In Bitcoin, an escrow typically involves either a trusted third party or a multi-signature script that only releases funds when specific criteria are met—like completing a service or receiving a product. Traditionally, a centralized escrow agent holds the money, but Bitcoin’s scripting capabilities can replace that agent with code. For example, a 2-of-3 multisig could include buyer, seller, and an arbitrator.

Escrow arrangements reduce counterparty risk for high-value transactions or when trust between parties is limited. If something goes wrong, the arbiter can settle disputes. While it introduces a layer of complexity and potentially a middleman, escrow is often essential for major purchases or marketplaces where chargebacks and consumer protections aren’t built into the payment layer.