Preventing Scammer Profit with Burnable Payments

A common problem in cryptoeconomics is that of scams — irreversible transactions combined with pseudonymity attract scammers like flies to honey. It is a major obstacle in designing a cryptocurrency marketplace. A common proposed solution is the use of an escrow scheme, but this requires the cooperation of a third party acting as an arbiter, and is therefore more costly to prepare — especially if the terms of the service or product are subjective or hard to define.

I propose a burnable payment as an alternative solution. It would prevent both the buyer and seller from profiting from a scam, but doesn’t require the judgment of a third party, instead relying on a smart contract with very simple logic and the game-theoretical implications of that logic. It can apply to any kind of product or service, even loosely defined or subjective ones.

When a buyer sends a burnable payment, he has committed to spending the money, and can no longer recover it. However, the seller doesn’t yet have the money. The buyer can now choose to either burn or release to the seller any part of the payment, in response to the seller’s delivery (or lack thereof) of the service or product. One implementation of this logic in Solidity can be seen here.

Imagine a buyer wants to buy something from a seller, but the buyer and the seller do not trust each other. The buyer doesn’t want to pay first, in case the seller has no intention of delivering; the seller doesn’t want to provide first, in case the buyer has no intention of paying.

As a solution, the buyer can propose sending a burnable payment to the seller, and releasing the payment after the service has been provided. The seller agrees, so the buyer sends the payment, but does not yet release it.

At this point the payment is in a sort of limbo — it has left the buyer’s wallet, but has not yet been released to the seller’s wallet. There are two things to note about the game theory involved at this stage.

  • The buyer has committed to spending the money, and won’t be able to recover it. This solves the problem of the seller not knowing whether the buyer has any intention to pay — the buyer has effectively already spent the money, and the seller can see this.
  • The seller has only one way to actually receive the payment: he must convince the buyer to release it to him by providing the service or product. If the seller had no intention of providing, there would be no reason for him to even enter the contract in the first place.

If the seller provides the product or service, the buyer releases the payment. If not, the buyer burns it. The buyer could also choose to burn some portion and release the rest.

It’s important to note that if the service provider never delivers, the buyer has still lost money. Similarly, the service provider could perform the service, only to find that the buyer burns the payment anyway. But perfect protection of both buyer and seller isn’t the point.

Rather, the point is that this system prevents a scam from profiting — whether on the side of a fake buyer who has no intention of paying, or a fake service provider who has no intention of delivering. Within this framework, there is actually no reason for a scammer to enter at all: a buyer must commit to spending the money first, so someone looking to get away without paying has no reason to try; a seller has only one way to actually receive the payment, and that is to provide the service to the satisfaction of the buyer.