Consumer protection escrows offer a crucial service benefiting sellers and buyers alike. These escrows guarantee the fulfillment of contract requirements and the secure exchange of funds, contingent upon both parties meeting their obligations.
Nonetheless, conventional escrow systems suffer from several drawbacks that blockchain solutions can effectively address. Jurat, a project focusing on blockchain in the legal industry, is poised to launch an application enabling users to establish escrows through smart contracts while providing robust legal safeguards for both parties involved.
Traditional Escrows Explained
A traditional escrow is a financial arrangement where two parties entrust a third party (called an Agent) with their money or other assets. The funds held by the Agent are only released when both parties fulfill their specific pre-agreed promises.
Escrow services are necessary for certain transactions to happen on the internet. For example, when a client hires a freelancer through an online marketplace, the freelancer is at risk because he might not receive payment, and the client is at risk because the freelancer might not deliver as expected. Escrow services make deals possible where the buyer and seller need protection in order to trust. Services such as Upwork and Fiverr serve as the escrow agent, collecting the payment upfront and disbursing it only after the contractor performs the work.
The Drawback of Traditional Escrows
However, online marketplaces are also self-interested intermediaries that want to collect fees by making themselves into the trusted party. And that causes problems. For example, Upwork charges a whopping 10% fee for holding the payment, while Fiverr takes twice that amount. Moreover, these services can tend to be biased in favor of the side that gives them the most business: they do not want to displease their repeat customers.
Overcoming these drawbacks with web2 technology is challenging. However, blockchain technology offers a superior alternative to traditional escrow services.
To better understand the source of these drawbacks and how blockchain technology can alleviate them, we can analyze the relationships using the language that Satoshi Nakamoto used to explain the benefits of blockchain:
Centralized: Conventional escrow services are administered by centralized third parties temporarily controlling a user’s funds. This centralized model presents a single point of failure, making it susceptible to human error and potential manipulation.
Intermediated: Escrow services can collect high fees from the users because of the trust problems that impede their deals. These “economic rents” result in increased costs for the buyer and reduced earnings for the seller. The intermediary can use his control over the assets to take a share of the transaction, which can sometimes be unreasonably large.
Overcoming the Drawbacks with Blockchain – Self-custodied Escrows
Smart contracts are self-executing programs deployed on blockchains, making them decentralized and immutable. They form the backbone of decentralized finance (DeFi) and decentralized autonomous organizations (DOAs).
Smart contracts can also form the foundation of an escrow agreement that eliminates the role of the Escrow Agent. The advantages of employing smart contracts for escrow services are as follows:
Costs: Smart contracts operate automatically and do not require an intermediary, thus reducing the costs substantially.
Transparency: Public ledgers provide transparency, enabling both parties to monitor the status of their funds.
Decentralized Security: Blockchains are immune to single-point-of-failure attacks, as they lack centralized control.
Automation: The escrow process doesn’t involve human intermediaries, resulting in automatic fund release upon meeting conditions.
However, there is a catch! Smart contract-based escrow services suffer from a significant limitation that prevents their use for escrows in most situations. By executing automatically, the escrows protect the seller but leave the buyer without legal recourse for subpar products and non-performance. Unless both parties feel protected, they will not adopt smart contract escrow services and will have to continue to pay the outrageously high fees of Agents like Upwork and Fiverr.
Fortunately, Jurat, a blockchain project specializing in legal solutions for users and developers, offers tools to address this limitation effectively.
Jurat: Blockchain Meets Legal3
Jurat provides technology that bridges the blockchain to state and federal courts. Called “Legal3,” such technologies create new use cases for blockchain by strengthening the relationship between cryptocurrency and the law. This bridge allows blockchains to enforce the legal rights of their users, such as by recovering stolen cryptocurrency and restoring coins following a mistaken transaction or lost private keys.
Legal3 also provides the missing piece for smart contracts to function safely for self-custodied escrows. Jurat is set to release an application that incorporates Legal3 into smart contracts, thereby ensuring legal recourse for the buyer and the seller if something goes wrong with their transaction. A buyer who is not satisfied with the seller’s product/service can invoke dispute resolution in the form of arbitration or a court case. Because the buyer knows that it has this capability, the buyer can feel safe escrowing the payment. This allows both sides to avoid heavy Escrow Agent fees by using inexpensive smart contract escrows.
Jurat’s app will permit users to create their own escrow smart contracts on any Ethereum Virtual Machine (EVM) blockchain, such as Polygon or Ethereum. Parties can employ this system to escrow any digital asset on-chain. If one party fails to meet the contract’s conditions, the other party can seek compensation through legal channels. Parties can even use the app to contract for cross-chain transactions and swaps.
Jurat’s Legal3 services unlock the potential of self-custodied escrows, making it a comprehensive solution for freelancers and anyone else wishing to transact over the internet.
Final Thoughts on How Blockchain Can Revolutionize Consumer Protection Escrows
Escrow services are pivotal in safeguarding customers and have become indispensable in our digital age. Yet, the conventional escrow system is fundamentally flawed because of its centralization, high expenses, and absence of automation. This is where blockchain-based alternatives prove their worth. Jurat’s smart contract escrow service will offer a faster, transparent, more secure, and cost-effective alternative to traditional escrow services.