Irrationality, Extortion, or Trusted Third-parties: Why it is Impossible to Buy and Sell Physical Goods Securely on the Blockchain

TL;DR

This paper demonstrates fundamental limitations in using blockchain smart contracts for secure physical goods exchange without trusted third parties, showing that extortion or third-party reliance is unavoidable under rational behavior and Turing-complete languages.

Contribution

It proves that secure peer-to-peer physical goods exchange on blockchain is impossible without third parties or extortion risks, highlighting inherent limitations of current escrow smart contracts.

Findings

Common escrow methods can be exploited for extortion.

Commitment schemes do not solve the problem.

No fully trustless escrow smart contract exists for this scenario.

Abstract

Suppose that Alice plans to buy a physical good from Bob over a programmable Blockchain. Alice does not trust Bob, so she is not willing to pay before the good is delivered off-chain. Similarly, Bob does not trust Alice, so he is not willing to deliver the good before getting paid on-chain. Moreover, they are not inclined to use the services of a trusted third-party. Traditionally, such scenarios are handled by game-theoretic escrow smart contracts, such as BitHalo. In this work, we first show that the common method for this problem suffers from a major flaw which can be exploited by Bob in order to extort Alice. We also show that, unlike the case of auctions, this flaw cannot be addressed by a commitment-scheme-based approach. We then provide a much more general result: assuming that the two sides are rational actors and the smart contract language is Turing-complete, there is no escrow smart contract that can facilitate this exchange without either relying on third parties or enabling at least one side to extort the other.