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In the future you could buy bitcoin with an escrow deployed on the Lightning Network

Key facts:

Similar to LocalCryptos, the collateral would not be held by a third party.

Smart contracts on the Lightning network promise to unfold in their complexity.

An implementation of the Lightning network could allow the exchange of bitcoins from person to person (P2P) using an escrow contract or guarantee of retention of funds, as in the style of the popular exchanges LocalBitcoins and LocalCryptos.

In the most recent delivery of the Bitcoin Optech Newsletter, released yesterday, February 17, 2021, an approach is highlighted on the use of the so-called Point Time Locked Contracts (PTLC) to develop a transaction where the figure of escrow exists. .

If this implementation is developed, a scheduled exchange can be made to be fulfilled on a specific date or condition under agreement between two people.

In this transaction, an example in the aforementioned newsletter illustrates, Alice and Bob would create and share compatible signatures among themselves, in order to approve and execute a transaction with the amount agreed between them.

This process called coinswap (exchange of coins) would be based on the authorized exchange of compatible signatures, technically called adapter signatures, which allow to authorize any expense or operation on the Bitcoin blockchain.

If Alice and Bob agree to make a payment with a fixed value, say, at 1 BTC, the generation of common signatures can help them make this exchange without leaving the Bitcoin blockchain and its protocol. In our case Alice will pay Bob.

The author of the proposal identifies himself with the pseudonym ZmnSCPxj. The proposal was published last year, but its discussion was picked up earlier this month and reported in the newsletter.

Smart Bitcoin contracts aim to become increasingly complex and advanced

In the report sent this Tuesday by Bitcoin Optech, they point out that the Lightning network needs to be updated and improved to allow the deployment of PTLCs. Being a multi-signature protocol, it is expected that these contracts will begin to be tested once Taproot is activated in Bitcoin, which could happen this year, as we reported in CriptoNoticias.

In response to the ZmnSCPxj proposal, developers Andrés G. Aragoneses and Pedro Moreno Sánchez, sent their concerns on February 8.

In the message thread, Aragoneses recommended simplifying some commands in the code so as not to force all Lightning implementations to update to use these types of contracts.

That is, allowing the escrow created to know the value of each transaction generated in the exchange in order to facilitate its implementation by non-custodial exchange houses, where it is very difficult to mediate disputes between the parties.

Simplify the flow of information between Alice, Bob and the escrow, would allow everyone to have the same awareness of everything that is happening, reducing the chances of a dispute between the parties that could only be resolved with an escrow guarded by a third party, as in LocalBitcoins.

In this case, the escrow figure configured as a smart contract, makes the custody of the funds. Its developer responds that the escrow is able to intelligently deliberate if the payment conditions were met, by verifying the validity of Alice and Bob’s compatibility signatures, but also setting a time limit to be fulfilled, like most Lightning contracts. Network.

A dispute between Bob and Alice would merit the figure of a judge if the escrow is in the custody of a third party. Source: mohamed_hassan / pixabay.com

For example, if the buyer is not satisfied with the transaction, the escrow will decide who is right. If the buyer (Bob) is right, the escrow will reveal his ESCROW key to the buyer so that, in combination with his private key compatible with the adaptation signature, he can withdraw the payment in his favor.

If the seller is right, the escrow would remove the private key from your ESCROW key and by default for the Lightning network, the issued transaction would expire and the funds would return to the seller’s hands.

The inversion of De Morgan’s logical theorem allows that, starting from combining the keys of the buyer and the escrow, the seller can generate a Refund Proof, where it guarantees that the funds are available and ready to be sent to the buyer when required.

In parallel, the seller can offer proof of payment, too, although creating an escrow with both guarantees requires blocking twice as many bitcoins. As Aragonese responded, this would force a buyer to have from the beginning an amount of bitcoins according to the amount they want to buy, which in their opinion would limit the shipment of new users, slowing down the adoption of cryptocurrency and harming the user experience (UX).

Clearly, the argumentative constructs of these contracts are unlimited, being able to develop various scalable functionalities over time. The possibilities of creating increasingly complex smart contracts are becoming wider each time. We are still in the early stages of Bitcoin as a technology that seeks to achieve important things in the long term.