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Escrow: How To Use It And Why

17:45 04/01/2018
Legal Concept Escrow

The term “escrow” comes from the financial concept of sharing assets with a third party. The third party holds all funds on behalf of two participants while they are managing the transaction, which brings a certain level of guarantee to the process. In this case, this party is called an escrow agent that must make sure that all the conditions of the deal are satisfied before transferring money. This prevents individual financial decision.


This scheme is perfect if you share data with a person you can trust. The provision of financial data, personal data, access data and other information seems to be normal in this case. And nobody can get it without a cooperative permission.


Unfortunately, there is a shortcoming. What if data is unavailable because of mistrust, the loss of access, or other technical problems during the cooperation? There will be no chance to restore data access. The same problem may arise if the contact with the other party is lost or the party is unreliable.


Consider the threshold secret sharing scheme. Suppose there are six parties involved in the agreement. Three of them have full access the storage, while others are not able to do anything. Any member can also be easily removed from the escrow. Given the level of confidence, these six parties can be divided into two groups — a trustworthy one (consists of three parties) and an unreliable one (the rest).


But if something goes wrong, a special data reconstruction scheme can be created

But if something goes wrong, a special data reconstruction scheme can be created. In this case, access is given to people from the first group and to anyone from the second group. This is a simple example but the threshold scheme can be as complex and deep as its creator wants.


Many cryptologists and other experts are involved in the security assurance. They have managed to create some secure escrow algorithms. The safety of such algorithms is proven by very complex calculations. Some schemes even include the ability of one group of participants to deny decisions of the other. This allows preventing cheating scenarios and at the same time not to worry about losing access to data.


All cryptographic models are fairly complex, hard to understand and may be really confusing. In the most cases, the team will need a specialist in mathematical cryptology to deal with them. Furthermore, wrong implementation of well-known principles can lead to huge losses.


Another important issue is the services of guarantors, which may be very expensive as these people risk their own reputation.


Escrow is getting more popular


Many participants start realizing how much it is important to protect investors from scam. Naturally, a development team of a startup has no reputation yet. But since blockchain has some responsible and well-known participants, some of them can take part in the escrow system as reliable participants to support different ICOs. Escrow has already entered the Ethereum blockchain in the form of an escrow smart contract and so far is considered a good way to show how serious your intentions are.

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