
Stop Saying Bitcoin Transactions Aren’t Reversible - tlo
http://elidourado.com/blog/bitcoin-arbitration/
======
ChuckMcM
Sigh. The author misses the point.

Amex can tell a Bank which is analgous to the BitCoin Wallet in this case, to
move your money from it into some other Bank, whether you agree or not based
on your agreement with Amex and the Bank's agreement with Amex. Nobody can
'force' a BitCoin wallet to transfer funds without the express permission and
co-operation of the person who has the wallet's secret key.

So in the example, seller and buyer agree on an escrow agent, seller sends
merch, buyer says they got it, transaction _completes_ , but if the buy _then_
discovers that the transaction was fraudulent [1] then there is no way for
them to "force" the seller to give them back their money or, in the parlance
of payments markets, "reverse" the transaction. Can't do it unless the seller
initiates a new transaction to send you the funds back, and if they don't or
won't, you are out of luck.

[1] (say only the top layer of kilos were cocaine and the layers below that
were just corn starch)

~~~
olalonde
> So in the example, seller and buyer agree on an escrow agent, seller sends
> merch, buyer says they got it, transaction completes, but if the buy then
> discovers that the transaction was fraudulent [1] then there is no way for
> them to "force" the seller to give them back their money or, in the parlance
> of payments markets, "reverse" the transaction.

I think _you_ are missing the point since the same is true of credit cards.
Credit cards typically freeze the merchant's money until a given chargeback
period is over or they require the merchant to always have a minimal amount of
money in their bank account. Even a credit card company can't reverse a
transaction if the merchant's bank account is empty. At best, they can refund
the buyer out of their own pocket.

With Bitcoin "escrowed" transactions, all those schemes are possible. If a
buyer wants to be able to reverse a transaction after X days, "chargeback
period", he can simply wait X days before he signs the transaction. If he
doesn't file a complaint within X days, the escrow is authorized to sign the
transaction. Obviously, the "chargeback period" should be agreed upon
beforehand between the seller, buyer and escrow.

~~~
ChuckMcM
I can only speak for the experience in US banks, your statement _" Even a
credit card company can't reverse a transaction if the merchant's bank account
is empty or if they do, they do so at their own cost."_ is not true. Bank
accounts can, and do have negative balances[1]. Both the banks and the credit
card companies, are in a position to attach liens, refer to collections, and
generally destroy the credit worthiness of an individual or a merchant as a
result of a dispute between the merchant and a customer, as a result of a
chargeback. The bank may be left with an unfunded liability, but they are
equipped with a number of legal ways to collect on that from the individual
who opened the account. The entire banking industry is built upon the singular
question of when and how liability is transferred. Further that structure is
backed by the enforcement arms of the government which has licensed the bank.
This is underneath the level of what the typical retail banking customer sees
or experiences.

You pay someone in cash, and they rip you off, there is no way for you to get
your money back except to sue them, send some enforcers around to threaten
them, or to steal something of theirs of equal value and sell it. This is
_exactly_ the same way BitCoin works. It was designed that way, and it is the
very definition of 'irreversible.'

Once a transaction is _complete_ there is no way for it to be reversed without
_both parties_ participating in the process. And this is fundamentally
different than a banking/payments system which _is_ reversible.

Now it would be possible to create a structure using BitCoin that would have
the property of being reversible, which is you bring a third party into the
mix, a Bank, and create a series of regulations and rules about how and when
transactions are voided and those institutions cause the reversals to
actualize in the respective accounts of holders. But that is not how it works
_today._ The current BitCoin payments system is equivalent to a bunch of
people walking around with suitcases full of cash.

You can argue it is a 'strength' or you can argue it is a 'weakness' of
BitCoin that completed transactions are not reversible, but it is a matter of
fact that this is a fundamental difference between BitCoin as a payment
mechanism and currency as a payment mechanism.

[1] I once participated in a long running conversation with Bank of America
about this when the account in question was mine. Remember, just because you
or I might not have any money in our account, it doesn't mean _the Bank_
doesn't have any money it can give to the Credit Card company.

------
vacri
This is not 'reversibility'. It's a go/no-go system, basically the same as an
escrow. The article is wrong in saying it's not escrow - the justification
used is "the independent party might sod off with the money"; that is a
downside to current escrow services when they go wrong, not the actual escrow
function itself. Multisig offers the same basic function as an escrow: an
independent third party signs off on the payment or the cancelling of it.

