Explained: Escrows & the problem of trust
As long as barter exists, it is accompanied by the problem of trust. Trust is the prerequisite of any exchange transaction. But what if this trust in the exchange partner does not exist? In these cases, escrows can be involved.
What is an escrow?
Someone who helps two parties trade by solving the problem of trust is termed as an escrow. The term escrow is generic and informally in some places also referred to as a middleman since the person or group acts in the middle of a trade.
Where trust is required: Exchanges, purchases & sevices
The need for an escrow arises in situations where the seller and buyer want to execute a particular deal but neither of them has faith in each other and no prior data to rely on.
It might be fiat trades or crypto or any kind of trades but there has to be someone who would send first and always risks getting scammed. In such exchange situations, an escrow can accept the funds from both parties and send them to respective parties.
Since it is often difficult to ensure the authenticity and legitimacy of the product in direct purchases, you can simply hire an escrow agent to avoid any problems. Once the seller has shipped the items and the recipient confirms the quality and quantity, the escrow will then release the money to the seller.
The problem of trust also exists in the context of services. The problem of trust also exists in the context of services. It may happen that the employer hires hard-working employees and refuses payment after the work is done, or vice versa, that the employee accepts money and never completes the task. To avoid such problems, an escrow can be hired to review the work and release the payment.
What you need to know about escrows
The involvement of an escrow brings both advantages and disadvantages. For example, when using an escrow, the identity of the seller an buyer is secured. Furthermore a reputed escrow may add suggestions within the deal to make it robust. Other useful advantages are the security of funds and the better conversion rate for deals to go through.
But there are also disadvantags when using an escrow. First of all, it takes longer than usual to complete the trade when a middleman is involved. There may also be additional and unwanted fees. Moreover, the potential for disputes and confusion increases when an escrow is involved and the terms are not clear.
Before hiring an individual or company as an escrow for your trade, you must take care of some important points. An ideal escrow would tick most of the points below.
- Reputation & track record
- Fee charged by the escrow
- Turnaround time and experience for the particular type of trades
- Dispute handling ability
- Well written agreement between all the parties involved
As described, escrows can help to solve the problem of trust. If you keep a few important points in mind, an escrow could improve your next trading experience. Good Luck!
This article does not provide investment advice. Historical cryptocurrency data is not a guarantee of future market developments. The author may hold several of the cryptocurrencies mentioned in this article.
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