What is Blockchain Escrow Service & How Does it Work?

To spare you time reading, this post is for online buyers and sellers interested in a new emerging form of escrow - blockchain escrow. Because of somewhat nerdy descriptions and use of blockchain buzzwords, better if you already know what the blockchain is and how it works 😉

Still, if interested feel free to check even if you are an absolute beginner.

A Brief Intro to Escrow Service

Before we dive into the world of blockchain escrow, let's first review how a centralized, a.i. traditional, escrow is used. Later on, this helps us see the differences and similarities that centralized and decentralized escrow, also known as blockchain escrow, may have.

So, if you have been long enough on this planet, you already know that an escrow service is often used for "something big that's worth a lot of money". Something like a Beverly Hills mansion, a supercar, a yacht, or the original Rolex Oyster that your grandpa used to wear (who knows?).

In other words, you do not hand over the car keys or the family Rolex to another person.

1. There's paperwork to be done before any purchase or sale occurs.
2. There in the contract you and the buyer signs you outline the rules of the purchase agreement that the escrow makes sure are followed.
3. Then, as the buyer sends the payment to the escrow bank account and it receives it, you send the keys/watch to the buyer.
4. Once the quality is examined by the buyer, the escrow is instructed to release payment to your account.

A blockchain escrow is similar in a way it also safeguards the payment while the deal is done, and then, sends it to your account. But because it is an alternative to a centralized escrow, where a single person or entity has authority over money and contract, blockchain escrow is decentralized.

Let's see what that means and why a blockchain escrow might be the next big thing for a P2P market.

Fun Facts to Play Around

• The word "decentralized" is forever linked with DeFi, and the picture most people have on their minds is staking and trading crypto on DEX.
• Ironically, the World Bank defines "decentralization" in the common civil context of a transfer of power to sub-national governments.
• In a decentralized blockchain network the data, or any change in it, is copied and distributed across all blocks of the chain.

What is Blockchain Escrow Service?

Let's start by giving the definition.

Blockchain escrow, sometimes called “decentralized escrow”, is a specific escrow system that uses a blockchain network to confirm and act on the given instructions in code instead of a human.

Because a blockchain is a network of nodes, it is fair to say that a blockchain escrow uses nodes as a substitute for bank clerks.

Sounds complicated? Let's try to put it simpler.

Imagine you received a wire transfer and went to the bank to get it.

You've explained to a clerk what your bank visit is about. The clerk listens to you, checks the system, and then, suddenly asks you to wait a few minutes before your query is solved.

Turns out the new clerk has difficulties recognizing an operation address in the system and went on to consult a senior clerk who assists, and a few minutes later you are given a receipt and moved a floor down to get your money from the cashier.

Depending on where you currently live, this wire transfer withdrawal may look familiar or not.

The key takeaway is that in the blockchain escrow multiple nodes must approve the transaction before it happens. That's where the "decentralized" part of it comes from. Not a single node is deemed more authoritative than the other, and all operations (later on about the types) are double-checked by the "peer nodes".

But, does any blockchain can be used as an escrow?

Not really. For a blockchain escrow service developers have to first build a safe machine, able to store both rules for how and when the deal is complete, and the money to be paid in the end. In the blockchain universe, such machines are known as smart contracts. Fancy, but true.

Just like an army officer, a machine is given the rules and is sent to the blockchain to complete its mission. And what is the mission? To receive and release money following the rules.

Sounds even more complicated now. But let's have another (and more suitable) example this time.

You walk to the nearest vending machine to buy soda. There is no one near supervising your purchase, but still, you are playing by the rules. To get the soda you input the right amount of money, and voila! it falls to your lap.

Now, as you are slowly piecing together what a blockchain escrow is, it's time to see how it works.

How Does a Blockchain Escrow Work?

At this point, you start wondering, how the blockchain and smart contracts come together as a blockchain escrow, right? In what way do they communicate and how connected they are?

Well, once created and sent to the blockchain smart contracts actually live on it. So, every action that is requested by the escrow user (to receive or release the money, for example) must be approved by multiple network nodes.

Such a verification process adds an additional layer of security to ensure that the contract is following its rules and no fraud is attempted. This may be the key reason why a blockchain escrow is a safer alternative to a traditional escrow service.

The way a user, a smart contract, and a blockchain communicate is through code, and more specifically, smart contract calls and pre-determined functions. With that in mind, here's how it goes.

1. A user makes a call to a contract, a.i. calls a specific function to execute.
2. Blockchain nodes receive and confirm this operation.
3. The function executes and brings the user expected results.

Yet, the average user who may not be familiar with code may find building and integrating smart contracts with the blockchain difficult. On top of writing a smart contract code, you need a UI to make contract calls and a gateway connecting you to a specific blockchain network where requested transactions are confirmed.

So, if you are a regular P2P marketplace user and not a full-blown developer, you need a blockchain escrow app or platform. It connects you to a smart contract and a blockchain network to request and confirm specific transactions without writing a line of code.

The whole process for both users in this case should look like a regular escrow deal supervised by the nodes instead of humans. Below are the steps for our first blockchain product - Zenland escrow application.

1. Either a buyer or seller fills out an escrow contract describing what, when, and how it is sold, and both approve the terms. Both must enter their cryptocurrency wallet addresses (to send and receive payment).
2. A buyer sends the contract and the agreed payment to the selected blockchain.
3. A seller checks if the payment is in the contract, and delivers the product/service.
4. A buyer frees the money from the contract to a seller's wallet address.

Watch a 2-minute explainer video for details, or read more in user documentation.

Is Blockchain Escrow Only for Crypto and NFT?

People often associate blockchain escrow with the purchase or sale of Bitcoins or other altcoins. A more recent trend is to use an escrow service for NFT. And it's easy to see why the use of smart contracts and blockchains as a secure guardian for fungible and non-fungible tokens is swelling in popularity.

But can a blockchain escrow be used for real-world products or services?

While it's hard to predict what the "big web3 future" holds for us, web3 escrow evolution seems inevitable.

Among the clear benefits of blockchain, escrow is its proven security, transparency, and trustless nature.

Given the fact that every transaction has to be confirmed before the contract executes any function requested by the user, fraudsters are having a hard time getting their hands on the money.

Also, because any transaction request is recorded on the blockchain, it can easily be checked via a blockchain search tool - blockchain explorer.

Last but not least, with the exception of the Ethereum blockchain, the overall fees for blockchain escrow services are lower and more flexible than the traditional centralized escrow. Various bank fees and minor differences in banking may explain why most escrow services have a standard minimum fee or do not serve certain countries and states.

Yet, perhaps the biggest limitation to the widespread use of a blockchain escrow service is the difference in regional and international laws regulating third-party trade and web3. This makes it difficult to track physical goods or value items over a long distance and is likely to influence the result of the deal and users' satisfaction.

On the bright side, digital trade (game items, domains, web services, etc.) is not only safer and geographically unlimited but cheaper and faster with a blockchain escrow. To eliminate the unnecessary volatility that cryptocurrency has today, Zenland users send and receive payments in stablecoins.

At the end of the day, a blockchain escrow is yet to reach its full potential with more Bitcoins, NFT, domains, websites, and who knows Beverly Hills mansions being sold without escrow agents and banks.

Though, in what we believe in as a team, our thousand-miles blockchain escrow journey starts with the first escrow contract on the test network. And you, an online user, can help us bring about this change.