So, once a payment has been made, how does multisig _reverse_ the payment, as
the article title promises?

~~~
sjs1234
If I understand correctly the independent third party is only needed in a
dispute. If the buyer and seller are happy then completing the transaction
does not require action by anyone else.

This delays payment until 2 of the three parties sign off. From the buyer's
point if view that is reversibility. From the sellers point of view this is a
delay in getting paid.

~~~
the_mitsuhiko
People complain that PayPal freezes merchants accounts. But PayPal only does
that if the number of unsettled goods is too high. In this particular case it
would always happen because parties would not acknowledge a transaction for a
long time.

Chargebacks allow a merchant to get the money right away and still give the
customer the option to reverse the charge a month (or more later) in case
something happens.

~~~
nadaviv
Could the money really be considered the merchant's if PayPal can still come
later and take it back?

~~~
the_mitsuhiko
PayPal does not come back later, that's the point of paypal. PayPal hedges
against chargebacks and handles them itself. In case thinks you're above the
average risk, it will start freezing your account temporarily. But they will
never come back after 180 days and want your money.

On the other hand if you sell directly via credit cards, the credit card
company can come to you after 180 days and want money back.

------
socialist_coder
This is great. I had read about the M of N multi-signature support before but
from what I understood, it was half baked and not supported at all. I'm glad
to hear that it's usable.

Is there built in support for paying the mediator a percent or fixed fee from
the transaction or is it expected the buyer or seller would just pay them in a
separate transaction?

I paid for an asic bitcoin miner using bitcoins and after 10 months of non-
delivery I really wanted to just get my money back but then I realized I
couldn't. I had been so accustomed to being protected by credit card
chargebacks and bank reversals that I just didn't think about a bitcoin
payment as being non reversible.

It actually made me really cautious about paying for ANYTHING on the internet
with bitcoin because it is so easy for the seller to rip you off.

~~~
nadaviv
Hey, I'm the author of Bitrated. Yes, currently you're expected to pay the
arbitrator separately. I'm still thinking how to go about it exactly, and
might improve that in the future.

------
jseims
I find this title misleading.

What this post describes is a 2-of-3 multisig, which adds further encumbrances
in constructing a valid transaction.

But any transaction, once broadcast, is irreversible.

~~~
w-ll
Not to be pedantic, but that's not necessarily true; we've had 1 major chain
split before that killed ##'s of blocks containing thousands of transactions.

And also transactions that don't make it into a block will just die if the
original node doesn't rebroadcast it. So after 1 confirm it's _mostly_
irreversible.

~~~
olalonde
To be truly pedantic, those transactions were never Bitcoin transactions to
begin with since they were never on the Bitcoin blockchain :)

~~~
makomk
To be _truely_ pedantic, at the time they were on the Bitcoin blockchain, it
wasn't until well after the incident started that the developers and pool
owners decided to reject that blockchain (which was just as compliant with the
stated Bitcoin rules and had a mining majority) and switch to the other side
of the form.

------
maaku
If I send coins to an M-of-N multisignature output, I can't economically back
out once it's confirmed. In finance we have a special word for that kind of
transaction: irrevocable.

Stop Making Misleading Headlines That Aren't True.

~~~
aianus
You can't single-handedly back out of a credit card transaction either. The
credit card company has to agree with you and give you your money back.

Most people would, however, consider a credit card payment reversible.

~~~
bunderbunder
In the credit card situation, it's possible for the consumer to change their
mind for up to 180 days. If so, then the credit card company gets involved and
things move on from there.

If I understand this BTC mechanism properly (and I've never used it, so
disclaimer there), once the consumer says "yes" there's no going back as far
as they're concerned. Since the merchant is going to always say "yes" right
away, that means that the only way to approximate the level of consumer
protection that credit cards offer using this protocol is if the consumer
makes a habit of waiting up to 6 months to release funds to the merchant.
Which is something I wouldn't blame merchants for not being willing to accept
such a situation. Defaulting to "180 days, same as cash" sounds like a
terrible business practice to me.

~~~
aianus
That's not how the mechanism works. The buyer sends the money to a special
address which is like a staging area. The money cannot leave that staging area
in any direction (including back to the buyer) until two of the buyer, seller,
and arbiter agree on its destination.

~~~
ars_technician
i.e. not reversible. Once the buyer says they received the merchandise and
signs off, the money goes to the merchant. If after two days the merchandise
goes bad because it was fraudulent, the buyer is screwed. No 180 day waiting
period.

~~~
aianus
Ok but it's a pretty involved and rare scam sending a product which arrives
and appears legitimate and later breaks down.

