut down by their provider — be it a payment processor, hosting provider, or eCommerce platform operator. The same can be said of people living in specific regions of the world that are banned from traditional financial services or simply unbanked.
Because even settlements on Particl can be achieved purely peer-to-peer, such individuals now have the new-found option of easily opening up a storefront and engaging in restriction-less commerce without the possibility for an escrow service to weigh in, intervene on, or run interference in the process.
In other words, a trustless, private, and truly person-to-person escrow model, especially when supported by an equally open and free marketplace environment, creates a global free market environment where everyone, regardless of who they are and where they live, gets to do business on a fair, level playing field.
Protection of intellectual property
In a powerful, reliable escrow system without third-party involvement, users are assured that it is impossible for their marketplace service provider (in this case, Particl Marketplace) to spy on them or collect valuable data information.
This is a reassuring news for sellers, and especially product inventors, as salvaged data from centralized escrow system providers is usually sold (often directly to competitors) and re-used by the platform operator itself; a practice that goes directly against a seller’s best interest and, at times, frustratingly leads to the total destruction of one’s business as we’ve explored in this Particl Story.
Providing additional means for wholesalers and goods manufacturers to sell/dispose of excess stock
When wholesalers reach a point of critical excess inventory, they need to get rid of excess inventory at a minimal cost. Unfortunately, this makes using traditional marketplace environments problematic due to its many layers of third-party involvement and associated costs.
With Particl Marketplace, they can do so with no additional sales costs thanks to Particl’s marketplace protocol zero-commission approach and the absence of middlemen involved. This is a scenario where both the wholesaler and the consumer get more out of their assets, ultimately reducing the total volume of waste/discarded products.
More direct, more liquid, and more secure B2B and B2C trades.
This is made possible by Particl Marketplace’s zero fees and zero data collection approach, which is unmatched in any other system (even in custom-built systems, the central entity running this system, such as a central server or database, can always collect some amount of data.)
Avoiding scams when making in-person or high-value transactions
Particl Marketplace and its two-party escrow system can be used to secure in-person transactions when an added layer of security is wanted or required, such as when two strangers physically meet to trade together.
The two-party escrow system, in this case, acts as a near-free trade assurance service and eliminates the need for trust and any incentive of foul play. This simple MAD escrow protection brings significant plus-value to any in-person trade between strangers, whether for small transactions such as on Facebook Marketplace trades or luxury goods like, for example, the sale of a piece of art or an expensive watch.
As an additional protection layer when trading with trusted business partners
When two people often trade with each other directly, they may end up building trust and not require the full range of costly escrow services offered by eCommerce platforms. Particl’s escrow system can then function as a near-free layer of additional protection so that both parties don't have to trade naked, protecting each of them against "long cons" or sudden shifts in the other party's behavior.
It allows a buyer and a seller to reap nearly all the benefits of removing traditional marketplace environments and associated fees from their business relationship while keeping a level of trade assurance to protect both parties against unforeseen risks. Should the worst happen, both parties are incentivized to find a solution acceptable to all.
To sell products that are heavily restricted or even banned by regulated entities, such as medicine.
This possibility opens the door to a whole world of cross-border arbitrage, as heavily regulated products often vary wildly in price from one market to another. It can also empower individuals to access products that are removed from circulation or difficult to acquire in their region, such as is often the case of medicinal products or even literature (i.e., books banned due to a specific political climate in the region).
N.B.: All of the above-mentioned use-cases are, of course, just a few examples of what a private, decentralized, and two-party escrow makes possible. We hear of buyers and sellers with different reasons and benefits that they draw from this system every week, and we’re sure we will continue to hear of new ones as adoption of this novel system grows!
An Uncompromising Alternative to Traditional Market Settlements
A two-party escrow system is unusual and involves a level of commitment that sellers and buyers are not often accustomed to. However, as we've just seen, it also comes with powerful upsides that facilitate commerce trades within a wide range of use-cases — the highest of which, in our view, is making possible a worldwide, absolutely uncompromisingly open, free, private, and unrestricted world market of goods and services.
Such a protocol is already a strong complement to traditional escrow models. Beyond that, we believe it is bound to hold as a soaring, paradigm-shifting alternative in a world where centralized payment processors and financial service providers are becoming more restrictive by the day. And we’re here for it.