E-commerce is sizzling. Last year, consumers spent more than $517 billion online with U.S. merchants, up 15 percent from the year before, according to Internet Retailer.

However, independent musicians, self-published authors and others have sometimes found it difficult to participate in the e-commerce revolution. That’s because they typically must set up a costly account with a third party, say, a credit card company, to protect against fraud while simultaneously increasing the comfort level of potential buyers. That can result in lower profits for artists and other online sellers and higher prices for buyers.

Bhaskar Krishnamachari, a professor at USC Viterbi, and Aditya Asgaonkar – a recent graduate in computer science from BITS Pilani, India, who collaborated with Krishnamachari at USC over several months in 2018, believe they have found a way to make the buying and selling of digital goods cheaper, more efficient and less vulnerable to fraud. Their proposed solution involves blockchain, “smart contracts” and game theory.

“Our scheme offers potentially a big improvement over the state of the art in electronic commerce because it allows buyers and sellers to interact directly with each other, without the need for third-party mediators of any kind,” said Krishnamachari, a Ming Hsieh Faculty Fellow in Electrical and Computer Engineering and director of the Viterbi Center for Cyber-Physical Systems and the Internet of Things.

The pair have created an algorithm that runs on a programmable blockchain as a “smart contract.” Blockchains allow multiple stakeholders to transact money or data virtually over linked peer-to-peer computer networks.

Here’s how it might work.

An author wants to sell her digital masterwork, “The Great American Novel.” However, she hopes to avoid going through Amazon or some other company that takes a commission.

Instead, she uses Asgaonkar’s and Krishnamachari’s blockchain-based solution and lists the book’s price at $20. An interested buyer contacts her. To ensure an honest deal, both the buyer and seller agree to pony up a $10 deposit through Ethereum or some other programmable blockchain platform.

The author then sends the digital book to the buyer, who can access it only by making a verifiable payment for the correct amount. If the transaction satisfies everybody, then both parties receive their deposits back.

But what if someone tries to cheat?

This is where the so-called smart contract kicks in.

The contract stores a good’s digital hash code, or “digital fingerprint,” in Krishnamachari’s words. The buyer has access to that code before making a purchase. If they receive an item with a different hash code, however, they can dispute the transaction.

Now, consider a different scenario in which the buyer tries to cheat by falsely claiming they received the wrong item. If the digital fingerprint shows otherwise, the unscrupulous buyer would lose their deposit.

Asgaonkar and Krishnamachari call their system “cheat proof.” Their research uses game theory to prove mathematically that, in their proposed protocol, the best option for buyers and sellers is to behave honestly, lest they lose their deposits or access to desired goods