Escrow is a trust-creating process whereby a third party mediator has possession and control of funds or documents during a business transaction. The point of an escrow is to create trust by placing control of pertinent information, documents, or funds with a neutral third party during business deals to eliminate the possibility of either entity defaulting on a contract. This prevents sellers from receiving money without providing the item or service for sale. On the buyers' end, it eliminates the possibility of receiving an asset or service without paying the seller.
The contract outlining conditions of the business agreement often stays in the hands of the escrow agent, to prevent either party from manipulating the contract. The various tools available on the internet has made it much easier to alter contracts in ways that might hold up in court unless there is solid proof to the contrary. If the contract is held in escrow, this occurrence is much less likely to be successful. It essentially provides the needed evidence that manipulation has occurred.
A vital role played by escrow agents is to verify the identities of the involved parties and to verify legal ownership actually exists for the seller. Fraud is a large problem that many industries face, and escrow agents often spend time investigating legal documentation to make sure everything is accurate. These types of services are extremely important since computer software has made producing false documents possible.
In practice, escrow companies or agents charge a fee based on a percentage of the sale value. This fee covers various costs of providing escrow such as their insurance, time spent during the transaction process, any fees related to the transfer of funds, and the cost of legal document access and modification.
Business deals which warrant the use of escrow agents are often completed slowly because legal and public document systems are known for being sluggish, and with larger deals, there is more complicated documentation and verification for escrow agents to complete. Three places where escrow is used highly are real estate, construction, and mergers and acquisitions.
Room for Improvement
Although fraud prevention is one of the reasons escrow companies exist, many instances of fraud actually occur under the guise of escrow. Scammers can successfully convince buyers and sellers that they are a trustable third party, only to disappear with their clients’ money or assets. Escrow companies can be fooled about who their clients really are, and can also be manipulated into money transfer scams resulting in money being sent to the wrong people.
Even worse, there is the possibility of an escrow agent colluding with the other party and taking advantage of you. Examples of these occurrences are plentiful in the news, and at a moment’s notice a previously reputable escrow company could shut down, taking other people's funds and assets with it.
The fees which these middlemen charge should also be examined. Escrow companies might seem like a great option since rates are usually single digit percentages. It’s pertinent to remember that escrow is often used during high-value deals with large amounts of value changing hands. This means that an escrow rate of two or three percent escrow can become tens, or even hundreds of thousands of dollars, making the escrow business lucrative.
In the event that someone defaults on a contract, the other parties can be put in difficult financial positions with their assets locked up until lengthy legal proceedings have been settled. Waiting to receive their money back can financially crush individuals and smaller sized companies.
It’s also normal for escrow services to take long amounts of time even when there are no contract defaults happening. However, many times this is forgiven or forgotten since escrow companies are fulfilling a vital niche in the market. One aspect that many people overlook is that starting and operating an escrow business takes a lot of upfront capital. This means that escrow companies tend to be large and the industry is rampant, with major players owning the market. Since smaller entities do not have equally large resource pools, the market isn’t ideally competitive for customers.
Escrow on a Blockchain
With the use of blockchain technology, decentralized escrow has the potential to revolutionize how trust is created in business deals. Decentralized escrow systems, as the name implies, are trust-forming digital agreements free from any controlling third parties or intermediaries. Open, blockchain-based smart contracts are the driving force behind decentralized escrow and are essential to its existence. The use of decentralized escrow allows cryptocurrencies to act as peer-to-peer collateral.
Smart contracts are task-oriented computer code which guarantees that tasks are completed in a specific manner, or the defaulter faces the consequences. One of the breakthrough aspects of smart contracts is that they are self-executing, and they make the business conditions highly transparent for the people involved. This provides a place for multiple parties to clearly outline the terms of a transaction.
Smart contracts self regulate and adapt after the involved parties update each step of the contract as completed or incomplete. Since decentralized escrow uses blockchain networks, there are no people to interact with or to pay fees to for upholding and monitoring business agreements. Since cryptocurrency is being used in decentralized escrow, the cost is decreased substantially since it is much cheaper to transfer funds with cryptocurrencies and there are no payments made to agents. With many cryptocurrencies, there are minor fees accrued during transactions that become the stake reward for nodes in the network. However, these fees are dwarfed by those accrued with fiat money.
The absence of third parties with the use of decentralized escrow means there is no possibility of escrow fraud or escrow collusion assuming the contract is set up accordingly. With a decentralized escrow account, the funds are not in the hands of any one person but placed into control of the smart contract. Manipulation by hacking is not feasible, as smart contracts are backed by the security that blockchain networks and consensus algorithms provide.
An escrow agent must take time to investigate the numerous details of the deal and scrutinize identities and other information, and in this respect, decentralized escrow accelerates the contract completion process. Once the smart contract has been agreed to, the only important factors are whether or not the contract (or the current level of the contract) has been completed in the specified time and manner.
The term ‘trustless’ is often used in regards to smart contracts since they remove the necessity of trust from the business deal. This element also means no legal systems have to be utilized to settle broken agreements. The irreversibility of cryptocurrency transactions means that payments cannot be revoked once they are paid.
Decentralized escrow takes its name from the blockchain network infrastructure used, but another aspect that becomes decentralized from its use is the escrow industry itself. Instead of paying large corporate entities to provide escrow services, decentralized escrow allows anyone with access to smart contract systems to enter business deals themselves. Imagine selling a home using decentralized escrow. You could require a full deposit into a decentralized escrow account before signing over any deeds or ownership documentation, and feel confident that the conditions of the sale will not be broken. No more reliance on escrow agents, attorneys, and potentially real estate agents as well.
Decentralized escrow can also limit investor risk and boost confidence during ICO’s. For example, coins sold through ICO’s can be bought with smart contracts that use dependencies to protect the investor. This acts similar to insurance, where investors receive a portion of their investment back if certain milestones or financial goals are not reached at moment in time. This same principle could work for investment during construction and other service contracts, where the company is paid based on their ability to stay on schedule. The smart contract would streamline the process of handling the escrow and the transfer of funds.
BitBay’s Double Deposit Escrow (DDE)
It’s no longer necessary to wait for long periods while escrow is being finalized for your business deals to be completed. When you create smart contracts with BitBay, the DDE system makes it easy for you and other parties to negotiate escrow and contract conditions prior to making agreements. Once a sale is completed and the conditions of the contract are either met or marked incomplete, the secure BitBay blockchain executes the escrow conditions in a rapid manner.
Backed by the power of a secure decentralized network, hacking or manipulation efforts with BitBay are fruitless. This also means that there are no intermediaries to pay or to trust with your money. This eliminates the possibility of someone committing contract manipulation, as the conditions of the agreement cannot be changed in dishonest ways. Using our native currency BAY, transactions fees are less than a $.01 (not a typo) and those with python programming skills can code more complicated custom contracts exactly to their specifications.
Here at BitBay, we recognize the power of decentralized escrow as a business tool, and we strive to empower individuals in the economic atmosphere. Our trustless smart contracts liberate peer to peer markets from the risks of dishonesty and high fees. We are proud of our DDE system and the security it provides with our smart contracts, all available to try with our Marketplace Client.
Experience the security of decentralized escrow and participate in a peer to peer economy today, at BitBay!