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The Clearinghouse Model


By Allen Holub
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May 15, 2006 —  (Page 1 of 3)
The notion of a “clearinghouse” is central to executing secure transactions with entities you don’t trust. The main idea is for the clearinghouse to guarantee that both parties to the transaction have an acceptable outcome, taking a fee or percentage of the transaction cost for this service.

Probably the most familiar example of a clearinghouse architecture is a stock exchange, which makes it possible for two entities who do not trust each other to buy and sell stock. Both the buyer and the seller have a relationship with the exchange, but neither has a direct relationship with the other. All transactions are with the exchange, not with your counterpart in the transaction.

For example, the exchange buys the stock from the seller, and you buy the stock from the exchange. If the seller turns out to be dishonest—if he didn’t actually own the shares he sold, for example—the exchange will absorb the cost of the fraud and get the stock from somewhere else at the agreed-to price. By the same token, the seller is paid by the exchange whether or not the buyer’s check clears. Both the buyer and seller have a legal, contractual relationship with the exchange that defines enforceable penalties if they’re dishonest.

I recently came across an interesting, though somewhat flawed, application of the clearinghouse architecture

in RentACoder (www.rentacoder.com). RentACoder matches contract programmers with clients in such a way that some of the risk associated with a project is minimized for both. Buyers post “Bid Requests” on the site for specific programming projects.

Most of the RentACoder projects seem quite small in scope (for example: I want a shell script that runs the same four SQL queries against four different databases), but some projects are more significant. Programmers bid on the projects they find interesting. When buyer and seller agree on a price and scope of work, a virtual contract is signed and the buyer puts the money into an escrow account managed by RentACoder. No work happens until funds are available to pay for the work.




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