Escrow Services with Blockchain technology

Framework of Bitcoin Escrow Services

July 2017 Note: The information contained in this article is was accurate at the moment it was written. Some companies, protocols, or solutions may be outdated, replaced, or no longer supported. Please conducted additional research.

Escrow services in the bitcoin network have slightly different responsibilities than other financial escrow institutions. Traditionally, an escrow performs duties as a representative of a particular account. An escrow can pay obligations, with designated funds, allocated for the purpose of paying those debts. Escrow services are useful for dispensing funds or documents as a neutral third party in various exchanges. Escrow services do not release their contents until agreed conditions are met. Escrow services acting in the blockchain are generally not exchanging and holding funds for later payment but rather exchanging public and private keys to perform their function as an escrow.

When using bitcoin, the importance of securing your private keys can not be stressed enough. If access to a private key is lost, all funds associated with the paired wallet are lost. Funds will not be able to move into a different bitcoin wallet because when a private key associated with a wallet is lost, transactions cannot be verified. Therefore the funds are immovable. Bitcoin transactions are irreversible and there is no central system to restore funds. As a result, securing private keys is incredibly important to protecting the bitcoin associated with that key. Single point failure is more common when handling a single private key. An alternative to a single private key is to have multiple keys associated with your wallet and have those keys stored separately.

Multi-signature verification (BIP-11 & 16) is a higher tier of bitcoin wallet security that require a function, M-of-N, to validate funds. M-of-N represents the number of keys needed to verify a transaction. 2-of-3 is the most common security measure for multi-signature bitcoin wallets and is more secure than a single private key. BIP-32 is the framework for creating multi-key verification . Hierarchical deterministic wallets are designed create “child” keys from their respective “parent” keys. A public parent key can create a public child key, and a private parent key can create a child private key. This system enables a parent key to be constantly used without having to compromise the location or the owner of that private key.

Creating additional administrative barriers can become a nuisance for many companies. Key security is a difficult concept for many business that have not interacted with bitcoin or are fairly new to the technology. There needs to be strict documentation, auditing policies, compliance reports, access lists and many other administrative hurdles that need to be functioning to provide an intermediate level of security. Multi-signature bitcoin wallets create the need for new escrow services that offer to securely manage private keys and authorize transactions.

Companies Offering Bitcoin Escrow Services

Third Key Solutions

Pamela Morgan, Andreas Antonopoulos, and Richard Kagan began this key management and consulting firm in late last March. As a neutral consulting firm, Third Key is merging leading industry standards with bitcoin security functions. Key creation and secure storage are the most impactful service that a bitcoin escrow firm can provide. Additional escrow services that are offered from Third Key Solutions include:

• Customized multi-signature administrative procedures
• Integration with other leading bitcoin firms such as
• Armory
• Gem
• CryptoCorp
• Compliance with the soon-to-be ratified CryptoCurrency Security Standard

Key recovery services are a new business entity. As bitcoin use increases, more escrow services may sprout out of necessity for a higher need of secure key storage. Escrow services currently in the bitcoin realm are coordinating efforts to create a Key Recovery Network that is slated to be completed by summer 2015. This Key Recovery Network is an attempt to create industry standards in the realm of key storage and signing services. Currently this network includes Third Key Solutions, Armory, C4, and Keepr.

Private key security is one of the most important topics to comprehend when using bitcoin. Single key verification is a default security measure for many bitcoin wallet services. Multi-signature verification is not a requirement to using bitcoin but is one of the easiest ways to increase the security of your funds.

Honoring Contracts with the Blockchain

Emergence of Smart Contracts

Contracts erect the framework of partnerships. Clearly established expectations and goals drive plans into completion. Trust is established by a legal obligation to perform the duties and responsibilities outlined in the contract. Decentralized networks are trustless and could create new forms of contracts. Oracles are programs that verify specific inputs are entered and validated before releasing pre agreed outputs. These outputs could be a payment for a service, a release of funds, or the outputs could create new contracts. Bitcoin can create distributed contracts via the blockchain. In a separate blog I wrote about a decentralized job board, LivelyGig, that could monetize individual tasks for outsourcing. This is a separate contract agreement for micro tasks that stays within LivelyGig’s network.

