Posted on

Ripple Escrow Reporting: Creative Accounting or Much Ado About Nothing?

Blockchain analysis firm Coin Metrics points to discrepancies in Ripple’s escrow accounting. Is there a basis to the claim?

On May 16, 2019, Coin Metrics released a report detailing discrepancies in Ripple’s escrow reporting system. The Blockchain analysis firm described these discrepancies as contradictions that required some explanation.

As per usual, any story concerning Ripple is going to come in for some polarizing viewpoints, with strong opinions on both sides of the matter. On the one hand, Ripple says the discrepancies aren’t so much a financial issue as they are a timeline adjustment. Critics of the company, on the other hand, see it as a further ground for criticism of Ripple’s operations.

How Ripple escrow works

Back in mid-December 2017, Ripple published a document detailing the mechanisms by which its XRP escrow account worked. According to the report, 1 billion XRP would be released once every 55 months, with all unused XRP returned to the escrow account at the end of each month. The purpose of this process was to create a total cap of new XRP tokens introduced into circulation every month.

At the time, Ripple revealed that the escrow’s main purpose was to introduce a level of predictability to the XRP supply. The company also revealed that, moving forward, the 1 billion XRP released per month would also be used for projects aimed at improving the overall XRP ecosystem.

Coin Metrics reports on discrepancies in Ripple escrow

As previously reported by Cointelegraph, Coin Metrics discovered some inconsistencies in Ripple’s escrow reporting system. These dissimilarities, according to the blockchain analysis company, can be found by comparing Ripple’s publicly disclosed escrow management and the information recorded on the XRP ledger.

Coin Metrics distilled these findings into three key summary statements:

  • “Two quarterly markets reports under-reported the number of XRP released from escrow by a total of 200 million XRP ($84 million at current prices)
  • The ‘escrow queue’ is implemented differently than announced, leading to a faster future release of escrowed funds compared to the announced schedule
  • Other party/parties, potentially associated with Ripple, have released 55 million XRP from an unknown escrow address not connected to the main Ripple escrow account.”

The first issue raised by Coin Metrics lies in the variance seen in Ripple’s quarterly reports for the third quarter of 2018 and the first quarter of 2019. For both periods, the amount returned to escrow as detailed by the quarterly reports exceeded the amount recorded on the XRP ledger by 100 million XRP.

This dissimilarity means that the quarterly report for both periods underreported the number of XRP released into the market. Such a move could have a profound significance when examined from a monetary inflation and liquidity point of view.

Cointelegraph spoke to Fernando Nieto, a developer and cryptocurrency advocate, about the implications of Ripple’s underreporting. He said:

“Coin issuance schedule has an impact on market price. The greater the amount of new coins put in circulation; the more capital is required to flow into the currency every day to keep the price. Monetary inflation consumes liquidity, so currencies with high inflation will tend to be less valuable and more volatile.”

The next bit of inconsistency, as reported by Coin Metrics, comes from the manner in which Ripple implemented the return of the unused escrow amount. Per its own guidelines published in 2017, every unused XRP released from escrow on a monthly basis would be returned to the escrow account from the back of the queue.

An excerpt from the report detailing this exact point reads:

“Any additional XRP leftover each month will be placed into a new escrow to release in the first month in which no escrow currently releases.”

Two months into its operation, Ripple changed the queuing format for unused XRP, no longer returning them to the back of the queue but instead locking them in such a way as to perpetually maintain a 1 billion XRP supply schedule per month. According to Coin Metrics, this new paradigm significantly accelerates the XRP release schedule.

The third issue raised by Coin Metrics focuses on 200 million XRP not associated with Ripple’s escrow account. The Coin Metrics report traced 55 million XRP from this scheme going mostly to Bitstamp — a Luxembourg-based cryptocurrency exchange platform.

Simply a timeline issue?

