An escrow system for Bitcoin?
These are my thoughts on how to use crypto for exchanges that require trust, ones that usually have an escrow agent as an intermediary.
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It is often desirable to use cryptocurrency to make a purchase that involves a title transfer and/or physical delivery. Real estate, automobile purchases and certain monetary metals transactions would fit this description.
Third party escrow services are used in fiat currency transactions, especially with real estate, to hold the purchase funds as the title transfer and/or physical delivery takes place, releasing them to the seller only when all of the formalities have been completed.
Conducting such transactions in a Defi – decentralized finance – environment would seem to require a similar escrow arrangement. All of the pieces are already in place. Here is how it could work in a real estate transaction using Bitcoin with a Trezor wallet. The hardware wallet used, the item being exchanged and the crypto could, of course, be different.
1) Seller, seeking crypto, and buyer, offering crypto, arrive at a crypto-denominated price.
2) The seller purchases a hardware wallet such as Trezor and sets up a Bitcoin account. In the setup process he receives a 24-word recovery key representing the private key of the Trezor device. Per the instructions, he hand writes the recovery key and stores it in a safe place. He sets a PIN of up to 9 digits to connect the hardware wallet to the account.
3) He mails the hardware wallet and the access code to the buyer. The buyer uses the PIN code to access the account. The buyer then adds a passphrase to the account.
4) The buyer gets a public key from the passphrase protected account, to which he transfers the contracted purchase price to the wallet.
5) The buyer mails the wallet back to the seller. The seller is able to connect to the device, but not having the passphrase he is unable to receive the funds.
6) When the paperwork for the transaction is complete, the buyer sends the passphrase to the seller. At this point the seller, with the Trezor device and the passphrase, is able to access the funds.
Such a transaction will usually require a trusted intermediary, but one who never has access to the funds, for these reasons:
a) The escrow agent would verify and hold the 24-word wallet backup. Note that without the passphrase, which only the buyer knows, neither the escrow agent nor anybody else will be unable to access the Bitcoin funds.
b) The escrow agent ensures that the documentation for the title transfer is complete before telling the buyer it is OK to release the passphrase to the seller.
c) The seller will provide all parties with the identification of the Bitcoin transaction, visible on the blockchain, used to move the funds from the escrow account to his own crypto account.
d) The escrow agent or seller will forward the title documentation to the buyer.
e) Should the transaction fail, and the buyer need to regain access to the funds, to get the Trezor device itself or the 24-word private key backup back to the buyer, who can then use his passphrase to recover the funds.
The risk, should the trusted intermediary fail to perform, is that the purchase amount is lost forever on the blockchain. If it works as described, there should be little risk of fraud or failure to deliver.
This is only a proposed method. The key concept is that there are several layers of security, and only when the buyer has provided the seller access via all four can the crypto transfer take place.
a) Physical possession of the hardware wallet
b) Knowledge of the 9-digit PIN
c) Knowledge of the 24-word private key recovery
d) Knowledge of the passphrase.
This concept employs devices that I know. There are a number of protocols that employ two private keys in a transaction; I am sure that there will be many, perhaps better, alternatives to what is outline here.
Governments will want to regulate such escrow agents, as they will want to pry out the details of the transactions. My guess would be that since the escrow agents handle only information, not cash, it would be harder to force them into compliance. Moreover, they could be domociled anywhere in the world.
Those are the thoughts from Lake WeBeGone, where the strong man and good looking woman are preparing to host the Toastmasters BBQ tomorrow. Weather is gorgeous. Oksana is a wonderful hostess - these things always come off well.
I would not recommend Trezor. I would only use something like a Blockstream Jade Plus or, preferably, a Coldcard Q.
Bitcoin certainly supports multisig. There are different ways to achieve the actual signing which is beyond the scope of a comment. YouTube should be able to fill in the gaps about how this is done.
I have no idea what any sh*tcoins allow.
If you are looking to do a transaction like you are describing and want it to be mostly DIY, I'd reach out to Ben at BTC Sessions. If you want some institutional support, I'd contact Unchained.
You can have an escrow system only for pretty stable currencies. The US dollar has been shown to lose value over time, but its value does not wildly fluctuate. My single bitcoin transaction was to use bitcoin to buy an agricultural tool - I'd negotiated the price to be $60 including shipping. I had, when I made the deal, the equivalent of $100 in bitcoin. By the time the seller got the bitcoin, the value had decreased to $62 - and that was in less than a week's time. If the value had gone down to even less, which is what would have happened if delivery had happened three days later, the seller would have been within his rights to refuse the bitcoin as inadequate payment - and demanded more money in bitcoin... Bitcoin - and all crypto - is not a sufficiently stable nor secure store of value to risk in escrow transactions.