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

TL;DR

This paper introduces a blockchain-based dual-deposit escrow protocol that ensures cheat-proof digital goods exchange without trusted third parties, proven to be stable through game-theoretic analysis.

Contribution

It presents a novel dual-deposit escrow protocol using cryptographic primitives and smart contracts to facilitate trustless digital goods trading.

Findings

Protocol guarantees honest cooperation as equilibrium

Analyzed as an extensive-form game with proven stability

Enables cheat-proof exchange without third-party trust

Abstract

A fundamental problem for electronic commerce is the buying and selling of digital goods between individuals that may not know or trust each other. Traditionally, this problem has been addressed by the use of trusted third-parties such as credit-card companies, mediated escrows, legal adjudication, or reputation systems. Despite the rise of blockchain protocols as a way to send payments without trusted third parties, the important problem of exchanging a digital good for payment without trusted third parties has been paid much less attention. We refer to this problem as the Buyer and Seller's Dilemma and present for it a dual-deposit escrow trade protocol which uses double-sided payment deposits in conjunction with simple cryptographic primitives, and that can be implemented using a blockchain-based smart contract. We analyze our protocol as an extensive-form game and prove that the Sub-game Perfect Nash Equilibrium for this game is for both the buyer and seller to cooperate and behave honestly. We address this problem under the assumption that the digital good being traded is known and verifiable, with a fixed price known to both parties.