Escrow service is one of the most frequent and seen custody services in the ecosystem of the cryptocurrencies. This service involves the creation of a guarantee deposit contract, where the funds or assets are in a reserve phase through the intervention of a third party. After guaranteeing and verifying compliance with the agreements between the parties involved, the funds are released. That is to say, a third party or intermediary is appointed an amount of money to safeguard it until the verification of certain conditions. Then the money is released and delivered to the seller or service provider, as the case may be.
This type of custody service is very useful when carrying out both physical operations and online agreements, since they provide us with a means to carry out an operation in a neutral, impartial, stable and transparent. Escrow services cannot be influenced by any of the parties involved in the agreement. In fact, the result they present must be faithfully adjusted to the pre-established conditions in the service agreement. That is why these provide a high level of security and confidence to the parties involved.
FIRST OF ALL, WHAT IS AN ESCROW PAYMENT?
Escrow payments are payments in which the money remains in custody or deposit until the operation that originates the payment is completed correctly. It’s a safe payment system that’s utilized by escrow services, for example, and whose goal is to make an economic transaction between two persons more secure.
To achieve this, people who establish an exchange choose a third party they trust to be this external agent. This third party will serve as custodian of the money, ensuring that the exchange rules are respected for both parties. Thus, at the end of the exchange, the external agent verifies that everything is in order and the payment is released for the recipient to use and enjoy it. In this way, both parties can be fully satisfied by the exchange and the risk of breach of conditions in a contract is eliminated.
Now, in the world in which we see more and more the devastating role of cryptocurrencies, surely you ask yourself, what logic do escrow payments or escrow payments have? Well, the truth is, all the logic in the world, and it is that they are very useful, especially if you are looking to exchange cryptocurrencies, tokens or some other value with untrustworthy actors. In addition, in the crypto world, the best thing is that escrow payments do not have to leave total control of the funds in one of the parties, and even that third party can simply be a smart contracts specially designed for this purpose.
PURPOSE OF ESCROW PAYMENTS
The main objective of escrow payments is to provide the highest security to the parties in the middle of an exchange. The idea is to avoid any negative situation that affects one of the parties due to the dishonest treatment of the other.
Hence, this type of payment is widely used, for example in P2P payment platforms. This is because it guarantees at all times that the parties will act honestly. Since acting in another way can lead to loss of reputation or expulsion of the dishonest party.
HOW DOES AN ESCROW SERVICE WORK?
To guarantee security and trust in the parties involved in an agreement, The escrow service must be provided by an independent, neutral and certified third party. This with the aim of protecting both the seller and the buyer.
One of the most common ways custodial services are used is to purchase a product. Thus the buyer deposits the money in an account of the escrow service provider. And once you receive the product and check that it is in good condition, inform the escrow to make the transfer to the seller. So that helps avoid typical scams where one person deposits for a product, and then the other disappears with the money. However, another common application of the custodial contract concept is in the provision of services.
It’s also being widely employed in the area of cryptocurrency, where smart contracts are deployed. Then, when paying for the provision of a service or acquiring a good or asset, the two parties involved establish an agreement. Guiding the conditions relevant to the agreement in terms of form, money and time. The service applicant or buyer makes the deposit in advance. And these funds remain in custody and safekeeping in an escrow account. Thus, when the service or product is shipped and the applicant checks the status and is satisfied, the funds will be released to the other party.
BENEFITS OF ESCROW SERVICES
The escrow service provides great benefits to both the buyer and the seller. But its biggest advantage is guarantee security and build trust between the parties involved.
In the case of the requestor of a service or buyer of a product, the escrow completely eliminates the possibility of losing the money invested. Since if you are not satisfied with the service or the product is not delivered, your money can be refunded. For its part, for the service provider or seller there is also an advantage. Since the funds are under the custody of a neutral third party, you are sure that by fulfilling the agreement you will receive your guaranteed payment. And that this will be delivered in time for when the service contract ends.
In the case of operations with cryptocurrencies, escrow services have allowed multiple transactions to be carried out transparently and securely. With the guarantee of totally unknown people they can carry out their operations without them ending up being scam or fraud. For example in the purchase of ICO, the use of escrow guarantees seriousness and responsibility for investors who want to finance these projects. Since it is very common for ICO developers to be little or nothing known in the business world, so it can create a certain environment of mistrust and uncertainty for investors. So, escrow services guarantee that ICO projects do not end in failure. So, they become safer and more profitable.
Therefore, custody services offer great advantages over traditional prepayment systems. Generating security, trust, responsibility and doing much more work efficient and agile.
Read Next: What is Business Liquidity
Resources Credit: Clever ways to save when buying a house