~~~
vidarh
It's one of the most widespread scams around: Sell cheap counterfeits.

------
sfjailbird
Not technically related, but wouldn't any bitcoin transaction be covered by
consumer protection rules anyway? Like if I had paid cash in a shop?

I pay a certain amount into a seller's publicized bitcoin wallet and I have a
receipt from the seller explaining what I bought, the agreed amount, terms,
etc. Same as a cash transaction?

~~~
pbreit
Yes, but on far worse terms than when using a credit card which also entail
Visa/MC rules which are specifically designed for transacting parties.

------
pesenti
What's the protection against double spending given that the transaction isn't
yet broadcast? Imagine that I am the buyer and as soon as I receive the goods
I double spend what was on my key. If the third party signs the transaction,
wont it fail because the funds will already be spent?

~~~
givehimagun
I think this is why most merchants who accept bitcoin won't consider the
balance paid until it has been confirmed x times.

I vaguely remember Humble Bundle having some verbiage about confirmations
before completing the sale.

~~~
vertex-four
I've bought from the Humble Store twice recently, both transactions have been
accepted instantly (i.e. before being included in the blockchain).

I don't believe that anyone's heard of a successful Bitcoin double-spend
attack against a competent merchant yet.

~~~
ars_technician
That's because protection was added (about a year ago I think) to rapidly
broadcast detected double-spends through the network. Before the canary
function, it actually used to be pretty easy to get a double-spend accepted
into the network within 5 minutes of the first spend.

------
hrjet
This is nice; I hadn't heard about m-of-n txns earlier.

But on the con side, unlimited, distributed arbitrators may not work out in
practice. The more the number of arbitrators, the smaller the intersection set
of arbitrators that are trusted by two unrelated parties.

~~~
eurleif
Not with a reputation system. Perhaps the reputation system could even be
based directly on the blockchain; just sum the total BTC the arbitrator has
arbitrated in the past.

~~~
davmre
The naive total-arbitrated-BTC solution wouldn't work, since someone can
always arbitrate a bunch of 'transactions' between sockpuppet addresses they
themselves control. But as long as there's some mechanism to pay arbitrators
for their services, it seems reasonable to expect a small set of trusted
arbitration services to spring up, analogous to CAs. Of course, once you're
paying an arbitration fee on top of a bitcoin transaction fee, it's not clear
that you're saving any money relative to a standard credit card transaction.

~~~
eurleif
How about max arbitrated transaction? It at least requires significant capital
to be a scammer.

------
trekky1700
A multisign service like this would be very difficult to make worthwhile. On
small transaction, it would be hard to justify doing an investigation for a
rate that would be worthwhile to the parties involved. It works well for Visa
because Visa's already handling everything. Having these investigation
services encourages people to use Visa, due to the peace of mind. It comes
with it. With this type of service, you have to seek it out, pay for it
separately and pay enough that this party will actually do an investigation.
Obviously, it would have to work like insurance, were a majority of people
aren't being scammed, but it's a difficult business model to comprehend.

------
jluxenberg
The Bitcoin ledger doesn't provide credit. There's nothing stoping someone
from offering a credit account (e.g. a consumer credit card) denominated in
Bitcoin.

~~~
socialist_coder
How is that relevant here?

~~~
gabriel34
It's relevant because the article opens up comparing BC and CC. If there were
a credit card denominated in BC, the credit provider would probably hold the
BC for a while just like they do with money, therefore grating it's users the
same warranties.

A better, tough far from perfect, comparison would be to sending money through
mail to later receive the goods, or a debit card sans the paper trail.

The article starts from a fallacy, but that doesn't mean it's point is null.

~~~
socialist_coder
Understood, thanks for the now-obvious explanation =)

------
logfromblammo
Even a 2-of-2 transaction would work, without any arbitrator, if both buyer
and seller place additional funds at risk and specify a verifiably neutral
means to sacrifice funds in a non-destructive way. This could be as funding
the jackpot of an automatic lottery, giving to the EFF, or as a prize added to
the next block mined--any transaction that is verifiably not controllable by
either party.

The seller commits the sale price in bitcoins. The buyer commits double the
sale price. If both agree the sale was good, the seller gets what the buyer
committed, and the buyer gets what the seller committed. If both do not agree,
the entire amount goes to the verifiably neutral address, or becomes a
windfall for the next block miner.

