Escrows are typically not cheap, that's kinda expected. It's relatively easy money earned by virtue of trust. Also there are typically lawyers involved to draft agreements and arbitration clauses. Arbitrations are handled by mutually agreed specialists, and costs extra.

I think that's all the more reason to create a service around it, no?

It is easy money once established. Nobody would park funds in escrow with a no name firm. The barrier to customer acquisition is high. That said, I don't discount the possibility. Definitely possible to create a service around it. Profitability is the question.

Incase of arbiteration, they would also need to be able to look at the actual source code and figure out who is right / wrong. Software escrow systems tend to be even more expensive I have seen.

Well larger companies and projects are already doing it. Fun part would be to bring the same authenticity and element of trust to a lower market (ie. Freelancers and smaller agency stuff). Yes, we will need large volumes to stackup profits but the biggest market gap is there as well. I can imagine a lot of freelancers/ agencies using some kind of platform to bring authenticity in their process.

Yes. And experts to review code aren't cheap. You also need to demonstrate capability to bring in those experts when needed.

Yeah, and that's for code based projects. What about all the other projects that don't involve code. I get it why it's a process limited to high-price projects and deals.

For smaller agencies and freelancers, it would also be fine if the services are initially limited to payment protection only rather than getting into complete arbitration thing. The escrow service provider could work as a party to review project deliverables ( through a bot or human checks) and release funds if it fits the deliverables’ criteria.

For first time clients, it might make sense if you aren't sure of the payment, or if they are reluctant to provide advance.

But small scale projects don't involve a third party based code-reviews. How about we just augment existing workflows with branched payments based on terms both parties agree on?