The Need For Escrow, Arbitration and Reputation in CryptoCurrency Transactions
Today, we are launching a new marketplace for professional services called TroopMarket. It’s based on fusing two ideas together: payment with crypto, and arbitration.
But it’s more than just a way to compete with Upwork, Fiverr or any of the other marketplaces. We think this is a better way to build marketplaces of all kinds so that consumers can trust buying and selling services over the Internet. We intend to develop this as a protocol, with an open source software library, externally addressable arbitrators, and code examples that will allow hundreds of marketplaces to bloom.
So why is this needed?
Rewind to 2009, when Satoshi Nakomoto created Bitcoin as an “electronic cash” solution. By design, this new invention was created as an “irreversible” payment mechanism, designed to “ protect sellers from fraud”. Nakomoto also mentions that “escrow mechanisms could easily be implemented to protect buyers”, but gives no details.
In fact, without escrow mechanisms, an ability to resolve disputes that is intrinsically built in to the buying process, and a reputation system that can not be easily gamed, crypto-currencies as a payment mechanism does not compete favorably with credit cards, square or Paypal. There is zero buyer protection.
Here’s our solution.
First of all, let’s start by huge advantage of initiating a payment in crypto. Whether it’s a marketplace, or directly peer-peer but controlled by smart contracts, crypto has one huge advantage over credit cards: it is always real. You can steal somebody’s credit cards, or buy them on the dark web. You can’t forge crypto. Crypto is cash. The fact that person A pays person B in crypto implies one thing: A has the funds and is willing to commit them to the transaction. It should not mean that B will automatically get them, without recourse. In fact, there needs to be a mechanism for A to quickly recover some or all of the funds in the case B does not provide the product or service agreed for in exchange.
In the marketplace solution to this problem, A pays the marketplace in crypto and gets credits with the marketplace. These credits are transferred with a “pending” status to the seller B, so that A cannot use them and that B knows that the funds are in place. Then the transaction occurs and B either provides A a good or service. If A is satisfied, the credits are released to B. If A is not satisfied, a dispute resolution arbitrator looks at the facts of the case and makes a ruling as to how much of the escrowed funds (if any) B is entitled to.
This solution does require a “trusted” third party — the marketplace. The buyer is not transacting with the seller directly. If the marketplace absconds with the buyer’s crypto tokens, the buyer has no recourse other than the legal system.
Decentralization purists will argue that this is not desirable. But in reality, we are all used to trusting many centralized marketplaces with this level of risk. It is certainly an order of magnitude smaller risk than the risk of paying an unknown seller in Bitcoin and not receiving delivery.
Enter Smart Contracts
If you want to eliminate the middleman entirely, you can do this with Smart Contracts. Smart contracts are pieces of code that are saved permanently to the blockchain and can be executed, for example, to move funds into escrow and wait for an external “oracle” event such as an arbitration decision.
The problem is implementation. Smart contracts are relatively low level constructs that can cause severe damage if not properly checked. In the case of Ethereum, a low level hack caused a massive breach in the parity wallet, with a 50 Million dollar consequence.
Building a full smart contract which interfaces to not one, but a bank of arbitrators is not trivial. In addition the oracle needs to be cryptographically certified to avoid fraudulent arbitration. And the marketplace itself may very well need to get paid as part of a completed transaction.
Finally a word needs to be said about reputation. In any marketplace, reputation (reviews / ratings) are key. But without true identity, service providers can “start over” if they get a bad review. Going beyond pseudonyms and usernames, and tying service providers (and potentially buyers) to real, verified identities is the key to real trust.
The need for standards
All of this can of course be built for every new marketplace from scratch. But why? The history of software progress is by packaging and standardizing functionality so that it doesn’t need to.
If you are interested in building a marketplace for legal services, such as court reporters, do you really want to go down the rabbit hole of ethereum (or other) smart contracts in languages such as solidity or web assembly? No you do not. You want a fully debugged toolkit that you can implement in a few hours, and focus on the job of recruiting buyers and sellers. A framework that you can build on.
And from the user’s point of view, also, a standard, consistent interface for escrow and arbitration are highly desirable. It allows you to trust that a marketplace for guitar lessons functions as smoothly as one for accounting professionals.
A reference user experience
To establish where we are going, we’re going to start with an actual, useful app that demonstrates viability for a specific market. We’re going to start with professional and expert services.
Right now, if you want to hire a lawyer, a marketing expert, an accountant, or a molecular biologist for a specific job, you can google, get a list of websites and start making calls. You can go to LinkedIn, and start sending direct messages. But you can’t browse real people who are in the market to provide services, look at their actual credentials (LinkedIn, github etc..) and use an escrow and dispute resolution system described above.
This app does not exist today. So we are building it. It will be the first app from which we define the open-source protocol for WorkCoin and a network of marketplaces all working with the same payment, escrow and dispute resolution model.
