What is an escrow?

If you have ever sold or purchased something online, then you have probably thought about the risks. You never know whether the other party keeps to the agreements. There are plenty of stories of people who have been scammed online. A solution to this problem can be an escrow. It is a service that ensures that the parties involved have complied with the agreements before the deal is done.

What is an escrow?

An escrow is used when making an online purchase. As we mentioned in the introduction, you are often never sure if you can trust the other party. This is mainly the case when you don't know the other party, such as on websites like Ebay.

When you make a purchase, or sell something, you send your assets to escrow. The other party does the same, so both assets are in the escrow. Then the escrow agent checks whether the agreed conditions are met, after which the assets are sent to the rightful party. You could use an escrow to send crypto coins to each other. If you want to sell 1 bitcoin (BTC) to a counterparty who has $50,000 to do so, both parties send the Bitcoin and the money to escrow. The escrow then checks if 1 bitcoin was sent to the escrow, and if the buying party really sent $50,000. Is that the case? Then you will receive the money from the escrow and the buyer will receive the bitcoin.

Escrow in real life

An escrow is an intermediary that provides more trust between parties involved in a sale or purchase. Incidentally, it is not a new concept at all, as it has been used for years (even before blockchain technology was in use). For example, a notary.

The moment you buy a house, you will have to transfer the purchase amount to the notary. The seller gives the key to the notary, after which they check if everything is in order. Is that the case? Then the buyer gets the house key, and the notary transfers the money to the seller. So, this is also effectively an escrow. Escrows are also increasingly used on the internet when you use an online marketplace like Ebay. This way you first transfer the money to the website where you are making a purchase, after which the seller of a product passes on the shipping code to the website. The moment you receive the package, you indicate this to the website, after which they transfer the money to the seller.

Escrows on the blockchain

You can probably imagine that it is quite easy to establish an escrow on the blockchain. Through smart contracts, it is possible to check whether involved parties have fulfilled the conditions. Then the smart contract will perform the preset actions.

The advantage of an escrow on the blockchain is the high level of security. When you send your assets to escrow, they will be stored in place that is inaccessible from the blockchain, such as a cold wallet. So, you can rest assured that hackers will not steal your assets once you have sent them to the escrow agent. To make it even more secure, multi-signatures are often used. This means that at least 2 parties must sign an action before it can be executed. Why? It is then certain that the escrow agent does not send the assets to itself, because of course the parties involved would never sign for this.

When looking for an escrow service that runs on the blockchain, it is of course important to do research on the service. For example, look for reviews and experiences from others to find out if an escrow service can actually be trusted. When there is money to be made, there are always scammers lurking around.

Escrows for ICOs

If you've been active in the crypto world for a while, you've probably heard about the scams surrounding Initial Coin Offerings (ICOs). An ICO allows you to invest money in a project that has yet to be launched. The money raised during the ICO is used to realize the project. In return, you receive tokens in the future, which you were able to purchase at a much lower price.

However, there were also many cases of ICOs where investors could whistle for their money. After they had made an investment, the ICO seemed to have disappeared from the face of the earth. There are many people who have lost a lot of money with this kind of scam. An escrow could be the solution to this problem. You can transfer money to an escrow, which ensures that you will eventually receive the promised tokens. In this way it is no longer possible for a party to not hear from you. They will not receive any money if they do. More and more projects are choosing to raise money through escrow. In this way they want to show that they are transparent and reliable, which also makes it easier for investors to invest money in the project without worry.

The advantages of an escrow

Using an escrow can offer many advantages for both the buyer and seller. Of course, the biggest benefit is security and reliability. Closing a deal is easier done than executing it. After all, in the back of your mind you know that things could always go wrong, as there are plenty of people who have been scammed in the past when making an online purchase or sale.

Escrow eliminates the possibility of losing money. This is because a deal is not executed until all agreed upon conditions are met. In addition, you can also indicate that you are not satisfied with the service or product you received. The escrow ensures that you get your money back. As a seller you will not be bothered by defaulters anymore. It is certain that you will receive your money if you meet the agreements. Of course, this also saves on the costs you would normally have incurred if you had gone to a bailiff.

Conclusion

If you buy or sell something online, it is always difficult to fully trust the other party. In most cases you do not know who you are dealing with. For this problem, escrows can be the solution.

An escrow is an intermediary party to which you transfer the assets involved in the deal. The moment the agreements are met, the escrow agent will send the assets to the rightful parties. This way, you don't have to worry about being ripped off by the other party. So, an escrow provides more security, trust and transparency.

Escrows are not new, but you are seeing them more and more on the blockchain. This is because they are fairly easy to program through smart contracts. However, it is important to do proper research before choosing to use an escrow service.