E-commerce is sizzling. Last year, consumers spent more than $517
billion online with US merchants, up 15 percent from the year before,
according to Internet Retailer.
However, independent musicians, self-published authors and others
have sometimes found it difficult to participate in the e-commerce
revolution. That’s because they typically must set up an account with a
third party, say a credit card company, to protect against fraud while
simultaneously increasing the comfort level of potential buyers. Those
credit card accounts, though, cost money. That can result in lower
profits for artists and other online sellers and higher prices for
Bhaskar Krishnamachari, a professor at the USC Viterbi School of
Engineering, and Aditya Asgaonkar – a recent undergraduate computer
science alum at BITS Pilani, India who visited and worked with
Krishnamachari at USC Viterbi over several months in 2018 – believe they
have found a way to make the buying and selling of digital goods less
costly, more efficient, and less vulnerable to fraud. Their proposed
solution involves blockchain, “smart contracts,” and game theory.
“Our scheme offers potentially a big improvement over the
state-of-the-art in electronic commerce because it allows buyers and
sellers to interact directly with each other without the need for
third-party mediators of any kind,” said Krishnamachari, a Ming Hsieh
Faculty Fellow in Electrical and Computer Engineering and director of
the Viterbi Center for Cyber-Physical Systems and the Internet of
“It uses a dual-deposit method, escrowing a safety deposit from both
buyer and seller that is returned to them only when they behave
honestly. And the verification of who is at fault and who is honest is
done automatically by the smart contract,” added Krishnamachari.
On May 15, 2019, Asgaonkar presented the researchers’ joint paper
titled, “Solving the Buyer and Seller’s Dilemma: A Dual-Dual-Deposit
Escrow Smart Contract for Provably Cheat-Proof Delivery and Payment for a
Digital Good without a Trusted Mediator,” at the IEEE International
Conference on Blockchain and Cryptocurrency in Seoul, South Korea.
Asgaonkar and Krishnamachari have created an algorithm that runs on a
programmable blockchain as a “smart contract.” Blockchains allow
multiple stakeholders to transact money or data virtually over linked
peer-to-peer computer networks.
Here’s how it might work.
An author wants to sell her digital masterwork, “The Great American
Novel.” However, she hopes to avoid going through Amazon or some other
company that takes a commission.
Instead, she uses Asgaonkar’s and Krishnamachari’s blockchain-based
solution and lists the book’s price at $20. An interested buyer contacts
her. To ensure an honest deal, both the buyer and seller agree to pony
up a $10 deposit through Ethereum or some other programmable blockchain
The author then sends the digital book to the buyer, who could only
access it by making a verifiable payment for the correct amount. If the
transaction satisfies everybody, then both parties receive their
But what if someone tries to cheat? What happens, for instance, if
the seller intentionally sends the wrong e-book? What recourse does the
aggrieved party have?
This is where the so-called smart contract kicks in.
The contract stores a good’s digital hash code, or “digital
fingerprint,” in Krishnamachari’s words. The buyer has access to that
code before making a purchase. If they receive an item with a different
hash code, however, they can dispute the transaction. In this instance,
the seller would forfeit their deposit after the algorithm determined
that they had attempted to cheat the buyer.
Now, consider a different scenario in which the buyer tries to cheat
by falsely claiming they received the wrong item. If the digital
fingerprint, shows otherwise, the unscrupulous buyer would lose their
Asgaonkar and Krishnamachari call their system “cheat proof.” Their
paper uses game theory to prove mathematically that, in their proposed
protocol, the best option for buyers and sellers is to behave honestly,
lest they lose their deposits or access to desired goods.
“Our solution, a crypto-economic system, disincentivizes malicious
behavior from either party,” said Asgaonkar, now a researcher at the
Added Clifford Neuman, a computer scientist at USC Viterbi’s
Information Sciences Institute: “The significance of this work is that
it changes the structure of incentives for correct behavior in online
transactions so that the optimal benefit to both parties occurs when
they transact fairly.”
At present, Asgaonkar’s and Krishnamachari’s system works only with
digital goods because physical products can’t have a cryptographic hash
associated with them. However, physical goods stored in a safe-box that
can be opened with a digital password could be potentially transacted
using their system.
The researchers’ blockchain-based system, under-girded by algorithms
and smart contracts, solves what’s known as the “Buyer and Seller’s
Dilemma,” all without the need for credit-card companies or legal
adjudications, Krishnamachari said.
“The dilemma is that with a traditional online transaction, either
the buyer or seller will have to go first, either trusting that the
buyer will pay honestly after delivery or that the seller will deliver
honestly after payment. But either party has the incentive and ability
to cheat the other if no other dispute resolution mechanism or trust
third party is involved,” Krishnamachari said.
“By providing for the dual-deposit escrow and an automated
verification process as a piece of software running on a blockchain,” he
added, “we are able to guarantee that neither party will cheat the
A Future of Microtransactions
What most excites Krishnamachari about this new protocol is its
ability to facilitate microtransactions, “which I see as the future of
digital commerce among individuals and between organizations,” he said.
Made popular in games and mobile apps, microtransactions allow users
to pay small amounts of money for virtual goods like a new sword in
“World of Warcraft” or unlocking hidden levels in a game.
However, with the advent of the Internet of Things, the potential for these tiny microtransactions is far, far greater.
Such automated arrangements, for instance, could include
micropayments to the owner of a sensor-laden car digitally providing
another driver with traffic data or air quality information. These and
other microtransactions, Krishnamachari said, will multiply with the
increased interconnection, via the Internet, of data-exchanging
computing devices embedded in everyday objects.
“Creating these data economies is going to require us to lower the
friction for transactions down to zero. And that’s what we’re trying to
do,” Krishnamachari said. “Millions of transactions could become
frictionless, digitized and monetized, and the Internet of Things would
be more robust.”
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