Double deposit escrow
Double Deposit Escrow (DDE) is a form of peer-to-peer agreement in which two parties place collateral into a joint account. Based upon a mutual destruction principle, this method can only be achieved through the use of a smart contract. Bound by a multisignature timelock, this contract can only release the collateral upon a signature receipt from both parties within a specified amount of time. If neither party can arrive at consensus before contract expiration, the collateral becomes indefinitely locked in the account.[1] The first execution of DDE was seen in BitHalo, a decentralized and open-source contracting software developed by David Zimbeck in 2014.[2][3][4]
Multisignature Wallet (Joint Account)
Traditionally, multisignature wallets have been applied as an additional layer of security within cryptographic networks. In order for funds to be moved, a private key signature is required from multiple parties involved with the wallet.[5] Both parties are required to sign the contract in order to refund their own collateral, which incentivizes agreement prior to receiving any returned deposits. [6] Each party must verify their agreement with a private key signature, before the contract's time limit expires.
Timelock
A timelock is used within double deposit escrow to further incentivize the prompt completion of each contract. If either party does not sign the completion of their contract within the allotted time, both deposits become indefinitely locked within the multisignature wallet, and are considered "destroyed". The Python programming command "timeouttx" is used to create this time function, which can be customized depending upon each party's agreement.[7]
Incentives
The enforceability of DDE relies upon multiple mechanisms of financial, time-based incentives. In order to receive their full deposits back, both parties have the option of a mutual completion according to original terms, a mutual restructure of terms, or a mutual cancellation of the contract. When each deposit is structured correctly, both parties become financially incentivized to finish the deal, and the choice of an intentional breach of contract results in financial loss.[8]
Risk Profile
A primary vulnerability of DDE is the risk of malicious destruction of contracts, with the intention of damaging market sentiment and discouraging participants. There are various proposed solutions to this problem, many of which are related to some variant of a reputation management system. With reputation management, the profile of each participant maintains a record of successfully completed contracts, which results in an appropriate contract deposit based upon that record. The nature of DDE and its imminent removal of third-party escrow services has made reconciliation (for breach of contract) and physical delivery of contract terms difficult to enforce.[9]
Effects on commerce
The removal of third-party escrow services eliminates counter-party risk, which has evolved from the introduction of online commerce in the late 1990s. The requirement of fees, third-party trust, and inefficient dispute resolution become unnecessary within a DDE contract. While the use of single security deposit escrow has been used traditionally, the cryptographic peer-to-peer mechanism of DDE was not available until recent years.[8]
References
- ↑ Chiara Bodei; Gianluigi Ferrari; Corrado Priami, eds. (2015). Programming Languages with Applications to Biology and Security. Pisa, Italy: Springer. p. 146. ISBN 9783319255279. Search this book on
- ↑ Thompson, Christopher P. (2018). BitBay A Decentralized Marketplace. C. Ellis. p. 8. ISBN 978-1717162274. Search this book on
- ↑ Kothapalli, Abhiram (Dec 23, 2018). "Reducing extortion in trustless two-party Bitcoin transactions using escrow practices" (PDF).
- ↑ Zimbeck, David (2014). "Two party double deposit trustless escrow in cryptographic networks and bitcoin" (PDF).
- ↑ Davenport, Ben (Dec 29, 2018). "What is Multi-Sig, and What Can It Do?". Coin Center.
- ↑ Buntinx, JP (Dec 28, 2018). "What Is a Multisignature Escrow Wallet?". Null TX.
- ↑ "BitBay (BAY) - Whitepaper". Whitepaper Database. Mar 15, 2018. Retrieved Dec 29, 2018.
- ↑ 8.0 8.1 Krishnamachari, Bhaskar (June 2018). "Solving the Buyer and Seller's Dilemma: A Dual-Deposit Escrow Smart Contract for Provably Cheat-Proof Delivery and Payment for a Digital Good without a Trusted Mediator". arXiv:1806.08379 [cs.CR].
- ↑ Eze, Peter U. (Jun 7, 2017). "A Triplicate Smart Contract Model Using Blockchain Technology" (PDF). Allquantor.
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