Cointelegraph contacted Ripple for comments regarding the matter but was instead pointed to a Tweet by David Schwartz, the chief technology officer at Ripple:

Schwartz went on further to point out how the altered timeline changed the company’s escrow reporting, while promising to make subsequent quarterly reports include language that would make the change more apparent, saying:

“We tweaked the timeline in 2018 to reflect transactions that happened each month of the quarter rather than linking returns to date of initial escrow release. Ex: a March escrow release returned in April is considered a Q2 event, not Q1. We plan to add some additional language in future markets reports in our continued efforts to be the most transparent in the industry.”

Schwartz’s explanation would mean that there is always a 100 million XRP unspent balance that is carried forward from the end of one quarter to the other. Thus, at the time of Ripple publishing its quarterly report, it will be 100 million XRP behind, even though the balance exists on the on-chain Ripple ledger as having already returned to the company’s escrow.

There, however, lies a problem with Schwartz’s argument, which becomes apparent when examining the total escrow reporting since Dec. 16, 2017 to the latest released quarterly report on April 24, 2019. According to Coin Metrics, the total net amount returned to escrow so far as recorded by on-chain data and the various quarterly reports differs by 200 million XRP.

Of the 17 billion XRP released from escrow since Dec. 16, 2017, on-chain data shows 12.5 billion XRP returned to escrow. Meanwhile, Ripple’s quarterly reports show 12.7 billion XRP.

If the tweaked timeline explanation is all there is, then the variance between both reports ought to be only 100 million, since the only difference would be the month-ending XRP balance not being represented in the accounting shown for the quarterly report.

Speaking to Cointelegraph on the alleged discrepancies, Joe DiPasquale, the CEO of cryptocurrency hedge fund BitBull Capital, declared:

“The alleged discrepancies in Ripple’s escrow reporting may impact XRP’s price negatively unless Ripple publicly explains them in due time. One of the pitfalls of a centralized system is a lack of transparency and Ripple’s control over XRP is an example of this. If Ripple wants XRP to gain global adoption it needs to work towards building trust and transparency is the first step towards that.”

Ripple’s monthly escrow releases supplement the total XRP market liquidity, which in turn contributes to the token price control mechanism. By controlling supply, Ripple effectively plays a great role in determining the price of XRP. The question, though, still remains about whether these discrepancies are simply a timeline issue or an example of creative accounting on behalf of the company.

Posted on

Is Yet Another Escrow Project to Become a Big Deal for Investment Process?

The concept of escrow services has been attracting investors’ attention over the last six months. Numerous startups have been promoting the idea that investing in ICOs may be protected by escrow mechanisms, which have various applications. For instance, a startup called Escroco, that ran its pre-ITO and ITO rounds in autumn 2017, offered a fund-reserve in order to grant reimbursement against losses.

Why freezing tokens?

Escroco describes itself as an escrow and insurance service that aims to connect investors with borrowers in a way that lowers risk and maximizes profits.

The team states in the project’s white paper that its coin-value architecture is targeted towards making Escroco limited in supply as well as highly needed, “thereby mitigating against inflation, mining and improving control of the currency across the market.”

The core idea of an escrow is that funds should be raised with all the risks of loss being insured. For example, a startup plans to use the frozen deposits. When a borrower wants to borrow large amounts of Bitcoin, they will have to use some Escroco token. The token will be frozen in an escrow account. But at the end of an investment package, the borrower can get Escroco back.

A referral charge is tagged to investment packages. According to the white paper, “It is to be paid by the borrower that created the package based on its patronage.” These charges are based on a percentage of investment cost. The fee is collected only when investors successfully establish a contract of investment on a particular package.

Moreover, the startup sets up a safety fund with almost one-third of its tokens. “From the token production, two mln out of 3.1 mln ESC will be in circulation, while 1.1 mln will be in a safety fund account and used for such purposes. At the same time, a very small percentage of the investors profit will go to a separate insurance account.

According to the Escroco team at Bitcointalk, the project is quite different to Bitcoinnect or any other lending coin: “Our module is new and we are closer to salt and etherlend, but we give investors the interest that paid by borrowers.”

Airdropping a new token

On Jan. 15 the Escroco team revealed on Twitter the plan on issuing and delivering a new token for its users, which is called Escroco Cash Airdrop (ESA).

