Crypto Escrow System: Retaining The Middleman


In the business world, Trust, is a crucial concept in every activity carried out by parties involved in a business agreement. For the agreement to begin in the first place, there is the need for trust, so also throughout the contract delivery process till it’s end, trust is key. Since the parties involved have little or no knowledge about each other, then there is the need for a third party that has little or nothing to lose, to stand in as the intermediary between both parties. This introduced the concept of Middleman, a word fans of decentralized ledger technology loathe with distributed passion.  

The middleman is the authorized legal entity where assets and documents are kept, on behalf of the other parties involved in a contract or business agreement. The middleman is the third party that carries out the function of control, storage, records, verification, backup, monitoring, oversight, security etc. Every sector of the world, be it business or social, employs the services of middlemen.

Of course, the services of the middleman are not free, it comes with a price. In advertising for instance, the middleman in this sector include Google, linkedin and other platforms where ads run. They act as the intermediary between the users of their platform and the advertisers. The funds get to them first, after which a share is given to the advertisers. In essence, the larger share of the ads dollars gets to them with the ad owners getting unfair share oftentimes. Aside that, users do not have direct contact with product owners to whom they can share their thoughts, grievances and feedbacks. These and many more are the issues with middleman.

It’s no secret today that one of the main foundational principles of bitcoin and its underlying technology is the ability to conduct peer-to-peer (P2P) transactions, effectively eliminating the middleman. Curiously, crypto exchanges are centralized platforms where cryptocoins and Fiat are exchanged or traded. Examples are Coinbase, Geminterm, etc.

What an irony! That the same product created from decentralized technology needs centralized exchanges. The same revolutionary blockchain has stepped in with an Escrow system concept. A means of eliminating the traditional middleman and replacing him with a secured digital escrow.

Escrow performs the function of guarantor, holder and director of how assets are shared and used. So, the crypto escrow system is the digital concept where financial assets and documents are stored safely on behalf of the parties involved in a transaction on the blockchain.

The most recognized escrow systems are

Secret splitting: in this method, participants can break a password into N pieces and share it among themselves such that when a party wants to access, the consent of all parties are gotten and they all contribute their pieces. The problem with this system is that should a party lose his key, the asset cannot be restored.

Threshold scheme: it is an updated version of secret splitting which eliminates the problem of loss of keys. Parties can be divided into group of two where a percentage of each group have principal access to the funds. For instance, the parties can be divided into two each consisting of three members each. Then, two members from group B can have access and the third person can be from group A.

With this two system, if a party cheats, he can be easily excused, if a party loses access, no need to panic as transaction can continue and no need for reconstruction.


Functions of Blockchain Escrow

  • Trust: blockchain smart contracts are by far the ultimate model that actualize trust based system. Since deposits are stored before process begins and rules are agreed upon which are monitored by non human activities, trust is achieved.
  • Security: The whole idea of escrow is that most times, funds are stashed in offline wallet, with the smart contracts and keys encrypted, enabling greater security. Besides, escrow does not employ the services of a third party, so the risks associated with funds on centralized agencies are eliminated.
  • Privacy: with blockchain escrow, transactions happen P2P. The user’s fingerprint can be left on the system. Personal detail aren’t needed.
  • Fees: smart contracts will also eliminate middlemen fees.
  • ICOs: investors funds are kept with the escrow that ensures company’s obligations are delivered and proceeds are fairly shared.

It’s a way to ensure trust between buyers and sellers by holding funds, making sure each party performs their duties until target has been achieved. But, the problem with the escrow system is that it is complex to understand by intending users. Expert services is needed. Also, mistakes can be costly, a single one can destroy the whole process. Aside this, Escrow system is a digital intermediary service that ensures suitable business transactions between parties.

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