How decentralised escrow holds the key to disrupting the e-commerce tech monopolies

by Anton Churyumov, founder of Obyte

The ability to trust people you haven’t engaged with and will never see in person is one of the key innovations to emerge in the last decade that could significantly alter the way people trade with each other.

Traditional contracts require the parties to trust each other before starting a business relationship. If the buyer pays first, they have to trust the seller that they’ll ship goods or provide the services after receiving the payment. If the seller ships goods or provides the services first, they have to trust the buyer that they’ll pay for the goods or services. Either way, at least one party has to take on risks of some kind.

These risks are often mitigated by reputations, and the business entities with established good reputations are considered lower risk. This also means new entrants and start-ups face  a real barrier to entry as they look to establish confidence with the people and customers they are looking to engage with.

Businesses tend to stick to what/who they know and retain existing partners rather than trying new ones, which is why supply chains tend to be more rigid, less dynamic than they could be. There’s also the problem of what happens when disputes occur between consumers and traders, although they can be solved amicably, sometimes there is subjectivity in deciding whether or not the terms and conditions have been met.

Traditional legal processes for disputes are slow and too expensive for most business transactions. Some centralized third parties such as eBay, Amazon, PayPal, connect many small merchants and buyers, the users only need to trust only the central platform rather than each other. In case of a dispute, the platforms provide a lightweight dispute resolution process.

However, these platforms are often both middlemen and monopolies. They have their own agendas, not necessarily aligned with the interests of buyers and sellers, using their market dominance they are able to pursue those agendas at the expense of buyers and sellers. For example, they might extract high fees or heavily intervene against free markets.

These tech monopolies have grown in the last two decades to have immense power and wealth that remains unchecked. They harvest users’ data and due to network effects have built an entrenched position and advantage over potential newcomers.

Smart contract technology however enables people to connect and trade free from intermediaries and centralised third parties. In cases when the contract parties disagree about the final product or service, arbiters can play a role in deciding who’s right and if the conditions have been properly met. The smart contract provides the decentralised escrow where the funds are stored for the full duration of the contract.

For this to work, arbiters need to be vetted, have their performance monitored to ensure their services are timely and professional, have dispute requests routed, and should for some reason arbiters not meet these standards they would be delisted.

Arbiters can charge fees, however the crucial point is they are spread far and wide, open to anyone interested in participating not controlled by a monolithic tech giant. Current global smart contracts market size is small at US$315.1 million in 2021, with the vast majority of trade involving off-chain assets, and for most transactions there is no need for a third-party oracle that would confirm that the agreed-upon goods or services have been delivered as specified by the contract.

Online retailers and payment platforms have created humanly devised rules of interaction, that enable people to exchange, commit, share information and interact without being physically present. Over the course of the last few decades however, their scale and power has created near monopolies that set the terms for people to engage and work that are almost impossible to challenge.

The introduction of contracts with arbitration enables any two-party contract to be secured by decentralized escrow that protects both parties who might not otherwise be able to trust each other. As we enter the digital age, the dimensions for people to engage with each other will also have to change.

The digital economy needs institutions that help economize on haggling costs and help solve collective-action and information problems when people trade with each other. International trade represents a $21 trillion dollar market, establishing trust through smart contracts with verified human arbiters to adjudicate on specific issues could hold the key to unleashing Distributed Ledger Technology’s potential.