An escrow system is a mechanism that holds assets or funds with a trusted third party or, on blockchains, in a smart contract until predefined release conditions are met. It reduces counterparty risk in transactions by guaranteeing that neither party can unilaterally seize value before obligations are fulfilled. On-chain escrows use conditional logic and timelocks to release or refund funds automatically.
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- In smart-contract escrows, funds are locked and released by deterministic logic rather than a human intermediary, eliminating trust in a single custodian. Timelocks and dispute paths handle non-performance, refunds, and arbitration.