An escrow is defined as a financial arrangement where two parties use a third party to hold and regulate payments of the funds for a given transaction. It guarantees that the transactions are secure by keeping the payment in an escrow account, which will only be released by the escrow company once all of the terms in the agreement are fulfilled by both parties involved. Escrow systems are a very powerful tool, especially if the transactions involve a very large amount. For example, when an investor pledges $2 billion for another investor’s start-up business. They may agree that only a certain percentage of the amount will be initially released, 20% for instance. The rest will be kept in the escrow account temporarily until all terms in their agreement are completed.
How it works
The escrow system works in many ways and designed for the temporary safekeeping of funds by a disinterested third-party escrow provider who doesn’t have any preference for whoever gets the payment, as long as whatever is stated in the agreement is fulfilled. Here are some examples of how and where escrow works.
1. Buying or selling property
Escrow is mostly used in real estate transactions such as buying or selling a house or other real estate properties. An offer usually includes an earnest money deposit to prove that the buyer is serious about buying. Depositing funds in an escrow account guarantees protection to both the buyer and the seller. The buyer can be confident about the return of funds should there be any problem with the property, and the seller can be confident to receive the funds should the buyer backs out unexpectedly. In cases like these, it is the escrow provider who will review the purchase offer and refund the buyer or release the funds to the seller, depending on the outcome of the review.
2. Online purchase of goods and services
Escrow systems are also useful for any type of online transaction. Online buying and selling are particularly risky because you are dealing with someone you don’t know and could be oceans away from you. Using an escrow system is beneficial for all parties because there is a third-party watching over the transactions. The agreement may contain the amount to be paid, the method of shipment, the date of shipment, and or return policy if the buyer is not satisfied with the quality of the product. Both parties just need to adhere to the agreement. If the seller never ships the good/s, the escrow provider returns the money to the buyer. But if the buyer claims not to have received the goods, the escrow provider and the seller will review shipping confirmations. If there’s proof of shipment, the seller gets the payment.
3. The Virie Market Escrow System
The Virie Market has a unique and secure escrow mechanism that does not use any third party. It follows the economic principle that everybody has to play fair to be able to maximize profits. Both participants make additional deposits that they can forfeit should there be any contravention of the rules. The main steps include the buyer’s attaching an encrypted escrow template transaction into the special transaction/carrier field in the system. It is then stored in the blockchain where the seller can decrypt to either proceed with the escrow transaction or decline it. If the seller decides to proceed with it, he will have to prepare a release transaction template that will send a certain amount of the deposit back to the buyer and the seller. The seller will encrypt it with the buyer’s key and attach it to the attachment field of the escrow transaction. Once the buyer receives the goods, he will send his digital signature to release the payment. While the Virie Market doesn’t use any third party, it uses a three-round protocol without any direct connection between participants. It guarantees that the transactions are secured and cannot be controlled or altered by anyone, including the system’s developers.