Smart Contracts: Why they’re the New Escrow Service We’ve Been Waiting For
What are Escrow Services?
As international markets continue to consolidate and the world turns more and more into a global village, commerce now functions on a global scale. Previously, working in a global marketplace forced us to rely on a service called “Escrow” to exchange assets. Escrow is a service by which a person or institution acts as a third party to help facilitate a transaction between two parties. The job of an Escrow agent is to hold onto the assets in question until both parties have successfully fulfilled their end of the arrangement. However, what was a practical business model in theory has been compromised by a few bad apples in practice, just look at the Tegeta Escrow Scandal. This is not to say that the Escrow system itself is flawed, individuals just have the ability to compromise the whole system’s effectiveness. All it takes is one person to derail the efforts of an entire organization. Thus, it is on the onus of both the buyer and seller do their due diligence and independently assess the trustworthiness of any Escrow agent they work with. Recently however, due to the growth of Blockchain based technology and decentralized systems a better alternative has emerged. This alternative makes the reliance on Escrow agencies obsolete. It is called a Smart Contract.
What is a Smart Contract?
Smart contracts help you exchange money, property, or any asset of monetary value, without the involvement from a third party. At its core, a smart contract is a piece of pre-programmed software that is kept on a blockchain. Since Smart Contract’s function on a blockchain, an immutable ledger that cannot be changed, the contract itself can also not be changed. It will function exactly as it has been programmed. Though a smart contract can be coded onto any blockchain, the most popular network for executing Smart Contracts is Ethereum’s. This is due to the Ethereum networks superior processing capabilities. Deploying smart contracts has eliminated the need for third parties to oversee transactions because, each party lists the conditions they require for a fair arrangement, and, based off these conditions the contract will oversee itself. It is a completely trustless process.
Lets look at the simple yet effective example of IF/THEN statements to contextualize the wide-spread potential of self-executing contracts:
IF/WHEN: X transfers the money in full, THEN Y will hand over the item to X
IF/WHEN: Person A sends money to Person B, THEN Person B will forgo the ownership of the house, giving it to Person A
IF/WHEN Person A completes Task 1, Then payment from Person B is delivered to Person A.
Because all the requirements for a fair transaction are coded directly into the smart contract, this technology not only defines the rules and penalties around an agreement in the same way that a traditional contract does, but unlike conventional contracts, it also automatically enforces those obligations. Financial mediation was an activity that, before, could only be done by a third party service. Now however, by leveraging this self-executing technology, it can be done directly between two parties. This peer-to-peer breakthrough has completely negated the need for a centralized authority or agency.
Smart contracts have the potential to alter the fundamental approach to sending financial assets, while upending the entire Escrow industry in the process.
Lets take a comparative dive at a transaction facilitated by smart contracts versus a transactions facilitated through a conventional Escrow service. John is buying a house from Amy. However the deal doesn’t close for two months and John and Amy are both nervous that something will go wrong from now until then, so they hire lawyers to represent them and an Escrow service to facilitate the sale of the house. Under these centralized conditions, Amy and John are both paying a steep price to secure legal counsel and Escrow services to ensure that the sale and swap-of-assets goes smoothly. However, in a decentralized setting, using smart contracts can alleviate the same problems for John and Amy, but without the use of intermediary services and the price tag that comes along with them. Instead, John and Amy can write a smart contract to facilitate this transaction. Encoded in the smart contract would be the terms of the sale, date of sale, along with all of their personal & banking information so the funds are automatically deposited once the date of sale arrives. When the date of the contract rolls around, the contract will automatically begin to execute itself so that Party A (John) sends his funds to Party B (Amy). Once the funds are successfully deposited to Party B(Amy), the next part of the contract will begin to self-execute, and the deed to the house will be digitally forwarded to Party A (John).
If you’ve just read this and it seems like the potential for smart contracts is limitless, you’re not too far off. The only limitations for Smart Contracts is the ingenuity and imagination behind the people designing them. On a relative scale Smart Contract technology is still in its infancy, but if early progress is a precursor to future success then it seems like a decentralized global marketplace and system of commerce has a very bright future ahead.
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