Irrationality, Extortion, or Trusted Third-parties: Why it is Impossible to Buy and Sell Physical Goods Securely on the Blockchain

Abstract: Suppose that Alice plans to buy a physical good from Bob over a programmable Blockchain. Alice does not trust Bob, so she is not willing to pay before the good is delivered off-chain. Similarly, Bob does not trust Alice, so he is not willing to deliver the good before getting paid on-chain. Moreover, they are not inclined to use the services of a trusted third-party. Traditionally, such scenarios are handled by game-theoretic escrow smart contracts, such as BitHalo. In this work, we first show that the common method for this problem suffers from a major flaw which can be exploited by Bob in order to extort Alice. We also show that, unlike the case of auctions, this flaw cannot be addressed by a commitment-scheme-based approach. We then provide a much more general result: assuming that the two sides are rational actors and the smart contract language is Turing-complete, there is no escrow smart contract that can facilitate this exchange without either relying on third parties or enabling at least one side to extort the other.