The Trouble: a Bitcoin business protocol for enemies who trust no one in the world

A Problem

Imagine a situation where you want to have some kind of deal with someone you don’t trust, and furthermore, there is no arbiter to resolve a possible dispute that you could trust, either.

To make this even harder, imagine that your counterparty is anonymous or too powerful, such that there is no authority you can appeal to if things go haywire and counterparty refuses to cooperate further. Currently the lack of trust and enforcement makes such deals impossible to be handled in traditional ways.

The Bitcoin Solution

Bitcoin enables such deals today with a rather straightforward protocol, here’s an outline:

  1. Both parties agree on deal specifics and on an exact service value, in any way the see fit.
  2. They create a 2-of-2 multisig address and compose a single transaction where Buyer sends 2x of value to that address and Seller sends 1x of value to the same address.
  3. Multisig address script allows a locked value to be spent any time if Buyer and Seller cooperate OR becomes an anyone-can-spend script after a certain CLTV timeout.
  4. If the service is rendered such that Buyer has no objections then Buyer and Seller compose a single transaction which spends 2x of value to Seller address and 1x of value back to Buyer address.
  5. If anything whatsoever goes wrong then it’s up to Buyer and Seller to resolve this, in case if additional time is required they can always spend 3x of locked value to similar 2-of-2 address but with higher CLTV timeout.

Basic Game-Theoretic Analysis

The whole process can be seen as a sequential-move game of 3 stages between Buyer and Seller:

  1. Entering The Trouble by atomic commit.
  2. Seller rendering a service (Seller move).
  3. Getting out of trouble (Buyer/Seller move).

Here are payoff matrices for all stages of this game. As can be seen, at each stage including the final one the Nash equilibrium for both Buyer and Seller is to cooperate.

Payoff matrices

In the worst (2.2) case we can imagine that Seller has sent some package to Buyer but it got lost due to, say, earthquake on delivery route. Neither Seller nor Buyer are at fault, but as things stand they both are about to lose the most amount of value if they don’t cooperate further.

One possible way to resolve this is they can agree on anoter round of Trouble where Seller sends a larger package at a discount to reduce his losses and get out of trouble in best possible way.