If the buyer cheats by accepting the goods and rejecting the transaction, he
pays double the sale price for it. The seller is twice as screwed as usual. If
the seller cheats by failing to deliver, he loses the cost of the item, and
the buyer is twice as screwed as usual.

Normal transaction: There is a Nash equilibrium for both parties reneging. You
cannot buy or sell with confidence unless you have a retaliation strategy,
like chargebacks and blacklists.

Bonded transaction: The only Nash equilibrium is at both parties being honest.

~~~
genericuser
The bonded 2 of 2 having a Nash equilibrium only when both parties are honest
makes some assumptions that leave some opportunity for abuse regarding
comparative advantage.

For instance if I the seller benefit from having the purchaser lose money. I
can remove twice as much money from the other party as from myself.

Extremely Hypothetical Example: Party 1: Rich Grape grower Party 2: Upstart
Raisin maker

Party 1 sells grapes to party 2 which sells raisins, party 1 decides to enter
the Raisin market off party 2 demonstrating its profitability. The next order
for N bit coins worth of grapes Party 2 places never arrives, party 2 is now
out 2N bitcoins which to them as a small bussiness is huge and may delay or
reduce their next order from an alternate supplier, Party 1 is out only N
bitcoins which to them as an established business is minor and they have hurt
the existing player in the market they are about to enter.

~~~
logfromblammo
Your hypothetical example shows that you know nothing of raisin farming. The
grapes are laid out on paper next to the grapevine, and don't move a
centimeter until they are dried. Moving grapes that are mostly water to be
dried at a second location is a waste of cargo capacity--you would be moving
water just for it to be evaporated somewhere else.

But let's fix it by changing the grapes to ARM CPUs and the raisins to tablet
computers. The chip fab decides to stiff the customer intentionally. You still
didn't say who the known reneg recipient is. Perhaps an open-source tablet
software project? If it is someone both parties are likely to support anyway,
they simply reduce their donation by the reneg amount and blacklist each
other.

With high-value supply-chain transactions, you probably want a lawyer-written
contract in place and at least one face-to-face meeting. At the least, you
know who the supplier is, and can go break his kneecaps with your lawyers. Or
you pick an arbitrator and do 2-of-3.

The bonded 2-of-2 is pretty much just to solve the problem of non-recurring or
rarely-recurring consumer-level transactions. If you want to buy weed online
and can't trust a third party, you can put up bonds. If the assumptions of
bonded 2-of-2 don't hold, you don't use it. One such assumption is that the 2
parties are anonymous and cannot trust anyone or effectively retaliate.

It could certainly be gamed. The FBI could take all of its Silk Road seizure
coins and put up as many fake bonded 2-of-2s as possible. In the end, it would
probably just end up funding a "legalize pot" PAC with a massive amount of
coins, since it would still have to designate a credible reneg recipient,
which must be clearly identifiable.

------
tlrobinson
I agree, though he's using a different meaning of "transaction" than is
normally used in Bitcoin. I'd call it "payment" or something.

It's kind of like saying IP isn't a reliable transport protocol, which is
true, but a reliable transport like TCP can be built on top of it.

Bitcoin _transactions_ aren't reversible, but _payments_ can be.

------
SilasX
Dourado is right -- but only in the same sense that physical cash transactions
"aren't reversible".

Which is to say that:

a) Once the transfer is made (of physical cash or bitcoins), then only a big
show of force against the right people can reverse it.

b) But you can still layer an escrow particle on top of bitcoins and physical
cash to extend the window of (non-forced) reversibilility.

It's still meaningful to say that bitcoin transactions in themselves, per the
protocol, are irreversible.

(And it's still stupid to promote Bitcoin on the false, flaky grounds that
somehow makes chargebacks impossible, even if the parties agree to enable
them.)

------
gesman
Stop saying that someone should stop saying anything

------
TheRubyist
Seems like Bitcoin doesn't have lots of tools to be considered as reliable
payment tool for every possible scnerio in which current currencies are being
used without issues. I'm wondering how this and other informations could
impact on bitcoin price in the future

------
mmaunder
The point the article is making is that: Saying "Bitcoin transactions aren't
reversible" and then using that as a premise for a "well it's fucked before
getting out the gate" argument is bullshit. Reversible transactions will
emerge with very little friction because the currency has the m-of-n feature
and there's a clear business model for service providers to be the trusted
third party.

------
dzshx
it's called escrow service

------
jczhang
lol somebody listens to KCRW...

------
whitcrrd
bitcoin transactions aren't reversible.

