Bitcoin' Escrow System And the Bank System

[Wenbing]

"over a communications channel without a trusted party.
What is needed is an electronic payment system based on cryptographic proof instead of trust,
allowing any two willing parties to transact directly with each other without the need for a trusted
third party. Transactions that are computationally impractical to reverse would protect sellers
from fraud, and routine escrow mechanisms could easily be implemented to protect buyers."

The bitcoin 2008 whitepaper by Satoshi Nakamoto.

I have come to understand that the escrow system acts like a trusted third party in every financial transaction where  it's operational.

I need more insights on tje following points:

1. How does the escrow system different from the the trust system of the traditional banking system and the Fintech business model.

2. Does the escrow system not against the foundational principle of bitcoin  which is to have an electronic currency without a payment system third party ?

Pls, i need your contributions about this. Thanks.

[Coyster]

1. How does the escrow system different from the the trust system of the traditional banking system and the Fintech business model.

The escrow is system is different from the trust system of the banking sector in that the bitcoin network or mode of transactions isn't built on the basis of a third party intervening in transactions to ensure it goes smoothly, that's exactly how the banking system works, but the bitcoin network allows transactions between two parties without any trusted third party, but in order to ensure the safety of the buyer, so that when he sends to the seller, the seller doesn't refuse to send the coins, then the need for an escrow who would hold the funds/take part in the transaction till the sender sends the coins. So the escrow system is just a form of protection from theft or fraud, transactions can even take place on the bitcoin network without an escrow, but in the traditional system there must be a trusted third party in the transaction, that's the difference.

2. Does the escrow system not against the foundational principle of bitcoin  which is to have an electronic currency without a payment system third party ?

Just as i said above, the escrow system doesn't go against "satoshi's" principles because it is not a compulsory factor in transactions, the escrow simply takes part in the transaction, like a part of a multi signature wallet, to make sure funds are sent by the buyer and coins sent by the seller, they assure safety and protection.

[OgNasty]

Escrow is a difficult problem to solve. I’m not sure anyone has ever gotten it right. Surely an automated solution of any kind will have flaws as will a human being acting as a middleman. However, I still believe a trusted individual is far superior than any automated system, at least with low volumes.

[Wenbing]

1. How does the escrow system different from the the trust system of the traditional banking system and the Fintech business model.

The escrow is system is different from the trust system of the banking sector in that the bitcoin network or mode of transactions isn't built on the basis of a third party intervening in transactions to ensure it goes smoothly, that's exactly how the banking system works, but the bitcoin network allows transactions between two parties without any trusted third party, but in order to ensure the safety of the buyer, so that when he sends to the seller, the seller doesn't refuse to send the coins, then the need for an escrow who would hold the funds/take part in the transaction till the sender sends the coins. So the escrow system is just a form of protection from theft or fraud, transactions can even take place on the bitcoin network without an escrow, but in the traditional system there must be a trusted third party in the transaction, that's the difference.

2. Does the escrow system not against the foundational principle of bitcoin  which is to have an electronic currency without a payment system third party ?

Just as i said above, the escrow system doesn't go against "satoshi's" principles because it is not a compulsory factor in transactions, the escrow simply takes part in the transaction, like a part of a multi signature wallet, to make sure funds are sent by the buyer and coins sent by the seller, they assure safety and protection.

Thanks for taking time to explain the difference. Sure, its a bit clear but see these.
1. Banking system acts as an intermediary between the parties of financial transaction same is the escrow system, it is an intermediary between the sender and receiver of a bitcoin.
The two work in similar way.

2. If the purpose of the escrow system is to protect and guarantee the safety of the transactions between buyer and seller of a cryptocurrency then while is it not a foundational part of the cryptocurrency network. I see the protection of such transaction to be very critical.

Pls, can we justify these two issues?

Escrow is a difficult problem to solve. I’m not sure anyone has ever gotten it right. Surely an automated solution of any kind will have flaws as will a human being acting as a middleman. However, I still believe a trusted individual is far superior than any automated system, at least with low volumes.

