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Escrow and Pseudo-Escrow: Three Steps for Checking if the ICO Founders can Abscond with Your Money

In 2016, 19,000 ICO participants lost over $225 million. Only 10% of that money was stolen by the hackers; the rest was pocketed by the organizers of ICO scams. This article explains what an escrow is and how to identify the scammers with pseudo-escrow.

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Cryptoassetsrank.com Published on Jul 20, 2018
'Escrow and Pseudo-Escrow: Three Steps for Checking if the ICO Founders can Abscond with Your Money' article image

In 2016, 19,000 ICO participants lost over $225 million. Only 10% of that money was stolen by the hackers; the rest was pocketed by the organizers of ICO scams. This article explains what an escrow is and how to identify the scammers with pseudo-escrow.

What is an ICO escrow?

An ICO escrow is a scheme of safe investment into initial coin offering. The ICO participants transfer bitcoins or altcoins not to the ICO founders directly but to a deposit at a multisig wallet that is monitored by a third party (an escrow agent).

According to the terms of a smart contract, all transactions in the multisig wallet are carried out only if they are confirmed by at least two of the three signatures. The money transfer must be signed by the project developer and one or both of the designated agents. The total number of signatures and the number of signatures required to confirm the transaction can be any quantity but the main idea is that the escrow agents have more votes than the team members. Otherwise, they will not be able to protect funds and their participation will become useless.

Why is an escrow required?

It solves the ICO trust issues. The users often do not trust the project founders. A competent escrow agent with an impeccable reputation inspires trust. The agent's participation is one of the signs of an honest project.

The agent guarantees that the organizers will not steal the money. A competent middleman will not take part in a scam or become the scammers' accomplice. If the team decides to abscond with the investors' money, the agent will prevent the theft.

The agent monitors the use of investments. The agent signs the transactions for financing each of the project stages and makes sure that the amounts of money correspond to those stated in the white paper.

The agent controls the investments return terms. If the organizers do not collect the soft cap, the agent will make sure that the invested money is returned to the wallets of the participants. The same will happen if a hard cap is exceeded and there aren’t enough tokens for all the investments.

When doesn’t an escrow work?

An escrow does not complete its tasks if the startupers use scam schemes:

  • invite their acquaintances, colleagues or specialists with shady reputation and lack of competence to become middlemen;
  • make up escrow agents, indicate the names of famous experts in the description of their project without in fact inviting them.
  • use bogus escrow: leave two of the three signatures for the team members, i.e. are in total control of all of the transactions.

For eхample: In DeClouds the first signature in the multisig wallet belonged to the project founder, the second signature was that of a team member and the third signature belonged to the company's agent. In fact, it turned out that the scammers did not collaborate with an agent at all and the third signature also belonged to one of the developers. They managed to steal over 296 BTC from the project users.

The escrow scheme can be ineffective not only because of the team's fraud. Sometimes the problems arise with the smart contracts of the wallets written by the developers themselves. Because of a critical error in a smart contract, all of the transactions can stop.

Escrow checklist

Ask the developers about the escrow. Get in touch with a representative of the team and find out if they are using a multisig wallet and who the signatures belong to.

Do not transfer the money to the teams who do not use escrow at all or give vague answers to your questions without providing any details.

For eхample: In Opair the scammers did not use escrow at all. After the complaints received from the users, they invited an escrow agent but did not hand over 70 BTC to him that they had collected at the first stage of the ICO. In the end, the team absconded with over $1 million.

Check the middlemen. Well-known competent agents should participate in the project. For example, in Runeuro three experts keep track of the token crowdsale and further development of the project: Stas Oskin, the founder of Wings; Yonatan Ben Shimon,  Matchpool’s CEO; and Dabs, a competent user of Bitcointalk.

Avoid the startupers who invite an unknown lawyer from a small American company, a programmer from India or other shady personalities to provide supervision.

Find out about the smart contract. Clarify if the programmers wrote it themselves or put the project on a blockchain platform with its own smart contract. It is desirable that the team uses the services of a large platform like Ethereum, Waves or Tezos.

Do not invest into the projects on their own blockchain or a little-known platform if you have any doubts about its security and protection from the hackers.

We have explained how an escrow protects the interests of the investors and have described the tricks of dishonest ICO organizers. Select the projects from our list and check them based on the escrow checklist.

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