Jarvis is creating total interoperability for its users to provide a seamless and futuristic user experience. To achieve this, we’re not reinventing the wheel, but rather reusing old tools that have worked for centuries. In this article, I’ll tell you a little about one of the key mechanisms of the Jarvis technology framework: the escrow. Do not worry, we will will try to make it as simple to understand, as we can…
There is a Russian proverb that says “Everything new is actually something old, that is well-forgotten.” Similarly, blockchain rarely reinvents the wheel: rather, we build better infrastructure to enable us to do what we have done for centuries, but in a decentralized way. For example, state channels and most scaling solutions, like Lightning or Rayden network work in the same way that clearinghouses and Banks do (multiple transactions but a single settlement). In this article, we will look at escrows’ role in building this infrastructure and how we will use it to enable features like trading on Forex from an ETH deposit, or paying our restaurant bill with our Apple stocks or Bitcoins.
What is an Escrow?
Escrows are essentially third party intermediaries, which hold assets, until some conditions are met between the main stakeholders of a deal or transaction. Escrow comes from the French word escroue, meaning a scrap of paper or a scroll of parchment: originally, escrows were used to enable a third party to hold money or assets on behalf of the transacting parties (“the buyer” and “the seller”). Ebay uses escrows for their transactions — until you receive your purchase, many sellers don’t receive their money! Escrows are also widely used for high-value transactions by banks, and are often part of big crypto OTC deals as well. Overall, they’re a secure place, where your money could be stored in case that a transaction would require a long time, or additional conditions to be met.
Escrows and decentralization
As you might know, crypto transactions cannot be reversed, when you hear or read about escrows in the crypto world we mainly refer to the third party or the smartcontract that will secure a transaction, as described above.
Cool! But what does it have to do with Jarvis? Well we will use escrows to lock users assets as well, but not secure a transaction, to trigger a collateral credit.
Collateral Credit.
Say Bob has 1 BTC, worth $3000. He will lock it into an escrow. Because it is locked, Bob can ask Alice to give him $1000. This is the collateral credit. Bob can make any use he wants, he can open a Forex trading account, or he can buy a flight ticket with it.
He cannot take back his 1 BTC, so Alice is reassured that he will still be able to pay back the loan. If BTC falls, and if the 1 BTC of Bob worths now $2000, Alice loan is still covered… but if by mischance the BTC fall to $1000, automatically the BTC will be released from the escrow and sent to Alice so she can then automatically sell it for USD.
How to use this collateral credit for instant payment ?
Well, let’s think about what normally happens in banks and why most transactions in traditional, centralized banks, are super fast. First and foremost, banks hold your money. So, when you want to send $50 to John, who is in the same bank as you — easy, peasy: the bank just writes -$50 on your account and +$50 on John’s account! If you are in different banks, same things happen: both banks write +50 and -50, and they wait the end of the day to do a clearing. So basically they will check how many transactions have occurred between their clients, and instead of executing them, they will do a single settlement.
Say 10 customers of bank A have sent 100 euro each to 10 customers of bank B, but 5 customer of bank B have sent 100 euros each to 5 customers of bank A. In the end, bank A will only send 500 euros to the Bank B instead of sending 1000 euros and then receiving back 500 euros…
Transactions are instant, not the settlement!
Many have asked us, for example, how we will be able to make instant payment in euro or dollar through the mobile application using cryptocurrencies, and even stocks, anywhere and at anytime? In a centralized mode, it is quite easy to do… But how then, can we achieve this in the decentralized mode, where users hold their assets and transactions take time to be validated on a blockchain?
Imagine Alice is strolling through Paris and finds some shoes costing 200 euros. She’s made high profit on crypto this week and wants to buy them using BTC. She can exchange them for euro but she will have to wait the transaction to happen on-chain… and she wants them now…
No worries, Alice — Jarvis allows an instant transaction from Alice’s Jarvis wallet, like a normal Apple Pay transaction. What happens behind the scenes is that Jarvis locks 220 euros worth of BTC of Alice’s BTC in an escrow. Then, Jarvis sends a message to the liquidity provider, linked to a Fiat Gateway, asking to transfer 200 EUR to pay the merchant, with her escrow as a guarantee that we hold the money. The merchant is paid. Meanwhile, Jarvis is looking for a buyer for the BTC and, after we sell it, we send 200 EUR back to our liquidity provider in a matter of minutes and unlock the remaining 20 euros worth of BTC in Alice’s wallet. Et voila! Alice gets to enjoy her trip in Paris to the fullest, without having to worry about transactions, exchanges, liquidity and more. We lock 10% more so we can be sure to cover BTC price movement.
Trading on Forex, CFDs and leverage product
Centralized blockchain entities already offer this same mechanism, because they do the same thing as a bank (explained above) and therefore can offer quick and secure transactions. Since we offer a semi-decentralized exchange mode, we needed to figure out how to do this while keeping users’ assets in their own accounts.
Jarvis can offer this by using escrows (through multi-sig wallet and smartcontract). A user can put any asset into an escrow: EUR, USD, gold, BTC, ETH, DAI, even tokenized assets like a house, or a portfolio, a stock or even a position on the market. Then, let’s imagine the user wants to trade Fx: since their asset is held securely in the escrow, a loan is triggered in EUR or USD, in order to have fiat to trade Fx.
So, you deposit 1000 euro of BTC into an escrow, you gain access to 700 euro, as a loan, and you can trade Fx with this as a deposit; you of course gain access to leverage, so you got a 2100 to 70,000 euros trading power. If BTC falls under 700 euros of value, the escrow releases the BTC to the lender so like that, the lender does not lose money.
Escrows can redefine the concept of money, you can keep your wealth into assets such as gold, and put them into an escrow when you need cash!
A little perspective
I know — I’m very excited about collateral credit and If you’re not too involved in blockchain, perhaps this sounds mundane. However, decentralization is currently backed against a wall, with its issues of scalability and the ability to provide quick, let alone instant, transactions. The biggest blockchains are still having issues transacting quickly between each other and blockchains like Ethereum and Bitcoin are under pressure to deal with issues around sustainability and their clogged and energy-consuming validation process.
At time of writing, Ethereum’s power can process just about 10–20 transactions per second (average of 15, to be precise). A block’s formation costs about 15 seconds and requires multiple confirmations of validity. Depending on this, as well as the amount of Gas paid, the reliability of the miners and more, a transaction will take from 3 minutes to way over 10. Compared to some banks’ international transfers of 2–3 working days, this seems like a dream, however, if you imagine Alice’s scenario of contactless payments — 10 minutes is infinitely long. And when we talk about modern lifestyles, we must note that around 30% of mobile phone users use NFC payments and mobile wallets* and the numbers are accelerating — instant, safe transactions have never been so important and standards must be set according to existing technologies.
While 10 minutes may have been a miracle a few decades ago, standards are set by centralized finance and, as innovators, we must ensure we are not only living up to financial expectations, but improving on them.
The future of escrows
Jarvis is committed to creating a lifestyle like Alice’s for the future: we want to see everyone benefit from decentralized finance in the safest, sleekest, quickest way possible. Escrows can present a part of this future. Of course, many more legislative changes need to occur before the fiction can become reality but stepping on the shoulders of giants and learning from traditional finance, we believe we can deliver accessible decentralization. I can’t wait to see people trading their bike for stocks, collateralizing crypto to lend fiat and paying their credit with shares in a bank.
*Data from PYMNTS and percentages vary depending on device and wallet.
Pascal.
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