[WIP] Introduction Fair Exchange

[fredo]

Motivation

The problem of a fair trade between two or more participants is a historic problem in our society. Traditional exchanges evolved over the years. Due to legal regulations exchanges are mostly built in an environment of trust. This has the drawback that not every entity is able to participate in exchanges maintaining the trustful environment. Nowadays the problem has escalated to the electronic exchange of goods and assets introducing new challenges due to the physical absence of the corresponding parties. The development of trustless platforms such as a blockchain removed the need of trust in many senses. It made it possible to transfer digital goods without the need of trust secured by the system itself. This is achieved by final state changes in a distributed global ledger.
Although this is true for transfering digital goods, exchanging two of them on these platforms still require some kind of action to bind the transfers together. Both parties involved have the natural desire to be assured that they are entering a fair trade. Since the environment is still to be trustless and there is no physical presence of the parties the secureness and fairness of the exchange has to be shifted to a protocol level.

Goal

The goal is to build a non-custodial p2p exchange using the raiden network as a medium of asset exchange. Users are to be in full custody of their assets. To guarantee a fair exchange in a trustless environment the whole process must provide at every moment in time a safe environment where participants cannot have an unfair advantage. A trusted third party controls the correct behavior of each participant and arbitrates in case of a dispute. It also is the syncing point of the protocol and defines timeouts for each participant to respond.

Definitions

custodian

A person who has responsibility for taking care of or protecting something.

Non-custodial

Describing an exchange model where participants are their own custodian and are always in control of their funds.

p2p exchange

Participants, also called trader, exchange their assets p2p.

Trusted Third Party

The ESA is a trusted third party (TTP) ensuring that the protocol follows certain rules and time intervals. It acts as a lead of the protocol and as a arbitrator in case of a dispute.

Participants

All user respectively trader are called participants. In an specific trade always two participants are involved. The two participants are differentiated as the maker and the taker.

Maker

The maker is the one of the participants who is creating an offer by sending it to the order book.

Taker

The taker is the one of the participants who is accepting an offer by sending it to the order book.

Assumptions

This is a collection of assumption in which environment we operate.

Each trader called participants cannot trust each other. All participants trust the TTP.

Fair exchange

Fair exchange describes the formal behavior of the protocol to be developed. Fair exchange is described by three properties which need to be met.

fairness

The property fairness describes the fact that in no point in time any participant has an advantage over the other. There is no possibility that one of the participants can run away with both assets.

timeliness

Timeliness describes the behavior that any honest participant knows that the protocol will eventually end. Furthermore any honest participant knows that he can leave the protocol at any time and the protocol will not only end in any point in time as well as he will not be left in an unfair state, i.e. The participant leaves due to connection error and he is going to lose his funds. This is specifically described as strong timeliness.

effectiveness

Effectiveness is described as once the participants are committed to the exchange, the exchange will happen in any point in the future. This means that there is no chance to revert the exchange after the commitment. This property can only be fulfilled by having a Trusted third party who is in possession of the actual item before or at the time of commitment.

Fair exchange mapped onto the use case

Fairness

The exchange of the assets either will happen entirely or it won't happen at all. No trader is able to steal the other participant’s asset. Or better said - is able to end up with both assets.

Timeliness

The exchange protocol will always end at some finite point in time regardless of the participation of the traders which could be disrupted by bad connectability as well as mal behavior. No honest trader has the fear of losing his funds in no point in time even if the connection broke.

Effectiveness

After the commitment of both traders in form of a signed message is completed the trade will happen eventually. There is no possibility of reverting the signed commitment.

Note: Effectiveness can only be guaranteed if there is a single point of control for the agreed assets to be exchanged. If both parties keep their assets in their control it is impossible to guarantee the exchange even after the commitment. That is why custodians exist. Within the Raiden Network every participant is his own custodian. This shows the impossibility of effectiveness within the raiden network. But on the Blockchain level a custodian exist - namely the Token Network Contract. It is pooling the funds together used within the network. The only possible way to guarantee effectiveness is to make the participant be able to claim the execution of the exchange by submitting the commitment signed by both parties. In order to still guarantee fairness claiming the exchange must mean that both payments are enforced or none. (This has a high similarity to claiming balance proofs with their corresponding secret)