Honestly, that is wildly impractical and would never account for the requirements of the real world. Want to buy a house for $300000? Well you better put up at least another $300000. Oh, and if the other guy scams you, you're out at least $600000.
Like you said, that scheme might work for microtransactions. For actual business, almost nobody has that kind of money lying around.
> For large transactions you could rely on reputation instead
Isn't that fundamentally what you are trying to avoid?
(I mentioned the former in my post, but I didn't realize NASHX was acting as a trusted 3rd party)
For reference, say you're trying to buy a widget valued $100. Both the seller and you deposit $150, you pay, the seller never ships. At that point you're out $100. You can punish the seller, at no use to you whatsoever, and increase your losses to $250. Do you opt to double (or more) your losses?
What if the seller were to offer $50 back? I know I'd rather be out $50 than $200.
If the honest people outnumber fraudster, fraudster a lose.
Also, I imagine you'd explain it to regulators with "a drug overlord's purchase was destroyed and the funds were gifted to the community". They're not stupid - if I obtained a "tainted" bitcoin and emailed fractions of it to everyone I didn't like, I doubt the authorities would be naive enough to put all my enemies in jail.
Yes, there is: bit-contract. I forgot where I read about it, but basic idea is very simple: before transaction takes place, both sides make a separate deposit exceeding in size the value of the transaction. After transaction completes, either both sides vote to release the deposits and get their deposit coins back, or one of the parties is so aggrieved, they decide to punish the other party by voting to destroy both deposits. The loser loses twice, but they don't let the perp to get away with it either.
This creates incentive for both sides to strive for mutual satisfaction. Scammers and crazy cranks will run out of money pretty soon. This works really well for small contracts, such as selling an old iPod on Ebay.
For large transactions you could rely on reputation instead - if the value of reputation is $X, you can trade for $X/2 with that person, as it would be silly for them to cash out so cheaply.