Escrow

Escrow is a feature of the XRP Ledger that allows you to send conditional XRP payments. These conditional payments, called escrows, set aside XRP and deliver it later when certain conditions are met. Conditions to successfully finish an escrow include time-based unlocks and crypto-conditions. Escrows can also be set to expire if not finished in time. Conditional held payments are a key feature for full Interledger Protocol support, which enables chains of payments to cross any number of ledgers.

The XRP set aside in an escrow is locked up. No one can use or destroy the XRP until the escrow has been successfully finished or canceled. Before the expiration time, only the intended receiver can get the XRP. After the expiration time, the XRP can only be returned to the sender.

Usage

Escrow Flow Diagram (Successful finish)

Step 1: To send an escrow, the sender uses an EscrowCreate transaction to lock up some XRP. This transaction defines a finish time, an expiration time, or both. The transaction may also define a crypto-condition that must be fulfilled to finish the escrow. This transaction must define an intended recipient for the XRP; the recipient may be the same as the sender.

Step 2: After this transaction has been processed, the XRP Ledger has an Escrow object that holds the escrowed XRP. This object contains the properties of the escrow as defined by the transaction that created it. If this escrow has a finish time, no one can access the XRP before then.

Step 3: The recipient, or any other XRP Ledger address, sends an EscrowFinish transaction to deliver the XRP. If the correct conditions are met, this destroys the Escrow object in the ledger and credits the XRP to the intended recipient. If the escrow has a crypto-condition, this transaction must include a fulfillment for that condition. If the escrow has an expiration time that has already passed, the EscrowFinish transaction instead fails with the code tecNO_PERMISSION.

Expiration Case

Escrow Flow Diagram (Expired escrow)

All escrows start the same way, so Steps 1 and 2 are the same as in the successful case.

Step 3a: If the escrow has an expiration time, and it has not been successfully finished before then, the escrow is considered expired. It continues to exist in the XRP Ledger, but can no longer successfully finish. (Expired objects remain in the ledger until a transaction modifies them. Time-based triggers cannot change the ledger contents.)

Step 4a: The sender, or any other XRP Ledger address, sends an EscrowCancel transaction to cancel the expired escrow. This destroys the Escrow object in the ledger and returns the XRP to the sender.

Limitations

Escrow is designed as a feature to enable the XRP Ledger to be used in the Interledger Protocol and with other smart contracts. The current version has a modest scope to avoid complexity.

  • Escrow only works with XRP, not issued currencies.
  • Escrow requires sending at least two transactions: one to create the escrow, and one to finish or cancel it. Thus, it may not be financially sensible to escrow payments for very small amounts, because the participants must destroy the transaction cost of the two transactions.
  • All escrows must have a "finish-after" time, an expiration time, or both. Neither time can be in the past when the transaction to create the escrow executes.
  • Timed releases and expirations are limited to the resolution of XRP Ledger closes. This means that, in practice, times may be rounded to approximately 5 second intervals, depending on exactly when the ledgers close.
  • The only supported crypto-condition type is PREIMAGE-SHA-256.

Escrow provides strong guarantees that are best suited for high-value, low-quantity payments. Payment Channels are better suited for fast, low-value payments. Of course, unconditional Payments are also preferable for many use cases.

Availability of Escrow

Conditional payments have been enabled by the "Escrow" Amendment to the XRP Ledger Consensus Protocol since 2017-03-31. A previous version of the same functionality was available on the Ripple Test Net by the name "Suspended Payments" (SusPay) in 2016.

When testing in stand-alone mode, you can force the Escrow feature to be enabled locally regardless of the amendment status. Add the following stanza to your rippled.cfg:

[features]
Escrow

You can check the status of the Escrow amendment using the feature command.

EscrowFinish Transaction Cost

When using crypto-conditions, the EscrowFinish transaction must pay a higher transaction cost because of the higher processing load involved in verifying the crypto-condition fulfillment.

If the escrow is purely time-locked with no crypto-condition, the EscrowFinish costs only the standard transaction cost for a reference transaction.

