With the use of blockchain technology, decentralized escrow has the potential to revolutionize how trust is created in business deals. Decentralized escrow systems, as the name implies, are trust-forming digital agreements free from any controlling third parties or intermediaries. Open, blockchain-based smart contracts are the driving force behind decentralized escrow and are essential to its existence. The use of decentralized escrow allows cryptocurrencies to act as peer-to-peer collateral.

Smart contracts are task-oriented computer code which guarantees that tasks are completed in a specific manner, or the defaulter faces the consequences. One of the breakthrough aspects of smart contracts is that they are self-executing, and they make the business conditions highly transparent for the people involved. This provides a place for multiple parties to clearly outline the terms of a transaction.

Smart contracts self regulate and adapt after the involved parties update each step of the contract as completed or incomplete. Since decentralized escrow uses blockchain networks, there are no people to interact with or to pay fees to for upholding and monitoring business agreements. Since cryptocurrency is being used in decentralized escrow, the cost is decreased substantially since it is much cheaper to transfer funds with cryptocurrencies and there are no payments made to agents. With many cryptocurrencies, there are minor fees accrued during transactions that become the stake reward for nodes in the network. However, these fees are dwarfed by those accrued with fiat money.

The absence of third parties with the use of decentralized escrow means there is no possibility of escrow fraud or escrow collusion assuming the contract is set up accordingly. With a decentralized escrow account, the funds are not in the hands of any one person but placed into control of the smart contract. Manipulation by hacking is not feasible, as smart contracts are backed by the security that blockchain networks and consensus algorithms provide.

An escrow agent must take time to investigate the numerous details of the deal and scrutinize identities and other information, and in this respect, decentralized escrow accelerates the contract completion process. Once the smart contract has been agreed to, the only important factors are whether or not the contract (or the current level of the contract) has been completed in the specified time and manner.

The term ‘trustless’ is often used in regards to smart contracts since they remove the necessity of trust from the business deal. This element also means no legal systems have to be utilized to settle broken agreements. The irreversibility of cryptocurrency transactions means that payments cannot be revoked once they are paid.

Decentralized escrow takes its name from the blockchain network infrastructure used, but another aspect that becomes decentralized from its use is the escrow industry itself. Instead of paying large corporate entities to provide escrow services, decentralized escrow allows anyone with access to smart contract systems to enter business deals themselves. Imagine selling a home using decentralized escrow. You could require a full deposit into a decentralized escrow account before signing over any deeds or ownership documentation, and feel confident that the conditions of the sale will not be broken. No more reliance on escrow agents, attorneys, and potentially real estate agents as well.

Decentralized escrow can also limit investor risk and boost confidence during ICO’s. For example, coins sold through ICO’s can be bought with smart contracts that use dependencies to protect the investor. This acts similar to insurance, where investors receive a portion of their investment back if certain milestones or financial goals are not reached at moment in time. This same principle could work for investment during construction and other service contracts, where the company is paid based on their ability to stay on schedule. The smart contract would streamline the process of handling the escrow and the transfer of funds.