Escrow services involve the participation of an intermediary in the transaction, who ensures its speed and security. Escrow is used not only in the traditional financial system, but also in the crypto industry.

What is escrow

An escrow agent in the crypto industry is a certain intermediary, thanks to whom the transaction will be safe for both the seller and the buyer. It acts as a kind of transshipment point that stores cryptocurrency until certain conditions satisfy both parties. The presence of such an intermediary in certain scenarios reduces the risk of errors and illegal actions on both sides.

The presence of a third party when conducting transactions with cryptocurrency is not always necessary, since there are smart contracts. They themselves are automated escrow agents.

However, exchanges like Binance, Bybit or Coinbase are not escrow agents. Crypto exchanges are places for purchasing and selling cryptocurrency with varying degrees of centralization. Escrow agents also include various P2P sites and platforms that allow the use of smart contracts.

Who is involved in the transaction and how does it work with the participation of escrow?

Parties to the transaction

There are three parties involved in the transaction: the buyer, the seller and the escrow agent. The latter acts as a guarantor that everything will go without incident.

For example, you want to buy a certain car model. They sell it only for bitcoins. At the first stage, you deposit your cryptocurrency into an escrow account, thereby showing your intentions. Next, the seller responds: he confirms the availability of the required model, the price and other details of the transaction. All this time, the cryptocurrency is stored with the escrow agent. After all the nuances have been agreed upon, the transaction takes place. First, the seller delivers the car to you, and then the intermediary transfers bitcoins to him.

It goes without saying that the system is not ideal. By adding a middleman to any transaction, you increase the risk of error, because the more complex the system, the easier it is to find a vulnerability. Thus, the guarantor may turn out to be unscrupulous, simply incompetent or a fraudster, so you need to approach his choice with due care. Historically, the first cryptocurrency was conceived as a peer-to-peer (peer-to-peer) network of financial mutual settlements, within which, unlike the banking structure, the participation of third parties is conceptually not necessary.

Types of escrow transactions

There are three main types of escrow transactions: traditional with the participation of a third party, based on the use of smart contracts and based on the use of multi-signature. Each of them has both advantages and disadvantages.

In the first case, if any organization acts as an intermediary, then it must have a certain level of reputation. It is unlikely that you will trust your crypto assets to the first person you meet. But even in this case, you cannot absolutely exclude the option in which you will be fooled.

Multi-signature escrow is based on the use of a wallet, which can only be accessed by providing signatures from all parties to the transaction: buyer, seller and intermediary. In this case, each party will have their own private keys, and the role of the intermediary will be reduced compared to the traditional type.

Smart contracts are an automatic way to solve a problem. In this case, the role of the intermediary is completely nullified. In fact, this method is the most reliable, since it eliminates the human factor altogether: the transaction occurs on its own without the necessary centralization.

Escrow services are not perfect. They have quite a lot of advantages, but the risks they carry must also be taken into account.

Advantages of escrow

The main advantage of using an escrow agent is psychological. It is easier for people to entrust their assets to an organization with a high reputation than to someone they do not know. Also, using an intermediary can often speed up the transaction process. Well, don’t forget that escrow agents are often P2P platforms, and they can allow you to maintain confidentiality, unlike the same centralized crypto exchanges.

Risks of escrow

The first obvious disadvantage of using escrow is the possibility of collusion between the intermediary and the buyer. Let's say the deal is agreed upon, the seller transfers the goods to the buyer, and the intermediary disappears. In this case, the escrow agent risks his reputation, but still no one is immune from this.

However, smart contracts are also vulnerable. They are not immune to errors in the code, so their work may not be correct. Even if everything is perfect in this regard, do not forget about hackers. There is no safe that cannot be cracked.

Another risk may be related to the very nature of cryptocurrencies. While you are going to make a deal, are negotiating, agreeing on the terms, the rate of this or that asset can change greatly. And if so, then the terms of the deal may be revised.

Conclusion

Thus, escrow services are, on the one hand, a profitable method to secure your transaction in certain scenarios; on the other hand, it does not guarantee 100% security of your finances.