An oracle is only a script, a function awaiting desired inputs. The only limitations of a contract are the constraints outlined in the agreement. A smart contract uses the outline of the agreement to contain releasing an output (payment) until a certain prerequisite has been met. When prerequisites are met in a smart contract, finalizing payment is only delayed by human interaction. The owner of the private key withholding payment in a smart contract must have no interest in the contract for the agreement to be completely trustless. This is the opportunity for new services offering oracle smart contracts to emerge. A company, SmartContract, emerged late last year and are one of the first to offer smart contracts.

You are the district manager for a regional business branch. You have received word that servers are down across your district and a technician must be dispatched to repair the network immediately. Your servers are located off site and in a remote part of the district and it would be impractical to send an employee to troubleshoot. A solution could be formed by using micro task payment channels and oracle contracts provided by decentralized services. Combining the automatized payment of oracle created contracts, with a payment system for micro tasks and you have a new system for sending contractors to remote sites to fix equipment. The contract would await specific inputs before providing payment. A GPS location can provide an input that the contractor arrived on site. An additional input can be created once a specific metric is reached (operational performance being restored). After the job is complete the output (payment) can be sent to the person who completed the contract with no additional involvement from the district manager required.

This example is not too far fetched and is a practical application for a service that does not quite have a large market at this time. Oracles have an autonomized payout by verifying inputs from each party. The service that creates the oracle will need a private key to verify that the transaction inputs are The oracle in the previous scenario can be set to pay out once connection can be reestablished with a specific server.

Trustless Decentralized Connections

Mesh Networks and Monetizing Unused Bandwidth

“We are thinking, what is the future of communication.”

This is one of the key phrases that came from Google’s Fi announcement this week. Big names in western technology are now exploring a communication concept already in use in other parts of the world. Mesh Networks are a primary means of connecting communities to give internet access over a large distance in the developing world. Wireless Mesh Networks allow communication by using radio redistribution points to gain access to the internet. A user will connect between nodes to gain access to the internet. This method uses a series of routers to create a wireless network that can reach over long distances by bouncing data from one node to the other. Established mesh networks can provide fast connectivity with dedicated nodes to boost signal strength or perform routing. Mesh networks are managed in a centralized or decentralized fashion. Centralized servers can be created or the network can be self sustaining in a decentralized manner. In a more decentralized mesh network, as one node becomes unavailable, the network protocol searches for the next available node to transmit to. This is a very cost effective method for creating network infrastructure as there is no single point of failure and it is rather inexpensive to create.

The reliability of mesh networks is creating communities with internet access they could not afford or were not able to previously. Political or geographic constraints are now eliminated with the establishment of a wireless mesh network. Many developing nations do not have the resources to build large scale infrastructure projects. In South Africa, mesh networks are growing in size and are creating new advancements in the technology. A small level of technical knowledge can now give internet access to any sized community. This network lead to efficient sharing between users and created a new marketplace with a bit of ingenuity. This ingenuity is what sparked the creation of a bitcoin company in Santa Cruz with a unique solution for unused bandwidth.

BitMesh

BitMesh has recently created interest as one of the first companies to use bitcoin to sell unused bandwidth. Creating a market selling unused bandwidth reliability and security will take time, but the implications are what excites observers. While away from your home network, you could lease your unused bandwidth and receive bitcoin for acting as a node for someone purchasing your bandwidth. BitMesh has a development phase before a full public release. Security will be the most important factor when creating a decentralized network of any kind. Bitcoin is the vehicle for services like mesh networks that want to create microtransactions that could not be done with traditional forms of payment. Micropayments using bitcoin take advantage of no transfer fees and are leading to the creation of other product markets. An example is the emergence of IoT products.

Creating a safe market built from mesh networks will be challenging. Articles have been published covering the challenges with creating a monetized internet access market with bitcoin. The most common concerns were creating secure networks, protection from false nodes, and participation. Many people already have home networks and may not require additional connectivity. With the announcement of the Google Fi service this week, there is validation that there is a market for retroactive internet connectivity. Mesh networks are designed to be as dynamic as it's users wish to be. Mesh networks providing internet services will be drastically different than BitMesh's service that offers micropayments for unused bandwidth. Technology firms are only beginning to explore this new level of connectivity. These types of communities could become more common in more developed nations once the technology to create these dynamic networks becomes more readily available.