The additional transaction cost required is proportional to the size of the fulfillment. Currently, an EscrowFinish with a fulfillment requires a minimum transaction cost of 330 drops of XRP plus 10 drops per 16 bytes in the size of the fulfillment. If the transaction is multi-signed, the cost of multi-signing is added to the cost of the fulfillment.

Note: The above formula is based on the assumption that the reference cost of a transaction is 10 drops of XRP.

If Fee Voting changes the reference_fee value, the formula scales based on the new reference cost. The generalized formula for an EscrowFinish transaction with a fulfillment is as follows:

reference_fee * (signer_count + 33 + (fulfillment_bytes / 16))

Why Escrow?

The age-old practice of Escrow enables many kinds of financial transactions that would be considered risky otherwise, especially online. By letting a trusted third party hold the money while a transaction or evaluation period is underway, both sides can be assured that the other must hold up their end of the bargain.

The Escrow feature takes this idea further by replacing the third party with an automated system built into the XRP Ledger, so that the lock up and release of funds is impartial and can be automated.

Fully automated escrow, backed by the integrity of the XRP Ledger itself, solves important problems for Ripple, and we think there are many other use cases that escrow enables. Ripple encourages the industry to find new and unique ways to put escrow to use.

Use Case: Time-based Lockup

Background: Ripple holds a large amount of the total XRP, which it sells methodically as a way to fund and incentivize the healthy development of the XRP Ledger and related technologies. At the same time, owning such a large chunk of XRP causes problems for the company, such as:

  • Individuals and businesses who use the XRP Ledger worry that their investments in XRP could be diluted or devalued if Ripple were to flood the market by selling at a higher rate than usual.
    • Although flooding the market would be a long-term loss for Ripple, the possibility that the company could do so exerts downward pressure over the price of XRP, and thus decreases the value of the company's assets.
  • Ripple must carefully manage ownership of its accounts to protect against digital theft and other forms of malicious behavior, even by insiders.

Solution: By placing 55 billion XRP into time-based escrows, Ripple ensures that the supply of XRP in circulation is predictable and increases at a slow but steady rate. Others who hold XRP know that Ripple cannot flood the market, even if the company's priorities or strategy changes.

Placing the money into escrow does not directly protect Ripple's holdings from malicious actors, but it sharply reduces the amount of XRP that can be quickly stolen or redirected if a malicious actor gains temporary control over Ripple's XRP accounts. This reduces the risk of catastrophic losses of XRP and increases the time for Ripple to detect, prevent, and track down unintended uses of Ripple's XRP assets.

Use Case: Interledger Payments

Background: In the quickly-developing world of financial technology, one of the core challenges is coordinating activities that cross multiple digital money systems, or ledgers. Many proposed solutions to this problem (including early views of the XRP Ledger!) can be reduced to creating "one ledger to rule them all." Ripple believes no single system can meet the needs of everyone in the world: in fact, some desirable features are mutually exclusive. Instead, Ripple believes that an interconnected network of ledgers—an interledger—is the true future of financial technology. The Interledger Protocol defines standards for making as many systems as possible able to connect securely and smoothly.

The most fundamental principle of inter-ledger payments is conditional transfers. Multi-hop payments have a risk problem: the more hops in the middle, the more places the payment can fail. Interledger solves this with the financial equivalent of a "two-phase commit", where the two steps are (1) prepare conditional transfers, then (2) fulfill the conditions to execute the transfers. The Interledger project defined a crypto-conditions specification to standardize automated ways to define and verify conditions, and settled on SHA-256 hashes as a "common denominator" of such conditions.

Solution: The Escrow feature makes the XRP Ledger ideal for bridging multi-hop payments using the Interledger Protocol, because it natively supports transfers that deliver XRP based on PREIMAGE-SHA-256 crypto-conditions, and it executes those transfers within seconds of being presented with the matching fulfillment.

Further Reading

For more information about Escrow in the XRP Ledger, see the following:

For more information on Interledger and how conditional transfers enable secure payments across multiple ledgers, see Interledger Architecture.

For more information on Ripple's 55-Billion XRP Lockup, see Ripple's Insights Blog.