What is Escrow?

Escrow refers to a financial mechanism where a third party is designated to hold the assets while the buyer and the seller negotiate the deal. Escrow accounts are required if either of the parties is uncertain whether the terms of the transaction can be completed.

Escrow accounts originated in traditional markets for property transactions. A third party holds the funds until the seller and the buyer sign the property purchase agreement. The escrow then releases the funds to the seller, while the buyer receives the property. In addition to this, escrow accounts may be used for banking, mergers, and acquisitions, among other purposes.

Escrow accounts have become increasingly popular among cryptocurrency investors. According to Business Insider, hackers acquired over $4 billion worth of cryptocurrency in 2021. Escrow services can be employed if crypto investors wish to exchange their crypto assets for fiat currencies but are unsure if the other party will follow through with the deal.

Blockchain-based escrow accounts can be automated by employing smart contracts. In many cases, the accounts are overseen by dedicated service companies. Blockchain is advantageous for escrow accounts due to the security of the distributed ledger. They may be less prone to hacks or scams, although cases of human error are still possible.

Escrow service companies act like third parties responsible for temporarily holding the funds and regulating the transaction payment. This helps ensure that both the buyer and the seller follow through with the terms of the agreement. The companies may charge a commission for their service of around 1-2%. The payment may be withdrawn from either or both sides of the agreement.

Crypto escrow services may be subject to national regulations and consumer compensation schemes to ensure transparency and legitimacy. Regulated firms can provide better reliability as the buyers and sellers entrust them with valuable assets.