Critiques of Blockchain Technology

Critical Assessments of Bitcoin

Bitcoin and blockchain technology have their fair share of critics and controversial topics. These topics frequently appear during conversations about Bitcoin. Knowledgable and influential figureheads from varying backgrounds have differing opinions about Bitcoin. Figureheads such as Warren Buffett and Bill Gates share a hesitant stance on the technology until more research have been gathered on various cryptocurrency nuances. Developers and executives of bitcoin companies give answers to common concerns and criticisms of bitcoin in various forms of media. A critical view on new technological services improve the overall health of the network. These responses are available from various public discussions in internet forums, video streams of panel discussions, or even skype conferences. A glimpse below gives a better understanding of various bitcoin and blockchain functionality from the leading influencers in their respective business sectors.

Price Volatility

“Bitcoin is an exciting new technology. For our Foundation work we are doing digital currency to help the poor get banking services. We don't use bitcoin specifically for two reasons. One is that the poor shouldn't have a currency whose value goes up and down a lot compared to their local currency. Second is that if a mistake is made in who you pay then you need to be able to reverse it so anonymity wouldn't work. Overall financial transactions will get cheaper using the work we do and Bitcoin related approaches.” - Bill Gates Source

Bill Gates gave this statement during a Q&A session he did on reddit a few months ago. This is commonly heard around discussions of creating infrastructure for future bitcoin products and future investments in bitcoin or other cryptocurrency. A common issue with volatility is who takes on the risk when the price adjusts unexpectedly. The price of Bitcoin has fallen to nearly a fourth of it’s peak price two years ago. There are a few bitcoin companies that are offering FDIC type security for holding bitcoin. Coinbase and Gemini (the Winklevoss Twins new venture) are the first wave of bitcoin companies that are offering FDIC type insurances for their customers. An alternative outlook of bitcoins changing prices is the growth bitcoin experienced prior to the fall in price. Bitcoin rose from a few dollars in value to over a thousand in a few short years. This high demonstrated volatility is a risk if someone is relying on Bitcoin as a sole investment or payment method. The value of bitcoin is not solely dependent on its use as an investment property.

Lack of Regulation Concerns

“Mt Gox happened a few years back, where a lot of people had virtual currency that they thought was safe. I think the bill is partly a response to things like that.” - Spokesperson for the Chairman of California’s Banking and Finance Committee

From California Regulation Discussions and New York State’s BitLicense Proposal

Licensing, regulation creation, and drafting other federal documents are proving challenging for many regulators. Scandals that have rocked the bitcoin space have left many with no choice but to hold an iron grip on allowing bitcoin businesses to develop. The bitcoin protocol has no central authority. There are active developers, contributors, and players in various domains, but no group controls the outcome of how bitcoin performs. Bitcoin works on a constant validation system. When new features are introduced to Bitcoin Core, they are rolled in in small phases, and no one is obligated to upgrade to the last version. Once a version is used by a majority of blocks, it is then considered a ‘main’ feature. The blockchain is a decentralized ledger that all bitcoin transactions are recorded to. This ledger is accessible to anyone and transactions are immutable.

There is no blacklist of ‘bad’ bitcoin and alternatively there is no whitelist of ‘good’ bitcoin. Bitcoin’s can be traced by outputs from wallets to an origin destination. If an individual wanted to reject a specific set of bitcoin, they have the ability to. This doesn’t affect anyone in the bitcoin network except the specific individual who is restricting the amount of bitcoin they are willing to accept. Creating a black or white list of bitcoin is generally seen as a negative idea. Once someone creates a list, it will need to be updated. Various versions of the list will become dispersed, and consumers will have a very difficult time validating their version of the blacklist because there is no central authority in the bitcoin protocol. A lot of responsibility when using bitcoin falls on the user to protect their own funds which is a deviation from the traditional banking framework.

Properties of Bitcoin

2.5 Billion people are without a traditional banking system. The rise of bitcoin in the last few years have started conversations about what constitutes a valid currency and how new currencies create value. Bitcoin is a useful form of money that can be exchanged regardless of the origin of the participants involved in the transaction. The characteristics of money are defined by scarcity, divisibility, portability, durability, fungibility, and recognizability. Bitcoin meets the requirements to be considered a viable form of money. As no central authority owns the bitcoin protocol, a transaction can be recorded on the blockchain that ties ownership of a good to the owner of those bitcoin. This creates a new value creation tool for goods that previously were not able to be traded outside of a regional market.

