How arbitration works in escrow: incentives, deadlocks and abuse protection
Dispute mechanics in the smart contract: the guarantor's two rates, the 30-day timeout with a 50/50 split, mutual cancellation and abuse protection.
In this article
A good escrow is not only correct code but correctly chosen incentives. Each participant - buyer, seller, guarantor - acts in their own interest, and the system must be built so that honest behaviour pays and dishonest behaviour does not. Let us see how it is done in our contract and why exactly so.
Three roles and their interests
The buyer wants to receive the goods and not lose money. Their weak spot: they may try to take the money back after receiving the goods.
The seller wants to be paid. Their weak spot: they may take a prepayment and not deliver.
The guarantor wants a reward for the work. Their weak spot: they may drag things out, take a side or simply vanish.
Each weak spot is closed by a specific rule.
Two guarantor rates: base and dispute
The guarantor is paid in two ways:
- The base rate (up to 10%) - when the deal closed without a dispute: the buyer confirmed, the sides cancelled by agreement or the term expired. It pays for readiness to settle a dispute: the guarantor reserves their time and reputation even if no dispute happens.
- The dispute rate (up to 30%) - when the guarantor really settled a dispute. It replaces the base and cannot be lower than it.
That last restriction is fundamental. If the dispute rate were below the base, settling a dispute would be unprofitable for the guarantor: hard work would pay worse than doing nothing. The contract does not allow such a deal to be created.
The upper limits differ. The base rate is charged on every completed deal, so an expensive base price would make the service unusable. A dispute is rare and pays for real work, hence its higher ceiling.
The rate is deducted before the split
When the guarantor gives a ruling their reward is deducted from the deal's money before it is split between the sides. If after the ruling the buyer gets 70% and the seller 30%, the guarantor is "paid" proportionally: each side's amount shrinks by the same share. The side that gets more pays more, the one that gets less pays less.
Example: a 1,000 USDT deal, platform fee 1% → 990. Dispute rate 10% → guarantor 99, 891 to split. A ruling "70% to the buyer": 623.70 to the buyer and 267.30 to the seller.
What if the guarantor is silent
A dispute is open and the guarantor has vanished or is stalling. They have 30 days. If there is no ruling, either side can close the deal and the money is split 50/50, while the guarantor receives nothing.
Why exactly so is the most interesting question in this design. The simplest would be to refund everything to the buyer. But then a hole would appear:
- A dishonest buyer picks a knowingly "sleeping" guarantor.
- Receives the goods or service.
- Opens a dispute and waits 30 days.
- Takes all the money back.
A 50/50 split breaks this scheme: choosing a non-working guarantor costs both sides half the amount, so nobody gains from picking such a guarantor in advance. And a guarantor who gets nothing has no interest in staying silent. Silence always loses for them.
Mutual cancellation
The sides can part peacefully. Each presses "Propose cancellation"; as soon as both agree the deal closes and the buyer gets the money back minus the platform fee and the guarantor's base rate.
Why does the guarantor get the base rate rather than nothing? They were ready - that is a paid service. Why not the higher one? They decided nothing.
Cancellation is available even during a dispute. If the sides agreed themselves they must not stay hostage to the guarantor. Incidentally this is cheaper than taking a dispute to a ruling - which is why the interface suggests trying to agree first.
Protecting the seller from a "refund at the deadline"
If the term has passed, the buyer has not confirmed receipt and no dispute is open, either side can close the deal with a refund to the buyer. At first glance this is dangerous for the seller: they delivered but the buyer is silent.
The seller's protection is the ability to open a dispute at any time before the term ends. The seller knew the term in advance - they accepted it with the terms. This shifts responsibility: if the seller is sure they are right they open a dispute rather than wait.
That is exactly why our guides advise not to delay: after the term ends, whoever presses first decides the outcome.
The guarantor cannot take the money
The guarantor has a single function - a ruling with the buyer's share from 0 to 100%. They cannot send money to their own address, change the terms, interfere in a deal without a dispute or rule twice. The contract also forbids the guarantor from being the buyer or the seller of the same deal.
What stays human
The contract guarantees execution, not the fairness of the ruling. If a guarantor is dishonest or wrong, there is no appeal - the ruling is final. So choosing a guarantor is the most important decision in a deal. Here is what to check:
- the guarantor's reputation and experience;
- agreement to the rates in advance;
- ability to check the terms document against the fingerprint;
- that the guarantor is independent of both sides.
These subtleties are covered in the guarantor's guide and in the FAQ section on disputes.
Incentives summary
| Risk | How it is closed |
|---|---|
| The buyer takes the goods and takes the money back | Term: a refund only after it ends; the seller has time to open a dispute |
| The buyer picks a "sleeping" guarantor | The timeout splits the money 50/50, not everything back to the buyer |
| The guarantor is silent | Receives no reward at all |
| It is unprofitable for the guarantor to settle | The dispute rate cannot be lower than the base |
| An expensive guarantor eats the deal | Ceilings: 10% base, 30% dispute |
| The sides can come to terms | Mutual cancellation is always available, even during a dispute |
What to read next
Practice of choosing: how to choose a guarantor, and how to prepare for a dispute - in the evidence guide. The arbiter needs something to rely on: how to fix a deal's terms so that neither side can swap them - in the article on hash commitments.
Keep reading
- 2 · Practice
How to choose a guarantor - criteria, rates and red flags
Who can be a guarantor in Coin-Trust, by what criteria to choose one, how to agree on rates and what to watch for so that a dispute does not become a problem.
4 min read - 3 · Under the hood
Writing escrow in Solidity: the state machine and a real contract walkthrough
How an escrow contract is built in Solidity: statuses, transitions, access checks, events and payouts - a minimal version and the production contract.
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Mentioned in
- dApps and DeFi - decentralised applications and finance without middlemen
- Escrow: how a deal with a guarantor works
- Glossary - blockchain, wallets, smart contracts and escrow from A to Z
- The deal lifecycle - from offer to payout, step by step
- How to read Etherscan: checking a contract, a transaction and events
- Coin-Trust fees by example - how much you pay and to whom
- How to choose a guarantor - criteria, rates and red flags
- Preparing for a dispute - what evidence to collect and how to present it
- How to write deal terms that protect both sides
- Multisig and timelock - managing a contract without a single point of failure
- Oracles and the oracle problem - how a blockchain learns about the outside world
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