Smart Escrows Post #1: What are Smart Escrows?

I’m starting a series focusing on different aspects of Smart Escrows. Post #1: What are Smart Escrows?

The XRP Ledger is built on a foundation of powerful, native features like Tokens/Issued Assets, Escrow, the DEX, and Payment Channels, which are renowned for their security, efficiency, and robustness. While the XRPL’s amendment process allows for careful, collectively-driven updates and provides a secure approach to introducing widely applicable features, this leaves a gap for developers who need to address the bespoke needs of their business but don’t want to (or can’t) drive broad community adoption for a specific (sometimes niche) use case. To maintain these core strengths while allowing developers greater onchain flexibility, a new vision for permissionless programmability is emerging.

The first major component of this initiative is the concept of Smart Features. These allow developers some limited customizability, built on top of individual XRPL primitives. Essentially, developers are able to unlock powerful new capabilities while maintaining the simplicity and efficiency the network is known for. The Escrow is the very first primitive to receive this upgrade: enter Smart Escrows.

First: a refresher on the existing state of XRPL Escrows.

XRPL Escrows are essentially onchain contracts that govern the all-or-nothing transfer of funds from one account to another based on pre-agreed terms. Currently, they can only hold XRP, but the TokenEscrow amendment (currently up for voting) will enable holding both IOUs (issued assets) and MPTs (multi-purpose tokens).

Historically, there were only two ways to release funds held in an Escrow:

• Time-based: The escrow can be released after a specific, predetermined time has passed.
• Condition-based: The escrow requires a "password" to be provided during the release transaction (essentially a hash-lock).

A Custom Release Function for Escrows

Smart Escrows introduce a new layer of programmability to the existing Escrow primitive. Instead of being limited to just the time- and condition-based release options, developers can now write their own custom release conditions.

This enhancement allows conditions that go beyond the current time-based or crypto-conditional constraints, significantly expanding the XRPL’s utility. Because Smart Escrows build upon the existing, battle-tested Escrow primitive, developers gain custom functionality without having to reinvent the wheel, such as via a completely separate smart contract.

The custom logic is introduced via a small, programmable code block that lives directly on the Escrow object. When an Escrow is created using an EscrowCreate transaction, the developer uploads this code block (written in compiled WebAssembly or WASM - more on this to come) alongside the standard parameters and the funds to be locked.

When a user attempts to complete the escrow and release the funds using an EscrowFinish transaction, the FinishFunction is executed on-chain. The function runs, and that custom code determines whether or not the escrow’s funds are released to its destination.

By just adding this small bit of programmability, Smart Escrows allow a significant amount of new onchain functionality. Examples include:

• Notary Escrows: The escrow is structured so that only a specific, trusted account (the "notary") can authorize the release of the asset.
• Compliance and Temporary Holds: Funds are held until compliance checks or KYC verification is complete. The custom function could check if the destination account holds a specific on-chain credential or NFT issued by a compliance provider before allowing the transfer.
• Trustless Token Swaps (Delivery vs. Payment): Developers can link two escrows so that the completion of one depends on the creation or completion of the other, ensuring a trustless, atomic exchange of value or assets.

If you want to read more about XLS-100, here’s a link to the spec: https://xls.xrpl.org/xls/XLS-0100-smart-escrows.html