The reveal states that Escroco “will be airdropping a new token that will be worth a fixed $1 (at least for the first few weeks), which our holder will get for free at the ratio 4:1- four ESC get one ESA. Only those who keep their coin on waveswallet.io will be able to get the new coin.”

So far the Escroco project has completed the first and second rounds of the ITO. The next round, ICO, is planned for Q3 2018. In January 2018 the startup has also released the platforms for borrowers and investors.

Today Escroco’s tokens may be purchased at crypto exchanges. Since Dec. 1 2017 Escroco tokens are being listed on two exchanges: livecoin.net and openledger. Both platforms offer many currency pairs, including trading ETH/ESC, BTC/ESC and BCC/ESC.

Disclaimer. Cointelegraph does not endorse any content or product on this page. While we aim at providing you all important information that we could obtain, readers should do their own research before taking any actions related to the company and carry full responsibility for their decisions, nor this article can be considered as an investment advice.

Posted on

Escrow, Explained

What is an escrow?

An escrow is a way to control and protect financial assets.

An escrow is a legal concept where a financial instrument or an asset is held by a third party on behalf of two other parties that are in the process of completing a transaction. In other words, when you use an escrow, a third party acts as a guarantor. The funds or assets are held by an escrow agent. This party controls the whole process and makes sure the commitments are fulfilled. Therefore, nobody can use money on their own without the agreement from other participants.

How does it work?

One of the most used concepts is a secret splitting.

It works when you possess important information and share it with people and/or companies you trust. You can share a password, a number of a bank account, an access to securities, and more. No one can get access on their own. The only way to access it is with a mutual agreement.

Pic 3

But it has some weak spots. If one party loses access to the info and has no connection with other parties to make an agreement or compromises themselves and loses trust, there is no way to restore it.

Pic 4

What if you can’t gather or reach all the people involved? What to do? Consider a threshold scheme.

What is a threshold scheme?

A threshold scheme is an improved version of secret splitting.

The threshold scheme does not require the agreement of all parties. For example, you share info with five different parties, but any three of them can reconstruct the secret. Two parties are not enough to get access to the info. If you need to exclude someone from your escrow, you can do it without any difficulties. These parties can be divided into some groups, depending on the confidence level. Let’s assume you have six people, you completely trust three of them- group one, and the other three are less credible- group two.

Pic 1

You can make a scheme of data reconstruction, in case something happens. So the access is available to three people from group one and anyone from group two.

Pic 2

Or any two people from group one and three people from group two.

There are no restrictions in the threshold system. They can be as complex and easy as you wish.

Is it secure?

Mathematics and cryptography prove the reliability of the escrow.

A lot of mathematicians and cryptologists have worked on the security issue and managed to develop algorithms for safe escrow. A lot of research was made to prove the security. To avoid collusion of some parties a scheme was developed when others are able to cancel the decision of others. If some party tries to cheat, there is a way to destroy its plans. If some party loses its access, there is no need to change the key.

If escrow is that good, why does not everybody use it?

Complexity of implementation discourages a lot of people.

The described models are rather complicated and weird. It’s much more difficult to understand it than it might look. You’ll most likely need an individual expert in mathematics and cryptography in the team. Moreover, incorrect implementation can be costly. You may not notice any mistake in the system at first, but it may make it vulnerable or the funds unavailable.

Don’t forget about guarantors. They put their reputation at stake. Certainly, their services will cost a lot. Together with the expert, expenses will significantly increase.

How is escrow applied in the Blockchain world?

Escrow is gaining more and more popularity in Blockchain.

A lot of companies understand the importance of guarantees for investors to prevent scams. The team may be unknown to the general public, but the Blockchain world has its authorities which reputation is indisputable. Some companies serve as a third party in different agreements. Some startups already launch their ICOs with escrow. The largest Blockchain platform, Ethereum, has already made an escrow smart contract. Escrow becomes one of the power instruments to show the seriousness of your purposes.