Escrow is a way to provide trust between a buyer and a seller in a transaction. In an online transaction, how can a buyer be certain the seller will deliver the product or service? Likewise, how can a seller be sure that the buyer will pay? Escrow solves this problem with a neutral third-party to hold the asset and payment.
For those unfamiliar with escrow, common use case of escrow is in real estate transactions. Suppose a seller agreed to sell their house to a buyer. The escrow company will hold onto the money and the deed for the house. The buyer gives the escrow agent a deposit and the seller gives the deed to the escrow agent. These agents ensure each party fulfills their obligations and releases the money and deed to the respective parties. With this system, the lack of trust between the buyer and seller is greatly reduced.
As with any service, the escrow agent must be paid for their work. The agent charges a fee, sometimes as much as a few percent of the total transaction value. For real estate transactions, this fee can cost thousands of dollars. So how do smart contracts fit into the picture?
Escrow with Smart Contracts
Smart contracts are pieces of code that live on a blockchain. They are essentially contracts put into computer code. Smart contracts execute without the need for a middleman, like an escrow agent. Instead, the money for the house and the deed can be placed into a smart contract. When both parties fulfill their obligations they would both digitally sign a transaction that would give the money to the seller and the deed to the buyer.
With smart contracts, this escrow fee can be nearly eliminated. In most cases, the whole process would cost only a couple of dollars. However, the money put into the contract by the buyer would need to be in the native currency of the blockchain. In other words, the money would need to be in the form of cryptocurrency.
Eliminating Transaction Volatility
The problem with transacting in cryptocurrency is volatility. Bitcoin and Ethereum prices may swing plus or minus 10% in a day. This is unsuitable for financial transactions, especially for large sums of money as is often the case in real estate. Stablecoins are a fitting solution to eliminate that volatility. A stablecoin seeks to maintain a constant value, making it reliable for transactions.
There several ways to achieve this goal, one method is having the stablecoin backed 1-to-1 by a US Dollar. This essentially makes the stablecoin a digital representation of a dollar. StableUSD, created by Stably, uses this method and is fully backed and redeemable for US Dollars.
The US real estate market transacts hundreds of billions of dollars each year. Escrow is a costly process but smart contracts can change this. As the usability of cryptocurrencies continues to expand there will be an increasing demand for smart contracts in escrow.
Stablecoins could be the final piece in solving the instability of existing smart contract escrow. The efficiency and transparency are there, only the issue of stability still remains.
Cover Photo by Dhruv Weaver on Unsplash