Idea: Escrow with Punishment

Published by Mario Oettler on

The first idea is to introduce an escrow contract. Both Alice and Bob pay a deposit to this contract. Alice pays 2*p and Bob pays p. p is the price of the good Alice wants to buy. After the deposits are made, the funds are locked for a predetermined amount of time. This time is necessary to allow Bob to deliver the ordered goods. This is the delivery period.

After the delivery period, Alice has to tell the escrow contract whether she has received the goods or not. Bob has to tell the contract whether he shipped the goods or not. This can lead to three scenarios:

Both parties agree that the goods were shipped and delivered: Bob receives 2p from the escrow contract (1p for the payment of the goods and 1p returning its deposit). Alice receives 1p from the contract (2p-1p as payment for the goods).

Both parties agree that the goods were not shipped and delivered: Bob receives 1p from the escrow contract (1p = deposit). Alice receives 2p (her initial deposit) back.

Both parties disagree. The contract burns all the money in it.

The pay-off matrix shows the pay-offs:

If we analyze this with “classic” game theoretical tools, we assume that Alice and Bob make their decision simultaneously. We would have two Nash-equilibria in {Not shipped, Not received} and {Shipped, Received}. Under these assumptions, we would have the problem of coordinating the strategies. But we would have a correlated strategy where the ground truth is the signal. It could also be interpreted as a Shelling point where the truth is the best option.

However, the problem here is that Bob and Alice don’t make simultaneous moves. Bob could extort Alice to pay for goods she never received.

Bob could decide not to ship the goods. But he claims in the escrow contract that he did by submitting the value “Shipped”. Now, Alice faces the following situation. If she submits the true value (Not received), she would lose her deposit (2p). If she submits “Received” she receives 1p. If Alice is rational, she would choose the higher pay-off and submit “Received” even if this is not true. Bob receives 2p.

It is worth mentioning that also Alice could extort Bob by claiming that she hadn’t received the goods.

The party that moves first has the power to extort the other one. This means a fast internet connection and high transaction fees are advantageous in a blockchain context.