A couple people here had a misunderstanding.
Assuming that any of the parties do not agree on anything , everything is frozen.
The money gets deposited in the shared wallet after both parties have provided collateral.
If they have a dispute , such as 1000$ is not received , both parties have their collateral stuck along with the 1 BTC stuck in the shared wallet.
Surely , the bitcoin seller has a bigger loss in this case , but the buyer has a loss too.
This only works if the price for BTC is stable.
At the time of the trade, 1 BTC is 1000 USD.
Alice buys 1 BTC, freezes 0.1 BTC, sends 1k USD honestly.
Bob sells 1 BTC, freezes 1.1 BTC, receives 1k USD but never reports on it.
Once these 1.1 BTC are worth LESS than 1k USD, Bob was smart.
Staying honest when selling with this scheme just depends on how low you think the price would go.
Collateral should be greater than amount in exchange. If they exchange $1000 for 1 BTC, collateral should be 2 BTC. So when Bob receives $1000 it's cheaper for him to unlock collateral (2 BTC) than to keep 1 BTC worth of product (cash in this case).
Only if he believes the price won't tank more than 2-fold until he gets the money. Also he has now a much higher risk that someone locks up 2 BTC to lock up 3 of his. Potentially forever.
Would you sell me 1 BTC right now via bank transfer if we both need to lock up 50 BTC for that?
>Once these 1.1 BTC are worth LESS than 1k USD, Bob was smart.
You are wrong with the above assumtion.
He cannot win anything when not releasing. Maby he was lucky with the price move, but in any case he just loose his collateral if he does not release and get back his collateral if he release. So he would be stupid to not click the release button.
Blackmail is discussed in the paper as well:
Blackmail: Satoshis statement in a discussion regarding his proposal for an escrow model [2]: "Now, an economist would say that a fraudulent seller could start negotiating, such as "release the money and I'll give you half of it back", but at that point, there would be so little trust and so much spite that negotiation is unlikely. Why on earth would the fraudster keep his word and send you half if he's already breaking his word to steal it? I think for modest amounts, almost everyone would refuse on principle alone."
To accept the blackmail would mean to trust a partner who has proved to be dishonest. There is absolute no reason to justify a blackmail acceptance. Therefore that risk can be ignored.
https://bitcointalksearch.org/topic/escrow-750