Let’s talk about decentralized escrow (or dp2p) — in detail — because it’s not really talked about enough. It’s important because it’s an actual revolutionary thing that crypto can give to real business that has plagued business relations since the very first contracts were formalized in writing.
- How do you ensure you get paid for service/goods you provide?
2. How do you ensure you get promised service/goods for a payment you made?
Historically it’s been done in these ways.
- Trust in those you deal with/shop from.
- The threat of legal (or in some cases illegal) action.
- Costly 3rd party custody.
Out of these 1 is ideal, as long as everyone acts honorably, because 2 is a really, really huge overhead cost financed by taxes (or violence) and also not 100% efficient and 3 is something there just isn’t a budget for in most situations.
Decentralized custody — “solves this” — though actually — not quite yet.
Why not yet?
Because decentralized custody does not completely escape the need for trust. Though a contract can be 100% guaranteed through code, some problems remain.
- The person writing the code/creates the contract has an edge, over the person who didn’t. What if they added some loophole, and the other party being completely code illiterate has no way to spot it.
- For crypto we face a reality of (big-time) currency fluctuations, potentially making the locked in value uncertain.
The solution to problem 1, is that there needs to be a system for contract creation that is commonly trusted by everyone and easy enough to use by anyone. We’re far from there yet, but Chainge Finance is really off to a good start in this area, and I will later go into detail on how their escrow contracts work.
I think eventually we will reach a state where we have dozens of competing solutions which has gained the neccessary level of trust and easy UX. In fact, I think it’s neccessary for the sake of “decentralization” and “competition to become even better” to have multiple great options for your decentralized business contract needs.
The solution to problem 2, is an ongoing battle continously fought by the entire crypto community, bringing more value, more stability and more trust in all things crypto. Obviously stable coins already provide the “solid” solution here. But even so — the vast majority of companies are still not at a stage where they would trust the stable value/validity of stable coins to risk entering crypto business contracts. There may be other legal reasons to avoid this — but the very real fear of a stable depeging, is enough for most of them to just stay clear. It will most likely take generational shifts and CBDCs entering the crypto worlds before we finally get to the stage where decentralized custody truly can help secure businiess relations. I consider it 100% inevidable we eventually get there, even if it’ll take a very long time.
Now as promised let’s look at how Chainge decentralized escrow works today. Currently contracts are restricted to 2 parties, which is the most common case for any businies transaction. It’s possible to use a vast number of Fusion based Spot FRC759 currencies. Most importantly it’s possible to use stable coins. This is important, because it could take months before a contract is considered finalized, and as the reciever you probably want the value of the contract to be guaranteed. As long as Chainge DCRM bridging is available and the chosen stable coin didn’t collapse, value is guaranteed. For currently crypto active people, this is enough (or at least it should be, because if in crypto — you deal with much, much higher risks on an hourly basis).
Now on to the actual contract — Here there are a number of options, which probably confuses/scares off some people. The first thing to choose, is how much will be put into escrow. Let’s for the sake of envisioning something real say we want to put 1000 $USDT into escrow with the intended use of paying someone to create a website and afterwards hand over you the control of it. This “mission” is something we can enter into the name and the description of the contract.
But after entering name, description and amount in escrow, we are faced with a choice of performance bonds, for 1. Nobody. 2. Only me 3. Only the Counterparty 4. Both me and the counterparty. What is this?
A performance bond is money bound into the contract that will be recived back in case the contract is finalized. You could say it’s a kind of extra insentive to eventually finalize the contract in order to avoid the risk of it never getting finalized.
Before choosing either of the options let’s look at what we’re trying to achieve. 1. We want a website built. 2. We want the other person to do it. 3. We want to eventually be in control of it. We also need to look at what the other person likley wants, which is 1. Get paid for their work. 2. Since they want to work, they might not have the best finances and are probably not ready to put up a big performance bond. 3. But they likely want a performance bond to assure themselves not to get fooled (important: In case there is no performance bond for the “recieving party” (contract types 1 and 2), the contract creator may at any time cancel the contract. These contracts could still be useful in case it’s only the contact creator who feel the need to have “assurances”). There could also exist some risk of the counterparty not wanting to finalize down the line. Taking all things in consideration, the best contract is likley one where both you and the counterparty have a performance bond, but the sum can be a bit smaller for the counterparty. Reasonable amounts could be 250 USD for you and 50 USD for them. This means you will lock in an additional 250 USD that you end up getting back after the contract is done, which assures the creator that you have an insentive to finalize it. And you also have some level of assurance that the creator has a small insentive to cancel the contract in case they eventually decide they don’t want to finish the job. Ultimately you are the bigger risk taker though, but it’s something you are fine with all things considered.
Now let’s look at some outcomes. Let’s say a month passes and this is the time you both hoped/felt it would all be done.
In scenario 1, the website is completed in a satisfactory way and control of it is handed to you. In this case you can simply proceed and finalize the contract and after both parties push through the contract, the 1000 $USDT goes to the website creator, you get back your 250 $USDT performance bond and the creator also gets back their 50 $USDT performance bond. All according to plan.
Now let’s look at another scenario, where almost no work was done, and the website creator just took off and started working on something else. In this case you probably want to cancel the contract, and hope the other party will agree to cancel it. In this case things feel a little more uncertain. But provided the counterparty wasn’t a total jackass or died, they’ll probably take the time to cancel it, because at least they will be getting back their 50 $USDT doing so, and they’ll probably feel bad about not finishing. They have no reason to deny you your money back at least. But in between these two scenarios there are many in between things that can happen.
Perhaps the counterparty has put down a lot of work, and feel that you were a bit too demanding and feel 1000 $USDT is far too low for the actual work that was done. In such a case, you might need to work out a new contract, after coming to a new agreement, and maybe or maybe not finish the first one depending on what you agreed upon. Situations can often get more complex than you first imagined they would be. This is especially true in jobs/projects that are planned over a long period of time.
But even if this happens, at least what you had agreed was already set in stone, and that is always useful and to your advantage in eventual further negotiations.
Another possibility is that you suddenly decide that there’s no longer a need for the website and don’t want to pay for it any more. In this case the reverse is true. The website creator, can still finish the job, or perhaps do another task instead in order to attain their promised money. Or if they instead desire to not work for you, they can cancel the contract and take their 50 $USDT back.
Basically whatever happens — the locked in funds is assurance for both parties that satisfaction for both parties must be reached. If not, the money will just sit there, which isn’t to anyones benefit.
That is the jist of it, and if you understand this, you can basically understand the nature of the contracts and can go ahead and create your own. The complexity could be incresed by two-way contracts, or multiple mile-stone contracts — whatever fits you and your counter-party’s unique situation best.