Freedom Project – Application 3 of 26
Escrow Backed IOU Micropayments
Escrow Backed IOU’s open many doors when it comes to online micropayments for content. Micropayments allow users to pay exactly for the content they are viewing instead of relying on intrusive ad-based revenue models. Additionally micropayments can act as DDOS/spam disincentive.
Escrow backed IOU’s will function as a simplified, trusted version of Lightning Network. For many applications it will be an advantageous trade-off to issue escrow backed IOU’s. Escrow backed IOU’s provide semi-peer-to-peer, instant 0 cost transactions. Let’s say Alice plans on generating 1000 transactions with 100 different merchants for a total sum of one Big Mac. Alice will pre-load her account with one Big Mac on chain with the escrow agent. When spending, Alice will issue escrow backed IOU’s to the merchants. These IOU’s require the merchant to trust Alice’s escrow provider. Alice will be permitted to spend up to the amount in her escrow account. Alice will have a pre-determined amount of time to settle her IOU’s. Settlements will be made directly from Alice to the merchant, with one distinction. Instead of Alice generating 100 outputs in an on-chain transaction to each of her merchants, she will consult the escrow agent and make a single payment, to one merchant, for her entire tab, with the longest outstanding IOU of the escrow provider. Upon IOU settlement, the third party releases Alice’s escrow to once again be used as collateral for new payments. If Alice does not settle within the time allotment, then her escrow is released by the trusted third party to the merchants. The merchant will consult a third party service to provide reputation for escrow providers enabling the merchant to easily accept thousands of different escrow providers.
More Censorship Resistant Than Lightning Network
In order for LN to work, users must find a route across the entire network. This inevitably leads to centralization. Merchants are NEVER going to open thousands of direct channels with consumers. That would require them to lock up an impractical amount of capital, on top of being a giant headache. Merchants are simply going to open a couple channels with hubs in LN.
Using “Escrow backed IOU’s” enables the merchant to open an unlimited amount of trusted payment channels without locking up precious capital. This enables the merchant to easily make thousands of connections resulting in a more decentralized network and hence a more censorship resistant network. A quality which Lightning Network can never achieve. As escrow backed IOU’s only make sense for tabs under the size of a Big Mac, trusting the escrow provider with funds is not a real concern (anything larger than a Big Mac would just be done on-chain). The escrow provider is only trusted with transaction details (privacy). As outlined above, Escrow backed IOU’s will be significantly more decentralized and hence more private/censorship resistant than the alternative LN for microtransactions.
Please read the Freedom Project whitepaper to discover more innovative ideas and our proposal for mass adoption on Bitcoin Cash.