Why Use Escrow?
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Reason for using Escrow
When it comes to making a purchase involving a high value asset or simply when you want to enter into a financial deal of any kind with a stranger, perhaps the only way to go would be to use escrow. Buying and selling high value assets, and also trades that involve nominal value assets, all need to have trust at the heart of them, otherwise the trade will result in loss for either for both parties. Using escrow can provide enough assurance in these situations. In this article we want to go through the fundamentals of escrow and also the advantages of using escrow services.
Fundamentals
Escrow is a legal concept wherein a financial instrument or an asset is stored by a third party rather than two main parties of transaction; in other words, when the user works with this system, the third party plays the role of a formal guarantee and promisor. The funds or the assets are kept by the Escrow agency. This agency controls all the trade and transaction process and ensures that the required commitments will have been made thoroughly.
Therefore, no one can use his/her money without the agreement of the other participants. In some Escrow companies, especially the ones based on the Blockchain technology, cryptocurrencies are used as the main method of payment. One of the main features of cryptocurrencies is guaranteeing people’s privacy and payments being made.
Mechanism of assurance
Escrow has been designed following the aforementioned purpose. Through this service you can invite transaction parties, make a contract and safely pay the charges by the methods provided by the Blockchain technology. Additionally, buyer, seller, and Escrow service provider, create a new shared wallet with their own private key. This new wallet, known as a MultiSig wallet, will only allow the withdrawal of the balance when at least two out of three of its creators provide conformation. In fact, in the shared wallet, three signatures have been created, and the entire trade fee will be deposited to this wallet. If the buyer and the seller come to terms about transferring the balance, the cost will be transferred to the seller’s account without the need for the escrow system.
As a result this mechanism can bring trust and assurance to any kind of exchange involving a high volume of money, such as the purchase of a house, jewelry, and other valuable assets. Additionally, exchange of cryptocurrencies, which takes place online, is almost always between parties that are strangers to each other and therefore do not trust one another. However, using escrow can bring an elegant solution to this matter. In the next section, we will delve into specific advantages of using escrow services in various types of financial interactions and exchanges, specifically crypto trading.
Applications
The use of escrow services are quite prevalent in cryptocurrency exchanges, especially those involving over the counter trades. The benefits and advantages of cryptocurrency and Blockchain-based finances are quite clear. However, since all payments over the Blockchain are tamper-proof and irrevocable, mistakes and fraud could happen easily.
When it comes to making a crypto exchange and entering into a deal with a stranger over the internet, the least that can happen is making the wrong transactions. However, that’s not where it ends. If escrow services are not used, scams and frauds could take place easily. There is absolutely no assurance that everyone will act trustworthy when engaging in a crypto trade. As a result, you cannot be sure that when you make the payment on your part, the other party will also fulfill their end of the deal. But using escrow could easily solve this issue.
Advantages
To fill the trust gap in such situation, using escrow services can give enough assurance to both sides of a trade; i.e. the buyer and the seller. Providing this assurance is especially needed in OTC trades . So, other than regular exchanges of assets and regular exchange of cryptocurrencies, escrow plays a crucial role in making OTC trades feasible, safe, and secure.
Therefore, any deal can be carried out with complete assurance that both sides of a contract will receive what they have a right to. For example, when it comes to selling a high value asset, the seller can be sure that when the asset is given to the buyer, the payment will be made in full. On the other hand, the buyer will have complete assurance that when the payment is made, the asset will be delivered fully and safely.
Last remarks
With the help of escrow, two complete strangers can enter into a deal to exchange cryptocurrencies with complete trust and assurance so that no loss will be sustained by either party. When using escrow, parties to any contract can be fully sure that when they make the payment, the other party will also make the payment, and that neither party will receive their crypto without the other party receiving theirs as well. Therefore, this equilibrium is created in exchanges through the use of escrow.
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