How do you keep peer-to-peer marketplace transacations private while also ensuring that the buyer and seller each uphold their end of the deal? The fatal weakness in 2-party systems is that both parties have to trust each other. For Particl, a blockchain startup with an intense commitment to privacy, the answer is MAD escrow.
The Escrow Dilemma
Traditionally, when you buy or sell something in a peer-to-peer marketplace, you face a dilemma: you can’t have total privacy without sacrificing the reliability of the transaction, or vice versa.
Consider how peer-to-peer transactions typically work. If you want your transaction to be private, you avoid involving third parties. This way, only the buyer and seller know what is being bought and sold, and for how much.
The potential problem with this approach is that if the buyer fails to pay or the seller fails to deliver the promised goods, or another type of transaction issue occurs, the aggrieved parties have no recourse. There is no neutral authority to resolve disputes.
The other conventional transaction model is to have a third party oversee your transaction. This is what happens when you buy an item from a third-party seller on a site like Amazon or eBay. The seller does not receive payment until the buyer confirms that they received the item they bought. If a dispute occurs between the buyer and seller, the third party that oversees the transactions will resolve it.
The main tradeoff here, of course, is privacy. The third party knows who bought what from whom and for how much.
Particl’s Solution: MAD Escrow
When transactions take place using blockchain-based cryptocurrency, an alternative approach is possible that provides reliable transactions without compromising privacy. It’s called Mutually Assured Destruction, or MAD, escrow.
A typical MAD escrow works like this: The seller places a given amount of value in an escrow account. The buyer places their purchase amount plus match the escrow deposit placed by the seller. The funds are not released from the smart contract escrow until both the buyer and the seller confirm that the transaction has been completed as expected. In the event that the seller fails to ship the item, or the buyer claims not to receive it, no money is released from escrow to either party.
In this case, both parties lose money, even if only one has done something wrong. While this may seem unfair, it is a clever and effective way to discourage fraudulent activity during transactions because there is no way for anyone to profit from them. If the seller refuses to ship an item, they pay a penalty by losing their escrow money. If the buyer receives the item but claims they did not, they end up having to pay up to 100 percent more than what the item should have cost.
Focus on Privacy
Particl did not invent the MAD escrow concept. The idea of applying mutually assured destruction strategy to two-party escrow has existed since at least 2014 and finds its roots in the Nash equilibrium, which has been around for decades. It is based on the theory of deterrence which has prevented nuclear wars.
When released, Particl Market will be among the first decentralized applications to implement MAD escrow for real-world transactions. Particl has embraced the innovative escrow model because its main goal is to provide a cryptocurrency-based marketplace that is secure, private and reliable without applying centralized regulation on every listing.
MAD escrows are only one of several privacy features built into the Particl platform. Others include Confidential Transactions (CTs) and RingCT, which prevent third parties from tracing transactions or even determining how much value was exchanged. Particl is also creating private communication tools for marketplace users, which will eliminate the need to rely on third-party communication solutions that may be insecure.
Conclusion: A Complex Idea With a Big Payoff
To be sure, familiarizing users with the MAD escrow concept may take some work. Most people are not accustomed to escrowing money when buying and selling online. The idea of escrowing more than what a purchase actually costs can also seem foreign — and the notion that you may lose money in a bad deal through no fault of your own can be difficult to swallow.
Yet innovative ideas are often unfamiliar at first. In this case, Particl is implementing an artful solution to a problem that seemed impossible to solve before blockchain technology appeared. Using MAD escrow, the company is delivering the holy grail of ecommerce: privacy and reliability.
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