Escrow is the cornerstone of darknet commerce. Without face-to-face interaction or legal recourse, markets need mechanisms to ensure both buyers and sellers fulfill their obligations. This article examines the evolution and technical implementation of escrow systems.
Why Escrow Matters
In anonymous transactions, both parties face risks:
Buyer Risks
- Vendor takes payment, never ships
- Product doesn't match description
- Package never arrives
Vendor Risks
- Buyer claims non-receipt fraudulently
- Buyer reverses payment
- Buyer extorts with negative review threat
Escrow provides a trusted third party to hold funds until both parties are satisfied.
Centralized Escrow
How It Works
- Buyer deposits Bitcoin to market wallet
- Buyer places order; funds held in escrow
- Vendor ships product
- Buyer confirms receipt (finalizes)
- Market releases funds to vendor (minus commission)
BUYER → BTC → [MARKET WALLET] → holds
VENDOR → ships
BUYER → confirms
[MARKET WALLET] → BTC → VENDOR
⚠ RISK: Market controls all funds
⚠ EXIT SCAM VULNERABILITY: Maximum
Advantages
- Simple user experience
- Fast dispute resolution
- No technical knowledge required
Critical Vulnerability
Exit Scam Risk
Centralized escrow means the market operator controls all funds at all times. When Evolution exit scammed in 2015, they walked away with ~$12 million in user funds. Every major exit scam exploits centralized escrow.
Multi-Signature Escrow
2-of-3 Multisig
The most common multisig configuration requires 2 of 3 keys to release funds:
- Key 1: Buyer
- Key 2: Vendor
- Key 3: Market (escrow)
Transaction Flows
| Scenario | Keys Used | Outcome |
|---|---|---|
| Normal completion | Buyer + Vendor | Funds to vendor |
| Dispute - vendor wins | Vendor + Market | Funds to vendor |
| Dispute - buyer wins | Buyer + Market | Funds to buyer |
| Market exit scam | Market key useless alone | Funds safe* |
*If buyer and vendor cooperate, they can release funds without market involvement.
Technical Implementation
# Bitcoin P2SH multisig address creation
OP_2
<buyer_pubkey>
<vendor_pubkey>
<market_pubkey>
OP_3
OP_CHECKMULTISIG
# Requires 2 of 3 signatures to spend
Limitations
- More complex for users
- Requires buyer to generate and manage keys
- Disputes still need market cooperation
- Not available for Monero (until recent developments)
Direct Payment (FE)
Finalize Early (FE) means releasing payment before receiving goods—bypassing escrow entirely.
When FE Occurs
- Highly trusted vendors may require FE
- Some products (digital) delivered instantly
- Buyer chooses FE for discount
- Market allows vendor to request FE
"Never FE" Rule
The community mantra "Never FE" exists because FE removes all buyer protection. Countless users have lost funds to vendors who demanded FE, collected payments, and disappeared.
Autofinalize
Most markets implement autofinalize timers:
- If buyer doesn't finalize or dispute within X days, funds auto-release to vendor
- Typical period: 7-14 days after marked shipped
- Prevents buyer from holding funds indefinitely
- Creates urgency for dispute filing
Autofinalize creates a race: Buyer must confirm receipt OR file dispute before timer expires. Vendors may game this by marking shipped early to start the timer while delaying actual shipment.
Evolution of Systems
Monero Escrow Challenges
Monero's privacy features make traditional multisig more complex:
- Multisig exists but requires more interaction
- Most markets use centralized XMR escrow
- Atomic swaps for BTC↔XMR emerging
- Trust becomes more important with XMR