|
jehst
|
 |
January 05, 2015, 08:48:28 AM
Last edit: January 05, 2015, 09:32:08 AM by jehst |
|
There is a connected issue lurking here that is going to pose a problem for Freebazaar. It's volatility. If I sold something on Monero Freebazaar two days ago, and the XMR was held in escrow, then my profit margin (calculated in the currency that my costs are priced in), would've almost certainly been erased by XMR/BTC's plunge. Users don't have a way to hedge against Monero's volatility.
With bitcoin, there are well-developed margin trading and options trading platforms now. If a merchant is selling 2 BTC worth of merchandise on Freebazaar, and 2 BTC is put in escrow, he can immediately borrow 2 BTC on Bitfinex and sell them for his desired currency. If bitcoin's price plummets, he takes no risk. When the 2 BTC are released from escrow, he uses those BTC to cover the short. Of course, this may be complicated and time consuming from the merchant's perspective. First, it requires the merchant to keep some USD on Bitfinex as collateral in order to borrow the BTC. Money that will be sitting there doing nothing, which is an opportunity cost. Second, borrowing the BTC also comes at a cost in the form of interest. Third, selling the BTC incurs fees. Fourth, there is counter-party risk in leaving funds on BitFinex. So hedging comes at a cost.
Let's go back to the basics. What do we want out a customer-merchant transaction:
We want (at least):
1) Security for both parties
2) Low costs for both parties
3) Convenience
But, like Zooko's triangle, we are finding it difficult to satisfy all three at the same time.
If we make the customer safe by using escrow, the merchant's costs go way up due to volatility.
If we lower the merchant's costs by letting him get paid upfront, the customer's security goes way down.
If we tell the merchant to go on Bitfinex and do short sales every time a customer escrows funds, that is inconvenient and costly as well.
So what is the market's solution?
1. In bitcoin's normal clearnet marketplaces, the customer often simply forgoes any consumer protections such as escrow and trusts the merchant. He trusts Dell. Dell has a long history, a solid return policy, and there's little risk. In an extreme scenario involving a very large order, the customer can sue Dell in court and they will likely arrive at a settlement. This is a reasonable situation, especially if the merchant gives the customer a discount in exchange for the costs that the merchant will save (no charge-back fraud). The customer is happy to receive the discount. The merchant is also happy, as he can utilize a payment processor such as Bitpay or Coinbase to immediately convert some or all of his payment into government fiat. He no longer has to deal with fraud.
2. If you look at bitcoin's dark net marketplaces, the market's solution is the same. Customers voluntarily give up escrow and pay anonymous merchants upfront. These merchants offer discounts in exchange. This is known as "FE" (Finalize Early).
Finalize early: This is the release of escrow funds before the seller knows that the conditions of the contract have been met. This is used to reduce seller risk from BTC price fluctuation, and against market shutdown. This is also used to scam buyers as after the escrow has been released there is no recourse for the buyer if the seller does not deliver on their promises. As you can imagine, customers are frequently scammed after they FE.
The prevalence of FE in anonymous darknet markets means that customers are not using multi-sig or escrow even when it is available and offered by default.
To bring it all back to XMR Freebazaar, my conclusion is thus:
The market has already rejected the escrow approach (which is what Freebazaar uses) in both the clearnet and the darknet markets. Escrowed cryptocurrency is far too volatile, making costs for merchants prohibitively high. Even in the world of government fiat currencies, where volatility is not a problem, the escrow approach is not often used except in special circumstances. It is used in far less than 1% of online transactions. The market consistently settles on security-imperfect solutions in exchange for speed and convenience. We can sit here and call these customers stupid for giving up their security, and we can create high-security, decentralized platforms such as Freebazaar to use Monero on, but this is simply not what people want. So it's not going to be used.
|
