User:Casascius/Escrow scheme draft

This is a draft for a three-party or four-party scheme that enables an escrow transaction using nothing more than standard (non-multi-signature) Bitcoin transactions. This proposal contemplates the following features:

1. One shared Bitcoin address for the entire transaction
2. All parties to the transaction can verify that the Bitcoin address belongs to the transaction they're participating in, and not one made up or taken from someone's own personal wallet
3. Escrow agent can control the disposition of the funds but cannot take the funds
4. Releasing the funds remains possible even if the escrow agent disappears

The proposal contemplates up to four roles, defined as follows:

• B - Beneficiary Bob - Bob is the person providing the goods or services, and who will receive control the proceeds of the transaction if there is no dispute and the goods or services are delivered as promised.
• A - Alternate Beneficiary Alice (or Customer Alice): Alice is the person who will receive the proceeds of the transaction if either the Bob or the Escrow Agent decide that the funds should not go to the Beneficiary. Alice might or might not be the customer who is paying into the escrow transaction. If Alice is the customer, then allowing the funds to go to Alice constitutes a refund. If Alice is not the customer, then Alice is an alternate beneficiary who may be granted access to the funds by the Escrow Agent in the event they determine it should not go to Bob, and might be a person more able to settle a dispute than anyone else.
• E - Escrow Agent Eddie - This person gets the power to award control of the funds to either Alice or Bob if the two of them cannot agree who amongst themselves should get the funds.
• C - Customer Charlie (optional) - If Charlie is a party to the transaction, then Charlie is the person paying into the escrow account with no hope of receiving a refund. Charlie has the power to grant the proceeds of the funds to Bob or Alice, but only if the Eddie doesn't do it first. Charlie can also verify, with the help of a tool, that he is paying into an account under the control of Bob, Alice, and Eddie, rather than into someone's personal wallet.

How the scheme works

Initiation of Proposal

First, any of the parties (other than Customer Charlie) can initiate an escrow transaction proposal. The second party creates a proposal that "seconds" the first. The third party either "accepts" the proposal (if it's a three party transaction) or "thirds" it, and finally (if applicable), the fourth party accepts it.

A proposal or acceptance is a Base58-encoded string whose prefix specifies who created the record and to whom it should be given. The parties can initiate and accept in any order, with one exception: the escrow agent must be first or second.

The prefixes for the strings are always four characters, that follow this format:

• First character: who created the string (B, A, or E)
• Second character: whether this is a Proposal (P), Seconding (2), Thirding (3), or Acceptance (A)
• Third character: the number 4
• Fourth character: the intended recipient of the string (B, A, E, or C).

As an example, if someone creates a proposal and selects that they intend to be the Escrow Agent, then their client will generate two strings: one starting with EP4A and the other starting with EP4B.

Initiation involves generating cryptographic key(s), and creating two Base58-encoded records containing the applicable keys (public or private) and signaling the party's intentions. One record is given to each other party.

Three party scheme

A three party scheme involves Alice paying Bob, and Eddie being the escrow agent. Alice and Bob can release the funds to one another without Eddie's help, and Eddie can break a tie and force the funds to go to either Alice or Bob if the two of them don't agree.

• Eddie creates private keys x and y. He gives Alice x and Gy. He gives Bob y and Gx.
• Alice creates private key a. She gives Bob a. She gives Eddie Gab if she knows b.
• Bob creates private key b. He gives Alice b. He gives Eddie Gab if he knows a.

After all proposals acceptances have been exchanged:

• Eddie knows x, y, and Gab. He calculates the Bitcoin address as (Gab)xy.
• Alice knows a, b, x, and Gy. She calculates the Bitcoin address as (Gy)abx.
• Bob knows a, b, y, and Gx. She calculates the Bitcoin address as (Gx)aby.

Once all parties agree they have the same Bitcoin address, Alice pays, and then:

• Alice releases the funds to Bob by giving him x (or Eddie's original record to him containing x and Gy).
• Bob can give Alice a refund by giving her y (or Eddie's original record to him containing y and Gx).
• Eddie can force the funds to go to Alice by giving her y (or the original record he gave to Bob).
• Eddie can force the funds to go to Bob by giving him x (or the original record he gave to Alice).

Four party scheme

A four party scheme involves Charlie the customer paying Bob the beneficiary, with no chance that he could get his money back without the combined consent of Alice and Eddie. Even then, Alice would have sole control over the funds and would choose where they ultimately go - if they should automatically go back to Charlie, the three-party scheme would work better. Alice is the alternate beneficiary - a third party entrusted to receive full control over the money in case Charlie and Eddie are certain it must not go to Bob.

In this scheme, Charlie can independently release the funds to Bob without anyone else's help. Eddie can also release them to Bob without help from Charlie. However, if Charlie and Eddie both agree that Bob shouldn't get the funds, then they can collectively agree to have the funds go to Alice; neither Charlie nor Eddie can send the funds to Alice acting alone.

Charlie must make the initial proposal, as everything else depends on keys produced by Charlie.

• Charlie creates private keys x and y. He gives x and Gy to Bob and y to Eddie. He gives Gx to Alice.
• Bob creates private key b. He gives it to Eddie. Bob has b, x, and Gy. He gives Gbxy to Alice.
• Alice creates private key a. She gives it to Bob. Alice has a, Gx, and Gbxy. She gives Gax to Eddie.
• Now that Bob knows a, he provides Gab to Charlie.
• Eddie doesn't create any private keys but knows y, b, and Gax.

After all proposals and acceptances have been exchanged:

• Charlie knows x, y, and Gab. He calculates the Bitcoin address as (Gab)xy.
• Alice knows a and Gbxy. She calculates the Bitcoin address as (Gxy)ab.
• Bob knows b, a, x, and Gy. He calculates the Bitcoin address as (Gy)abx.
• Eddie knows Gabx and y. He calculates the Bitcoin address as (Gabx)y.

Once all parties agree they have the same Bitcoin address, Charlie pays, and then:

• Charlie can release the funds to Bob by giving him y (or the original record he gave to Eddie).
• Eddie can release the funds to Bob by giving him y (or the original record Charlie gave him).
• If Charlie and Eddie agree that Alice should get the funds, then Charlie gives her x and y, and Eddie gives her b.

And just so it's clear:

• x represents Charlie's control, ensures that Alice can't get funds without his consent.
• y represents Charlie's and Eddie's ability to decide if and when Bob gets the funds
• a is never known by Eddie or Charlie and prevents them from ever gaining access to the funds
• b represents Eddie's ability to override Bob and to consent to Alice getting the funds.