Great addition to the discussion.
If the automated escrow system have flaws than the human escrow then escrow technological development should be considered keenly and improved.
Because, in my own opinion an automated system should always be better than the human system.

What do you think?

[moderator's note: consecutive posts merged]

[Upgrade00]

Because, in my own opinion an automated system should always be better than the human system.

What do you think?

Building a completely automated system to supervise transactions would be very tricky, imo.
Take for example; I want to purchase a camera from someone in another country and pay in Bitcoin. I send my BTC and it's held in escrow till I get the good delivered to me. Now, I can refuse to acknowledge that I received the goods even though I did, and this can delay the transaction. But when dealing with a human, the seller can prove (using documents) that the good was indeed sent and has been delivered and the escrow service provider can act on his own judgement.

I'm not a tech specialist, but a machine which would be able to correctly handle all types of transactions independently would be fairly difficult to develop.
The system is not perfect, but it's better than the alternatives.
We should also note that escrow is not a prerequisite in every Bitcoin transaction. While a fiat transfer can not be done without a bank being involved.

[joniboini]

1. Banking system acts as an intermediary between the parties of financial transaction same is the escrow system, it is an intermediary between the sender and receiver of a bitcoin.
The two work in similar way.

2. If the purpose of the escrow system is to protect and guarantee the safety of the transactions between buyer and seller of a cryptocurrency then while is it not a foundational part of the cryptocurrency network. I see the protection of such transaction to be very critical.

Pls, can we justify these two issues?

To be honest, I don't think the whitepaper specifically addressed this issue and the focus of the paper is more on the creation of sound money which is not controlled by a third party (a.k.a fiat). This is where the foundation comes in. Bitcoin is a decentralized sound money, not a new escrow system. So, blindly saying that bitcoin is just the same with banks just by looking from one aspect is not right imo. A simple example, with banks they can hold your money and decide not to pay you if they found you're somewhat guilty by their own standards, while in bitcoin a transaction as long as it got confirmed then there's a high chance it will end on the receiver address.

Even if we compare bitcoin and bank case in terms of escrow, there are some differences. First, you can use multi-sig with as many people as you wish as the escrow. Of course, this has weaknesses too but that means you don't have to trust someone else completely, unlike a bank.

As for your second question, yes it is important, but I think the point satoshi making on his post is:
1. With irreversible transactions, the seller would be protected from scam such as double-spending, cancellation etc.
2. For the buyer, we can design another escrow system that uses bitcoin/cryptocurrency as the money (and this is done via several ways, multi-sig, trusted user on this forum for example, etc).

Because, in my own opinion an automated system should always be better than the human system.

You can't completely trust anything. Even if there's a godlike code that can act as your escrow, those are just codes. Sometimes it's buggy but works, sometimes it broke completely. CMIIW.

[HeRetiK]

Thanks for taking time to explain the difference. Sure, its a bit clear but see these.

1. Banking system acts as an intermediary between the parties of financial transaction same is the escrow system, it is an intermediary between the sender and receiver of a bitcoin.
The two work in similar way.

2. If the purpose of the escrow system is to protect and guarantee the safety of the transactions between buyer and seller of a cryptocurrency then while is it not a foundational part of the cryptocurrency network. I see the protection of such transaction to be very critical.

Pls, can we justify these two issues?

Banking and escrow are two very different things. Banking only ensures that money gets safely transferred from A to B but does not mediate if there's a dispute between counterparties. For that in classical banking you also need an escrow service on top of banks.

[Wenbing]

1. Banking system acts as an intermediary between the parties of financial transaction same is the escrow system, it is an intermediary between the sender and receiver of a bitcoin.
The two work in similar way.

2. If the purpose of the escrow system is to protect and guarantee the safety of the transactions between buyer and seller of a cryptocurrency then while is it not a foundational part of the cryptocurrency network. I see the protection of such transaction to be very critical.

