OpenBazaar Explains Proof Of Burn As It Nears Beta Release

OpenBazaar has built up a decent amount of hype. And for good reason. In a world increasingly moving towards decentralization, their decentralized marketplace is going to have a major impact on something. What that impact will be and what industries will be affected remains to be seen, but there isn't much doubt that it will have an impact.

OpenBazaar, if you are unfamiliar, is being built as a decentralized market that uses Bitcoin as its main currency. It has been hailed as the spiritual successor to the infamous Silk Road, which was known for its drugs and illegal weapons sales, but, as its developers are quick to point out, it is potentially much more than that.

A decentralized exchange means that the service isn't hosted on one, or even several servers. Instead, it exists much like Bitcoin or the Internet itself: spread among the computers of its users. Because there is no central authority or server, it will be virtually impossible to shut down. So long as more than one person is running the network, OpenBazaar will always exist. Users never have to trust any one entity, like they do when selling on eBay or one of the Silk Road's various copycat marketplaces. This means no one, not even the government or the developers themselves, can take the system down.

OpenBazaar has a novel solution to that: Letting sellers essentially set their Bitcoin on fire.

The problem with a “trustless” system like OpenBazaar is that, when purchasing something, you still have to trust the person on the other end. The conventional way to get past this is with a peer rating system, as seen on nearly every online marketplace with third party sellers. OpenBazaar includes this as well, but the problem is that since OpenBazaar is pseudonymous, scammers could make as many throw away accounts as they wanted.

As soon as someone tried to make a deal with a new user, he or she would have to hope not to pick an account that isn't one of the hundreds accounts potentially made by a single scammer. With eBay and similar sites, they can do certain things, like block bank accounts and paypal accounts. It isn't foolproof, but those aren't the easiest things in the world to obtain. Bitcoin accounts are infinitely easier to obtain, and the market could potentially be filled with such scammers.

OpenBazaar will include a system called “proof-of-burn”. Sellers can optionally send Bitcoin to an address that no one has the keys for. Doing that will essentially remove those coins from the Bitcoin network forever; the cryptocurrency equivalent of setting a dollar bill on fire. The idea is that it will prove that the seller is willing to invest money in order to gain trust. If a brand new seller with no transactions has burned twenty dollars worth of Bitcoin, you can assume they aren't going to risk getting a negative rating from their first buyer if it is a ten dollar purchase. The developers compare it to traveling salesman vs brick-and-mortar stores.

It doesn't sound like a perfect system. It is a waste of Bitcoins. Also, intelligent scammers may try to build up reputations with small orders and then take off running once someone trusts them with a larger one. However, that is a risk in most peer-to-peer or third party marketplaces. It will be up to buyers to be cautious; there is no one to help them if they fall victim to a scammer. But the proof-of-burn does give a buyers a valuable tool in deciding who to trust, while giving honest sellers a way to stand out from scammers. It isn't perfect, but things rarely are.

There has been some talk about donating the Bitcoins for mining fees or a charitable cause. Technically, burning bitcoin in OpenBazaar's current method will cause a relative amount of deflation of the currency, since there are essentially less bitcoins in the network. The developers noted that they are open to other ideas, but that using it for mining fees would enable sellers to theoretically get their “burnt” coins back.

OpenBazaar is planning its open beta at the end of this month. Which gives them 3 days. You can technically compile it from Github and run it now, although people aren't supposed to be trading just yet. They did announce the first sale of a physical item through the system, developer Chris' book.

First product purchased on OpenBazaar is Sam’s book. Go figure! @SamuelPatt t.co/1KCGIeHgXx

— OpenBazaar (@openbazaar) August 28, 2014

We will have more from OpenBazaar as they enter their Beta launch.

Expert commentary

Matthew Slater: "What kind of world are we building when we don't know and don't care who we do business with? When I trade with people I respect and trust I don't even need an account somewhere to be credited. I just ask them to pay my bills on my behalf. That's the kind of world I'm building."

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