Home Digital Marketing What is escrow and why is it important in P2P bitcoin trading?

What is escrow and why is it important in P2P bitcoin trading?

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Bitcoin trading through peer-to-peer platforms comes with a variety of risks that can strike anytime. Have you ever been part of a shady trade before? At one point did you feel uncertain about a trade partner that you wish there is something that can protect you from anything going wrong? Did one of your previous trade partners take off with your money and bitcoin never to be heard again? Don’t you wish that there can be a system that can protect you and your trade partner from tearing each other? This is where escrow comes in.

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What exactly is escrow?

Wikipedia’s definition of an escrow is as follows: “An escrow is a contractual arrangement in which a third party (the stakeholder or escrow agent) receives and disburses money or property for the primary transacting parties, with the disbursement dependent on conditions agreed to by the transacting parties.”

What does that mean? It simply means that everything will be kept for safekeeping by a company or a broker until the two transacting parties make up their minds and finally decide to settle their deal. Escrow serves as insurance that both trading parties can benefit from. Serving as a mediating party that makes sure that both the transacting parties will hold their part of the bargain.

Escrow in peer-to-peer bitcoin marketplaces

If you planned on getting deep into bitcoin trading, there is a chance that you asked a ton of questions before deciding you really want to do it. Questions like “What are P2P marketplaces?”, “Why are there so many cryptocurrencies?”, and “What if I get ripped off?. While all of those are reasonable things to ask before you really get into trading, one thing that a wannabe trader should always consider is their safety. Safety while using a peer-to-peer platform, safety while talking and starting trades with other users, and the safety of their hard-earned bitcoins.

Peer-to-peer marketplaces often provide escrow services to their users as a security measure. It is implemented as a deterrent against users that are planning to scam other users off their funds and/or bitcoins. It’s for their users’ protection. In turn, marketplaces take a small fee for the use of escrow.

How can escrow protect you?

Imagine that you and your trade partner are in the last steps of buying some bitcoin. Everything went smoothly from the beginning to the very last moment where you have to pay what you owe. You’re ready to give your payment and let’s say you do. What’s stopping your trade partner from running away from you as soon as he/she gets your payment? As a seller, your trade partner is also probably thinking “If I send him/her my bitcoins first, who’s to say that he/she is even going to pay me?”

This is where escrow comes in. On peer-to-peer marketplaces, escrow usually serves as a third party to hold the bitcoins until both parties are happy. Now… let’s head back to the scenario we’ve established. After you submit your requirements, there is usually a button that marks the trade as paid. This will let escrow know that you have submitted your requirements and are waiting for the seller to release the bitcoins. The pressure is now on the seller because he/she now has to verify your payment. Once your payment is verified, the seller should then release the bitcoins from escrow and the trade is now complete.

This is how escrow protects you. It protects both parties from potential scam and makes the whole peer-to-peer system feasible. You have to remember that trading with people online means that you are trading with complete strangers. You have no judge of character and you have no idea what your trade partner is intending to do with the trade.

Why escrow is important on a peer-to-peer marketplace

On a peer-to-peer marketplace, escrow is the thing that prevents everyone from getting scammed. If it weren’t for escrow, scammers would run rampant on all peer-to-peer marketplaces out there and trading on those platforms probably wouldn’t be a good idea.

If there were no escrow, there would be no extra protection from people who want to take your gift cards (or any other payment method for that matter). As a seller, there would also be people who are aiming to coinlock you (for whatever reason – those people are evil).

Since bitcoin transactions are irreversible, a lot of traders should look into using escrow services in and out of peer-to-peer platforms. Escrow is the entire backbone of the peer-to-peer system and is technically the thing that allows peer-to-peer marketplaces to work in the first place. If you’re looking for a good peer-to-peer marketplace to trade on, make sure that you find one with a good escrow service.

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