What’s An Escrow? A Beginner’s Guide On How To Buy and Sell Crypto P2P Safely

Are you new to cryptocurrencies, or new to p2p crypto exchanges? In recent years the crypto industry has grown quickly, and new wallets are being opened daily. In fact, there are over 460 million Bitcoin addresses, and an estimated 23 million entities hold Bitcoin. Of course, Bitcoin is just one of many different crypto assets. There are currently more than 5,700 cryptocurrencies in existence and over 300 digital asset exchanges globally (although not all of them are p2p crypto exchanges).

The “p2p” in p2p crypto exchange stands for “person-to-person”. This means that rather than trading through a centralized intermediary like a bank or a broker, traders can interact and negotiate the terms of trade directly.

Now that you understand the name of this type of exchange, you are likely wondering, “If you are trading directly with someone else and there is no centralized authority, how do you make sure that one person doesn’t try to cheat the other? Couldn’t the buyer just refuse to pay the seller for the cryptocurrency? Are you just supposed to trust that the person you are trading with is honest? Are there any security measures?”

The problems that seem to be present when trading p2p are often solved by software and more specifically by an escrow. So, then, what’s an escrow?

What’s An Escrow?

In short, an escrow is first and foremost a security measure. In other words, an escrow is a “legal concept describing a financial instrument whereby an asset or escrow money is held by a third party on behalf of two other parties that are in the process of completing a transaction.” You often hear the word “escrow” in relation to home purchases, however an escrow can be used in other situations as well.

How Does An Escrow Work?

An escrow is designed to protect both the buyer and seller. By having a third party hold the object of value, the buyer can be certain that the seller actually deposited the object of value somewhere, even if the buyer has not received it yet, and the seller can proceed to the next step where they get paid by the buyer for the object of value.

Finally, once the seller receives the payment, the escrow is released and the buyer can now access the object of value. In this way, the buyer is protected from having the seller promise to send the object of value and then not do so after receiving payment from the buyer. Also, the seller is protected because the buyer is more secure in their willingness to make the payment since the object of value has left the custody of the seller, so the transaction process progresses faster to the point in which the seller is paid. As you can see, both parties benefit from an escrow system.

Traditionally, in an escrow system, if the seller does not submit the object of value to the third party, the transaction is terminated. Similarly, if the buyer refuses to send payment to the seller after the escrow was funded, the transaction is also terminated and the object of value is returned to the seller by the third party.

How Does An Escrow Work In The Crypto Industry?

1 — Traditional P2P exchanges

In a traditional p2p cryptocurrency exchange (e.g. LocalBitcoins, Localcoinswap) using an escrow system, the escrow works in the same way as previously described. The only difference is that rather than the object of value being a physical object such as a house, the object of value is a digital object; the cryptocurrency that is owned by the seller.

2 — CryptoLocally

At CryptoLocally we upgraded traditional escrow systems by using smart contracts. This feature completely removes the third party from a trade while keeping a bulletproof security layer throughout the trading process.

Smart contract escrows enable users to trade among themselves without having to deposit their funds on an exchange wallet. The assets are directly sent to the smart contract address and released only when the seller confirms the payment reception. CryptoLocally never holds custody of users funds.

Our advice

  • Make sure the P2P exchange uses an escrow system.
  • Investigate the escrow system itself. It needs to operate as described earlier. Remember, an escrow system requires the object of value to be held by a third party, or even better, by a software.
  • Double-check that the exchange operators are honest and do not randomly hold the cryptocurrency in some cases.

If you are looking to buy crypto on a p2p exchange that is easy to use and includes an escrow that offers the highest level of security, you should try trading on CryptoLocally.

How Does The Escrow Work On CryptoLocally?

If you want to buy or sell crypto on CryptoLocally, the process is quite simple. Assuming you have already registered and set up an account, first select the currency you want to buy or sell from the drop-down menu in the top right corner of the website.

As a buyer, you will have to agree with the terms of the trade and wait for the seller to fund the escrow. CryptoLocally’s escrow system will ensure that the proper amount has been deposited in the escrow and will notify you to send the payment. You will then be required to send the payment to the seller through the agreed-upon payment method before the seller releases the escrow. Finally, you should give feedback on the seller at the end of the transaction as a courtesy for doing business with you.

Since the seller is the one funding the escrow, for this example we will follow the seller’s journey. Once you have selected a cryptocurrency, click on “Sell Crypto” to search the available buyers of your chosen cryptocurrency, in this example, Tron (TRX).

Search the available offers to find the one fitting your expectations.

When you click on the green “Sell” button you will start the transaction.

Step1: To start the trade, enter the amount of cryptocurrency you want to sell and then click on the green “Publish Offer” button.

Step 2: Next, you will have to chat with the buyer to agree on a payment method. Click on the green “Agree On Terms” button if you both agreed on a payment method.

Step 3: Fund The Escrow. You will be required to deposit the amount of cryptocurrency agreed with the buyer in the smart contract address provided. You must provide both Address and Memo to fund the escrow. Once the escrow is funded, click on the green “Marked as funded” button to proceed.

Step 4: Now inform the buyer of the payment details in the chat window and ask the buyer to send the payment.

Step 5: The final step is to Release The Escrow. Once the buyer has paid you, click on the green “Release The Escrow” button to confirm that you received the agreed sum. Never release the escrow before you confirm that you have received the agreed sum via your requested payment method.

Finally, you should give feedback on the buyer and the transaction as a courtesy to them for doing business with you, assuming that the transaction was successful.

Conclusion: The Benefits Of An Escrow

Now that you know how crypto escrows work and the steps taken by both buyers and sellers to complete trades, you can relax knowing that if you use a proper p2p trading platform with a secure escrow system like the one described, you are protected from fraud.

Through p2p trading platforms like CryptoLocally using crypto escrow systems, you can trade directly with people you don’t know without the concern that they might try to steal from you. This makes completing the exchange much more enjoyable and strengthens the entire cryptocurrency community.

By providing a secure and trustless environment, more people are likely to start trading cryptocurrencies. In this way, p2p trading platforms that use escrows are helping the entire crypto community to take steps towards mass adoption of both cryptocurrencies and blockchain technology.

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