First look at dEscrow
A simple implementation of a big idea
Rental deposits are a headache for everyone. Tenants tie up their cash with near-zero return, and have to beg their landlord to give it back at the end of the lease. Landlords have to set up a bank account and do bookkeeping.
dEscrow handles these deposits with a smart contract. Tenants will find it easier to get deposits back, and they will earn interest on their money. Landlords get simple compliance.
Apartment deposits are a simple example of an escrow and arbitration workflow. “Escrow” is the process of putting up money to guarantee an agreement, in this case, the apartment lease. “Arbitration” can resolve a dispute about how to distribute the money.
We are using two bits of magic that we can only get from DeFi.
There is no bank. We send the money to a smart contract. We can accept, arbitrate, and deliver money instantly.
The tenant can earn the interest and appreciation. They can buy an interest-earning asset (such as our MaxUSD interest-earning stablecoin). Then, they can submit that asset as their deposit.
The big picture — Improving legal agreements
“It doesn’t fit our industry model,” we complained to co-founder John Stadler. “Escrow and arbitration is an important tool for our real-world agreements, and a great use case for our flagship MaxUSD interest-earning stablecoin. But, it doesn’t fit the model of rebuilding an industry.” John instantly replied “It’s rebuilding law.”
Legal enforcement is local. Agreements based on escrow will work globally. Legal enforcement is slow. A study of arbitration reveals ways to resolve disputes quickly.
Ross Campbell of LexDAO was thinking the same thing when he made LexLocker, a smart-contract approach to escrow and arbitration that he describes as “crypto law codified.” Here’s a diagram of the LexLocker workflow.
Our task is to reduce this mass of spaghetti to a simple product that anyone can use.
Finding a use case
Escrow is useful in cases like these:
You are buying something (a house, a tanker of oil, a watch on eBay). You put payment into escrow while you wait for delivery.
You are selling professional services (legal services, programming) and you want to solidify the deal by eliminating billing risk. This is often called a “retainer.”
You are making some legal or financial agreement and you put up “collateral” to guarantee delivery on your commitments.
You want to vouch for a relative, so they can rent or borrow.
You are moving money by swapping bank money in country A for bank money in country B, and you offer a matching amount of collateral while you wait to see the transfers. When banks do this it is called a “nostra account.” When this is implemented in software, it is called a “payment channel.”
You are renting an apartment and you put down a “deposit” to cover damages.
We build DeFi for the real world by starting with a broadly defined real world service, pulling together an expert team, and narrowing down to a specific product where we can add some DeFi magic. I started this process by pulling in arbitration expert John Stadler, and workflow designer Manni Li.
We ran a series of calls where pulled in people to comment on various use cases. One of John’s friends moves money around Asia. John buys real estate. We called in lawyers who were handling retainer payments from clients. Eventually I said “let’s just try the simplest possible case — an apartment deposit.” John said “I’m a landlord. I would do it. Let me call some of my tenants.” Fifteen minutes later, he called me back. “They want to do it.”
The entrepreneur’s challenge
We found strong interest from tenants.
The challenge of this application is that we need to get the tenant and the landlord to adopt it at the same time. Landlords were not as interested. They see some benefits, but they don’t care, because deposits are not a big part of their business. They are interested in more comprehensive payment services that include rent collection. They often asked about ways to earn more interest on their own cash.
We’re looking at next steps that include:
Targeting landlords that get most of their money through escrow deposits. For example, landlords that rent for short periods through VRBO get paid with up-front deposits. Doing it with VRBO is needlessly complex and expensive.
[Note from Andy about the theory of startups: It makes sense to look for a smaller and more enthusiastic customer base (just VRBO style rentals), rather than make a more comprehensive product (rent payment and banking). Incumbents are better at delivering comprehensive products. Small startups have an advantage in making a living off small markets.
Targeting cases where the buyer is putting up a significant amount of money, and therefore has leverage to demand a better escrow arrangement. This is often true in real estate purchases, and it may be true for legal retainers.
Targeting cases where the seller has leverage to ask for money in escrow, such as with programming retainers.
Ideas and requests from you, our friends and readers.
Product development is ready to go with a smart contract and a mockup. In design sessions, we moved the application from a complex leasing and adjudication process, to a stripped-down thing of beauty. Here is the settlement workflow:
You can set up up on a mobile phone like this:
If you want to build the next use case for escrow and arbitration, contact me on Discord.
Maxos builds DeFi for the real world. We bring together experts to figure out how to rebuild specific real-world financial services. Then we create, validate, and launch.
We made a 90 second video about dEscrow for a local pitch contest. It stars some actual tenants, me, and John. Our two-hour production job did not win a prize. We had fun.