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> one of the parties is so aggrieved, they decide to punish the other party by voting to destroy both deposits. The loser loses twice, but they don't let the perp to get away with it either.

Honestly, that is wildly impractical and would never account for the requirements of the real world. Want to buy a house for $300000? Well you better put up at least another $300000. Oh, and if the other guy scams you, you're out at least $600000.

Like you said, that scheme might work for microtransactions. For actual business, almost nobody has that kind of money lying around.

> For large transactions you could rely on reputation instead

Isn't that fundamentally what you are trying to avoid?

This is an unreasonable complaint. No one buys houses with piles of cash. Bitcoin is cash. It probably won't replace transactions that are impractical to do using cash today.

I think you're talking about NASHX http://nashx.com/HowItWorks and the trustless version documented by Oleg Andreev http://blog.oleganza.com/post/58240549599/contracts-without-...

(I mentioned the former in my post, but I didn't realize NASHX was acting as a trusted 3rd party)

The bit-contract idea is neat, although it seems like it could be misused. A group of dishonest buyers could gang up on an honest seller and inflict a worst-case N x (penalty + item_cost) damage at a cost to each buyer of (penalty - item_cost). The seller damage is only N x (penalty - item_cost) if the seller waits until they have payment before shipping, though, so I suppose you'd need a very high N to impact a high-volume seller that can verify quickly. Seems reasonable for low-profile or low-volume sellers, though.

I'm not convinced many people would volunteer to destroy their deposits just to punish a fraudulent seller.

For reference, say you're trying to buy a widget valued $100. Both the seller and you deposit $150, you pay, the seller never ships. At that point you're out $100. You can punish the seller, at no use to you whatsoever, and increase your losses to $250. Do you opt to double (or more) your losses?

What if the seller were to offer $50 back? I know I'd rather be out $50 than $200.

interesting idea but completely impractical for normal humans. if i want to buy an ipod on ebay for 0.5btc, i'm not going to stage another 0.5btc to protect against fraud where the potential outcome is I lose double, and the fraudulent seller loses 0 or whatever the staged contract amount was.

The fraudster loses more than zero, that the whole point. If you're buying a $200 iPod, both you and counterparty make a $400 deposit. If seller takes your money but never sends you the iPod, you punish him for $400, so he is $200 in the hole.

If the honest people outnumber fraudster, fraudster a lose.

Strictly, there has to be at least as many people willing to punish than there are people unwilling to punish amongst the people the fraudster targets for the fraudster to lose all the gains from their scam. I don't know that this radically changes anything, but it's not quite the same thing as honest people outnumbering fraudsters.

This is silly because $x can mean a whole lot more to one party than the other. A rich and nefarious individual could cause massive harm to others.

Just curious but where do the funds go when the transaction is 'destroyed'?

Presumably they're just unspendable until the parties reach a resolution. If that never happens then everyone else's bitcoins increase in value a tiny bit, in theory.

Try explaining to your local regulators why your bitcoin balance has traces of illegal/laundered money in it...because a drug overlord's purchase was destroyed and the funds were gifted to the community.

No, not gifted to the community. More like, burned, and thus driving down inflation.

I believe the suggestion was to destroy the bitcoins, which implicitly makes everyone else's go up in value, rather than explicitly dividing it up and emailing it to every bitcoin user in the world.

Also, I imagine you'd explain it to regulators with "a drug overlord's purchase was destroyed and the funds were gifted to the community". They're not stupid - if I obtained a "tainted" bitcoin and emailed fractions of it to everyone I didn't like, I doubt the authorities would be naive enough to put all my enemies in jail.