Creating a Decentralized Escrow with ArbStore: Empowering Secure and Fair Transactions

The concepts of escrow and arbitration have long been an integral part of traditional financial systems, offering security to parties who don’t trust each other —i.e., companies or individuals that just started working together. With the rise of distributed ledger technology, they can now become decentralized. So, they can enhance transparency and drastically reduce the need for (and fees of) intermediaries.

We will delve here into the world of decentralized escrow and arbitration, focusing on the new ArbStore platform. By exploring the fundamentals and advantages of this decentralized protocol, we can gain a deeper understanding of how it revolutionizes trust and dispute resolution in peer-to-peer transactions.

Traditional Escrow and Arbitration

In case you didn’t know, escrow is a financial arrangement where a third party holds and manages funds or assets on behalf of two parties involved in a transaction. It acts as a neutral intermediary that ensures both parties fulfill their obligations before the funds or assets are released. Think of escrow as a safety net that safeguards the interests of both the buyer and the seller.

For example, imagine you're buying a collectible online from someone you've never met. Instead of sending your money directly to the seller, you use an escrow service. You deposit the payment into an escrow account, and the seller ships the collectible to you. Once you receive the item and verify its condition, you inform the escrow service to release the funds to the seller.

Indeed, some online marketplaces offer escrowed payments to their customers, with the escrow service providers (like Escrow.com in eBay) acting like a neutral third party between individual users —but never without fees.

Arbitration is also used to offer security to parties that don’t know each other. This is a method of resolving disputes outside of traditional court systems. It involves appointing a neutral third party, called an arbitrator, who reviews the evidence and arguments presented by both sides and makes a binding decision. The goal of arbitration is to provide a fair and impartial resolution that avoids the time, expense, and complexity of going to court.

Following the same example as before, we could add an arbiter to the collectible sale. Let’s say that the parties agreed to arbitration, instead of court. The buyer, for some reason, isn’t satisfied with the product, so they refuse to release the funds from the escrow. They both can call (and pay for) an arbiter, present evidence, and solve the dispute this way. The decision made by the arbitrator is final.

Fees and more fees

These services are convenient, but they’re usually not cheap at all, especially for companies. Escrow agents and arbiters are typically experienced lawyers whose fees may vary depending on numerous factors like the complexity of the case, the country, and the funds involved in the contract.

According to Aceris Law LLC, “For a relatively simple [international] arbitration requiring 1,500 hours of legal work, for instance, if billed at the rate of USD 300/hour, legal fees would equal USD 450,000 per arbitration.” Some companies offer the service including a filing fee between $2,000 and $6,000, besides a high percentage to properly manage the case. That’s a lot of lost money to a dispute between parties, so, we can say for sure that the service is only available for big companies.

Decentralized Escrow and Arbitration

Decentralized escrow is the same trust mechanism that safeguards funds or assets during a transaction between two parties. However, unlike traditional escrow services, this one operates on distributed networks, eliminating the need for a central authority. Smart contracts facilitate the automatic release of funds once predefined conditions are met, ensuring transparency and security. In other words, the neutral third party is the code.

If the information needed to release the funds is publicly available, you wouldn’t need any intermediary at all. For example, in a P2P Flight Insurance, if your flight is late, you’d just need public proof of that to “feed” the contract and release the funds in escrow. This is done by using a crypto oracle, which is a special address that registers data on the ledger from public and reliable sources. The process is fully automated because the data from the oracle is binding for the smart contract code, so it triggers the funds' release by itself.

Of course, an oracle can’t be available for everything. The potential agreements between people and companies aren’t always related to publicly available data, like the price of an asset. Instead, there’s a lot of private and/or very specific information that could only be shared by the parties. A business contract, for example. If some of the parties misbehave here, a crypto oracle won’t help with it.

That’s why the Obyte wallet offers the feature “contracts with arbitration”. They’re smart contracts too, capable of locking funds until predetermined conditions are met. But there’s an important addition: an independent arbiter from the new ArbStore.

How does the ArbStore work?

Before signing a contract with arbitration in the Obyte wallet, the parties select an arbiter from the ArbStore first. They’re (human) professionals registered on the platform with their real names and available to solve certain types of disputes in exchange for a fee.

Anyone can find several arbiters there and check their data before selecting one. The data available about them includes bio, number of contracts and resolved disputes, last activity, languages, and service fees. The fees are only paid in case of dispute. Even if they were selected as an arbiter in the contract, payment isn’t required if the deal ends without a dispute.

Some easy steps

To use the ArbStore and the services of the independent arbiters there, it’s first needed to prepare a contract with arbitration in the Obyte wallet. This way, only the involved parties will know the details of the transaction, since the built-in wallet chat is encrypted. The steps would be like this:

1. Company A and Company B discuss their contract and terms (e.g. in the built-in encrypted chat in the wallet). For a contract with arbitration, they need to select an expert and reliable arbiter from the ArbStore.

   
   

2. One of the parties (A or B) offers a contract with arbitration through the chat, by clicking on the other party’s address. This contract includes the Obyte address of the selected arbiter. If the other party accepts it, the involved funds (in stablecoins) will be locked in a smart contract until the terms of the contract are met.

3. If one of the parties fails to fulfill their obligations, the other party can open a dispute and call an arbiter to resolve the issue. They’d pay the arbiter fee for it, and then present the necessary evidence. Since the arbiter address was involved in the smart contract from the beginning, they’d have the power to release the funds to any of the parties after evaluating the case.

   
   

4. If one of the parties finds the arbiter decision unfair for any reason, they can report it to the ArbStore moderators. They won’t be able to make a complete refund, but if they find that the decision wasn’t right, the arbiter will rank lower on the ArbStore and can even be delisted.

Lower Fees with the ArbStore

For starting, making any contract with arbitration (decentralized escrow) from the Obyte wallet is 0.75% plus the ledger transaction fees. They are between 700 and 5,000 bytes (up to $0.000060) per operation. Beyond this, every arbiter offers their own fees, depending on the complexity of the case and the funds involved.

There’s no such thing as a “filing fee” in the ArbStore. Only in the event of a dispute, the plaintiff party has to pay the fee asked by the selected arbiter. That currently varies between 2% and 5%, with an optional minimum and maximum —e.g., “2%, min $50, max $1,000.” So, for instance, if the contract only involves $1,000 and the arbiter percentage is 2%, that’d be a payment of $20. But if the arbiter only starts with a minimum of $50, then the fee would be $50.

Any expert can register as an arbiter in the ArbStore and set their own rules and fees (within reasonable ranges). But, in the end, it’s just up to the users to select the most competitive ones. As a result, the whole escrow and arbitration service is exponentially cheaper than with traditional companies and even more effective. It eliminates paperwork, courts, and fraud at the same time.

Decentralized escrow and arbitration solutions, like the ArbStore platform, provide a robust framework for secure and fair transactions. Whether it's facilitating peer-to-peer sales, managing freelance jobs, or ensuring secure cross-border transactions, these services offer practical applications across numerous industries.

Featured Vector Image by katemangostar / Freepik