So that the secret keys are fully disposable (and so LocalEthereum has perfect forward secrecy), the ECDH agreement uses one-time temporary keys called a pre-keys, that have been generated and signed in advance. For more on this, check out Open Whisper Systems’ “Forward Secrecy for Asynchronous Messages”.
In the case of a dispute, any party can volunteer the secret key to a trusted arbitrator, who’ll then be able to decrypt the past messages and work with both parties to make a fair decision. In ordinary trades, the secret key is erased — effectively erasing the message history forever.
All ether that is used on LocalEthereum is stored in a wallet that is derived from the user’s offline private key. Trades are completely peer-to-peer and ether is sent directly from user to user. This means that no one (not even our staff) can touch your ether nor read your messages.
As the ethereum ecosystem matures, LocalEthereum plans to move the remaining parts of the system into the decentralized web. Our entire website will be hosted on ethereum’s swarm to ensure zero downtime and perfect security. Arbitrators will be selected via a smart contract, which means anyone will be able to work for LocalEthereum, making it an unstoppable decentralized autonomous organization.
Within next two weeks, we’re going to release our roadmap. If you haven’t already, be sure to check out “Part One: The Frustration of Buying and Selling Ether” and join the waiting list for the next update.