The properties of bitcoin are defined by mathematics, rather than value based on material goods or issue by a central authority. The value created by these algorithms  molds a currency that only relies on trust and the level of adoption. The adoption of bitcoin is measured by the frequency of users, merchants, or other parties exchanging the currency and the level of acceptance. An increase in the frequency of bitcoins exchanged does affect the price.

Bitcoin’s price is created by supply and demand. As demand for bitcoin fluctuates, the price will also change. When demand for bitcoin decreases, so does the price. There will only ever be 21 million bitcoins created. This creates a predictable rate of how many bitcoins will enter the market and inflation can be predicted if demand does not match the level of inflation. If the level of demand does not match the changing level of inflation, the price will fluctuate. Bitcoin’s overall market share is relatively small, and because of this small pool of currency, the price can become volatile when significant amounts of money are exchanged.

If bitcoin as a currency does not reach a high level of adoption, it can still hold value. Romans used the silver denarius as a means of exchanging currency and the coins still hold value today even though the coins are no longer in circulation. As long as there are people using bitcoin they will hold value. The usefulness of bitcoin boils down to trusting the reliability of the decentralized ledger and using bitcoins that are validated and recorded on the blockchain. Transactions being recorded on the blockchain, verified, and posted are referred to as blocks. It takes approximately ten minutes to solve, or validate, a block. There is an analogy I enjoy using from a talk Andreas Antonopoulos gave at MIT that describes the adjusting difficulty of validating a bitcoin transaction.

The analogy begins by describing a room with 50 people, each with their own Sudoku puzzle. The amount of rows and columns have been calculated to have the Sudoku solved in approximately 10 minutes. A reward is posted for the first person to solve the puzzle at 25 bitcoin. As the timer begins people have started to walk towards the front of the room to have their puzzle solution validated as correct. After 9 minutes of continuous attempts someone shares the correct solution, and is paid 25 bitcoin. The next round begins and someone solves the puzzle in 8 minutes. The puzzle is made more difficult as rounds are being solved faster than ten minutes. More rows and columns are added to the puzzle to adjust the time taken to solve the puzzle on average. After a few more rounds, a large crowd enters the room and now 500 people are attempting to solve a puzzle in 10 minutes. More rows and columns are added to the puzzle to adjust for the number of new players. The players are randomly guessing and checking their answers until the correct answer is discovered. That random element is also used in the bitcoin protocol as cryptographic nonces assign values to each transaction so it can be verified.

These basics give an overview of the technical complexity of bitcoin. Financial inclusion will increase for unbanked individuals as more consumers begin to use bitcoin and adoption increases. The ability to increase financial inclusion without the risk of fraud, laundering, or other negative financial disruption is unique feature that bitcoin offers. Economic uses of bitcoin are just the tip of the iceberg for the usefulness of the technology. Read other posts on the sidebar or an expanded look at how blockchain technology is affecting other industries.

Bitcoin Payment Platforms

Accepting Bitcoin as Payment

Where to start

The benefits of accepting bitcoin as a form of payment is a discussion had at almost all bitcoin events. Moving away from credit card transaction fees, minimal transfer fees, and the algorithm validating the creation of bitcoin appeal to merchants or individuals that want to accept bitcoin as payment. The number of transactions that are being completed are considerably increasing each year. The complications of accepting and exchanging bitcoin however, are exasperated if a small business owner doesn't understand how to adopt bitcoin into their current payment structure. It is recommended that as you are accepting bitcoin that you advertise with a small sign declaring that you offer a bitcoin payment option.

There are a few ways to accept bitcoin. One is through a bitcoin payment system that offers support for web based payment systems. Bitcoin payment systems offer conversion options that can automatically exchange currencies from BTC to the currency of your choice. If you are paying suppliers, employees, or other merchants the business owner can set their a conversion rate based on current market price. The set price point can be calculated by looking at popular bitcoin exchanges and finding an up to date exchange rate.

A few payment processing systems have a large pool of systems with bitcoin integration. Bitcoin payment processors have grown in the last year and POS systems are beginning to adopt bitcoin with just a few setting changes. Bitpay is an active payment processor that is rapidly acquiring new partners that have adopted bitcoin integration. Using DC POS with your Bitpay account, you can enable a Vend POS system to accept Bitcoin in 7 steps. The SoftTouch POS system, mainly for restaurants, accepts Bitcoin as well. Other methods include mobile platforms that allow your customers to scan a QR code to complete a transaction. Gift cards can also be purchased with bitcoin and can be used as a substitute for the above payment processing methods if conversion is too cumbersome or the risk is too high for you to accept direct bitcoin payments.

