What Is Escrow?
Escrow is a way to control and protect financial assets. An escrow is a legal concept in which a third party holds financial products or assets on behalf of the parties involved in the transaction completion process. In other words, when you use escrow, a third party becomes a guarantor.
Investments or assets are held by an escrow company. This company controls the whole process and ensures that the commitments are fulfilled. For this reason, nobody can use the money on their own without the participation of other participants.
How Does Escrow Work?
One of the most used concepts is “secret splitting”. It works when you have important information and share it with the people and/or companies you trust. You can share a password, a few bank accounts, access to stocks and bonds, and more. No one can access this information alone, but it becomes possible through collective agreement. But one of the weak points is; if a party does not contact the other parties to make an agreement or makes concessions and then lose trust, there is no way to bring it back.
If there is no way to reach all relevant people? What to do for this? Consider the threshold scheme.
What Is Threshold Scheme?
Threshold scheme is an improved version of the secret splitting. Its difference comes from that it does not require the agreements of all parties. For example, you share information with five different parties, but three of them can reconfigure secret. The two parties for access to information is not enough. If you need to get someone out of your escrow, you can do this easily. These parties can be divided into some groups depending on the level of trust. For instance, let’s assume there are six people, you completely trust three of them (group one) and the other is the less reliable, the second group. If something happens, you can do a data reconstruction scheme. In this way, you can use three people from the first group you trust and two people from the second group you trust less. Or two people from the group one and three people from the second group. There are no limitations in the threshold scheme. It can be as complicated or as easy as you want.
Is it secure?
Mathematics and cryptography prove the reliability of the escrow system. Many mathematicians and cryptologists have worked on security and have been able to develop algorithms for secure escrow. To avoid collusion, they developed a scheme in which others can cancel the decision of others. If one or more parties try to deceive the other party, the plan will disappear. If one or more parties lose access, it does not need to change the key.
If Escrow Is So Good, Why Does Not Everybody Use It?
The complexity of the implementation discourages many people. Because the explained models are quite complicated and much harder to understand. Probably, there is a need for an expert on mathematics or cryptography. Also, wrong implementations can be costly. At first, you may not notice any mistakes in the system, but you may not be able to prevent it if you notice it.
It is important to remember guarantors. Because they are risking their reputation. Therefore, in the case of a mistake, of course, their services will also be much more costly. Expenses together with experts will increase significantly.
How Is Escrow Implemented In The Blockchain World?
Escrow is gaining more and more popularity in Blockchain. Many companies have recognized the importance of guarantees to prevent investors from fraud. The team may not be known by the public, but the reputation of authority of the Blockchain world is not disputable. Some companies serve as third parties in different agreements. Some enterprises are already launching ICOs with escrow. Ethereum, the largest Blockchain platform, has already made a smart contract for escrow. Escrow has become one of the power tools that show the seriousness of your goals.