Pls, can we justify these two issues?

To be honest, I don't think the whitepaper specifically addressed this issue and the focus of the paper is more on the creation of sound money which is not controlled by a third party (a.k.a fiat). This is where the foundation comes in. Bitcoin is a decentralized sound money, not a new escrow system. So, blindly saying that bitcoin is just the same with banks just by looking from one aspect is not right imo. A simple example, with banks they can hold your money and decide not to pay you if they found you're somewhat guilty by their own standards, while in bitcoin a transaction as long as it got confirmed then there's a high chance it will end on the receiver address.

Even if we compare bitcoin and bank case in terms of escrow, there are some differences. First, you can use multi-sig with as many people as you wish as the escrow. Of course, this has weaknesses too but that means you don't have to trust someone else completely, unlike a bank.

As for your second question, yes it is important, but I think the point satoshi making on his post is:
1. With irreversible transactions, the seller would be protected from scam such as double-spending, cancellation etc.
2. For the buyer, we can design another escrow system that uses bitcoin/cryptocurrency as the money (and this is done via several ways, multi-sig, trusted user on this forum for example, etc).

Because, in my own opinion an automated system should always be better than the human system.

You can't completely trust anything. Even if there's a godlike code that can act as your escrow, those are just codes. Sometimes it's buggy but works, sometimes it broke completely. CMIIW.

Wow, this is a sound clarification.
With an escrow the financial transaction is guaranteed but doesn't act like the banking system.
What I can see in the escrow system is that its built on trust, that such system will honestly keep your coin and be given to the owner after verification.

Don't you think a better solution can be developed to handle this market friction that escrow system try to solve?

[Findingnemo]

Escrow is a difficult problem to solve. I’m not sure anyone has ever gotten it right. Surely an automated solution of any kind will have flaws as will a human being acting as a middleman. However, I still believe a trusted individual is far superior than any automated system, at least with low volumes.

Great addition to the discussion.
If the automated escrow system have flaws than the human escrow then escrow technological development should be considered keenly and improved.
Because, in my own opinion an automated system should always be better than the human system.

What do you think?

There are some automated escrow websites are available for bitcoin transactions but most of them are just scams that is why people choose human as escrow over the automated ones.There is a big difference between escrow and trust with the banking system which is after effect of any transaction.One the crypto transaction is done and escrow is released then that is the end of the story but in banking even after years, they may ask you questions regarding that transactions.

[Wenbing]

Because, in my own opinion an automated system should always be better than the human system.

What do you think?

Building a completely automated system to supervise transactions would be very tricky, imo.
Take for example; I want to purchase a camera from someone in another country and pay in Bitcoin. I send my BTC and it's held in escrow till I get the good delivered to me. Now, I can refuse to acknowledge that I received the goods even though I did, and this can delay the transaction. But when dealing with a human, the seller can prove (using documents) that the good was indeed sent and has been delivered and the escrow service provider can act on his own judgement.

I'm not a tech specialist, but a machine which would be able to correctly handle all types of transactions independently would be fairly difficult to develop.
The system is not perfect, but it's better than the alternatives.
We should also note that escrow is not a prerequisite in every Bitcoin transaction. While a fiat transfer can not be done without a bank being involved.

Well explained, thanks.

When it comes to the escrow system in the financial industry does the Fintech like PayPal and traditional banks operates with the same escrow system or Fintech has a way of doing this that distinguish theirs from the traditional banks.

[Upgrade00]

~snip~

I'm not an expert in how it works behind the scenes, but on the surface, they look pretty similar to me.
I've not used PayPal, but I've received payments on Upwork, and their payment option allows one to receive the deposit from the buyer if the service, pending when the service is done and complete the payment. In case of any fallout during the transaction, they chose the best appropriate step to take, based in the information provided.

A banks functions similarly, except that, it's a walk-in service, while most fintechs are digital services.
You should also note that banks are more regulated by the government, so you should double check the legal status of a buyer and a seller in an escrowed transaction in your country.