Here is a visual infographic, from CoinTelegraph, of information I provided above:

Considerations

There are other areas of finance that do not have such clarity on how bitcoin payments are processed. Taxes, and accounting procedures have yet to create a uniform standard for bitcoin transactions. I am not qualified to give advice on these matters so I will not be giving direct guidance, but there are resources available for further research. The risks with accepting bitcoin are not unfounded either. The risk of fraud is high, and new regulations attempting to derail the increase of fraud, is making accepting bitcoin a more complicated process. The more blocks that are confirmed, the more validation those transactions have. So if you are trading in large denominations, waiting for more blocks to be verified, decreases the amount of risk you have for double spending. Be mindful for fraudulent QR codes and addresses that your customers may interact with attempting to pay you, but funds are sent elsewhere. There is no central banking system for bitcoin and if funds are sent from a customer to a malicious third party, you will not be able to recover the mispent bitcoin.

Mining Pools and Reward Systems

Combining Hashing Power

Individual Mining Shifts to Mining Pools

In the beginning years of Bitcoin, personal mining computers were a possible means of verifying transactions and earning BTC. Now, a personal computer will have a statistically low chance of solving a block, and the energy consumption required to successfully mine a block makes the endeavor a negative investment. Mining Pools are a function of the Bitcoin Protocol that allows miners to combine resources and pool hashing power to increase their collective odds of validating blocks with other miners. Reward for solving a block are split between users who participated in the mining pool towards solving the block. Hashing power is the gauge of computing power that a pool possess. The distribution of hash rates amongst miners can be found at blockchain.info.

Mining Pools

The payment of 25 BTC that is awarded after successfully validating a block, can be split depending on the distribution model of each mining pool. A share is created by the client when a user provides a valid Proof-of-work for a lower difficulty than the current level of difficulty. Each share on average will give you the block reward after pool fees, divided by the difficulty. If the BTC reward is 25 BTC, the transaction fee is 2%, and the difficulty is 250,000, each share will give about .000098 BTC or 98 μBTC. There are various reward types available, here is a sample of a few popular reward structures:

Reward Types

Pay Per Share [PPS]

Each share that is solved by the miner is given a value of BTC. This method is a guaranteed way for a miner to be instantly paid for their contributions. The pool operator is the carrier of most of the risk but the payout are distributed fairly. The level of shares required to solve a block is dependent on the level of difficulty. This type of reward system is difficult to maintain. A large reserve of bitcoin must be able to payout to miners in the event of long periods of not receiving any rewards.

Proportional

When a block is found, a miner is paid based on the based on the proportion of shares the users found individually.

Pay Per Last N Share [PPLNS]

After a block is found, payment is configured based on a maximum set number of shares instead of just distributing rewards based on the total number of shares during that round. If a user does not have any shares in the window of shares that are being rewarded, there will be no payment to the user. This window of accepted shares can pay out miners from past rounds even if they did not participate in the current round. The number of shares contained in a PPLS reward system vary based on the level of difficulty set to each block.

Double Geometric Method [DGM]

This is a popular type of reward distribution model that puts some risk with the mining operator. A score value is set to each miner and payment is based on that score. As rounds are completed, scores can be carried over but vary based on the level of difficulty of previous blocks. The longer the round between each block, the higher the score the user can transfer. This reward system is considered a geometric method because shares decay in geometric sequence in two directions. Every share found and every block found decreases the variable score. If users have too high of a score, a periodic rescaling can be applied. This ultimately rewards the user with a small score during short rounds, and during longer rounds the score can accumulate that decays at an calculated rate.

If you are interested in mining or mining pools, I recommend understanding the reward system that each pool offers before deciding to dedicate resources. Mining Pools have large amounts of processing power in the Bitcoin Network but do not steer the direction of Bitcoin development. Bitcoin is a consensus protocol. This consensus network is decentralized and spread out throughout all users participating in the economy. If a mining pool tries to cheat the system in some way, by creating false coins, starting disruptive forks, or other malicious modifications, those coins can easily be tracked and marked as such.