Blockchain and Dispute Resolution
Welcome to the world of self-help and autonomy. From financial institutions to freelancing, every industry can benefit from the use of blockchain technology. That’s because blockchain is Turing complete. This means any existing business logic can be coded into a block to create a transaction. And for many companies, this type of commerce is exponentially faster than legacy systems in place.
As the crypto economy continues to expand, the value of these blocks rapidly increase, which also escalates the risk of smart contracting. Since the basic premise of smart contracts and blockchain is emphasized on computer programming, hypothesizing human interpretation is nearly impossible for a court. That makes many businesses second-guess the process and invokes consumer mistrust.
The lack of governance and conflict resolution within the blockchain environment undermines trust and hinders the broadening evolution. Therefore, something must be done to create jurisdictional means around this new form of business.
Resolving Disputes in a Digital World
Convenience and efficiency are the key selling points for a blockchain-based crypto economy, but there are also inherent limitations within the system. Once a transaction is complete (and all parameters met) the smart contract self-executes. It becomes immutable on the blockchain and cannot be changed. Even by a court of law.
There are a variety of challenges the technology faces when it comes to governance. The existing legal infrastructure has challenges like:
- Limited regulatory oversight: Courts cannot identify who transacted a smart contract. They do not have jurisdiction over an anonymized blockchain.
- Distrust: Contracting parties may second-guess a third-party decision pertaining to disputes.
- Automated Execution: The transaction is coded and once it is filled, the smart contract self-executes. It cannot be altered after that.
Courts cannot effectuate resolutions to disputes rising from blockchain-based smart contracts because the contracting parties are anonymous, the contract cannot be accessed, and it undermines the evolution of the crypto economy.
It’s difficult to conceptualize opportunities in the crypto transactional environment where an existing legal infrastructure can enforce any disputes over a smart contract. The inability to consistently identify parties in a disagreement, and the problems of applying the law, means that crypto dispute resolution must be developed for this new framework of business.
Additionally, it should be realized that smart contracts are not infallible. Although they can be coded for a variety of possible breaches, there are still many factors that can make a breach inevitable, like:
- Subjectivity in a human relationship
- Rationality of coders and contracting parties
- Incomplete data
- Poor foresight
- Opportunistic behavior
- Other unpredictable human errors
Therefore, any dispute resolution mechanism must be an intra-blockchain distributed jurisdiction. This means governance from within the blockchain itself to effectively address the inherent issues.
The need for internal blockchain-based governance is critical to the growth of the crypto economy. The existing legal infrastructure will be called upon to arbitrate and interfere with crypto transactions. This will ultimately result in suboptimal outcomes and hurt the entire process.
This is where the concept of distributed jurisdiction come in. Both requirements for developing a structure of distributed jurisdiction are already in place: anonymity and effective intra-blockchain governance.
The Ties Network project has worked out how to perpetuate anonymity in the blockchain universe, despite its exponential growth. TiesDB runs the first public database for decentralized structured data storage and will be part of the solution for distributed jurisdiction.
There is also a need to establish a system of intra-blockchain governance. The Aragon Network is the first decentralized organization governed by a community whose primary goal is to create an online court system that isn’t bound by traditional barriers (i.e. states, countries). Using peers to resolve disputes, every aspect of the network is governed by the people.
Open-Source Platform Ecosystem
Professor and Director of the Private Investment Fund Institute at the University of St. Thomas, Wulf A. Kaal, Ph.D. has proposed a creative solution for distributed jurisdiction. It’s an open-source platform ecosystem of dispute resolution for smart contracts that allows for governance within the blockchain itself.
The system uses both anonymity and internal controls to create a P2P intra-blockchain governance. The benefits of this proposed open-source ecosystem include:
- Opting into resolution mechanisms at the start of the smart contract which enables more nuanced crypto solutions.
- Produces greater legal certainty than normal smart contracts and can ensure less risk.
- Greater trust is fostered between anonymous parties.
- Users can identify the highest expertise of their judges and arbitrators through a review system.
- Judges have a profile with a record of their decisions across different fora and types of disputes.
- It boosts consumer confidence that there can be a fair resolution of crypto disputes.
- Effective and just resolution through the non-arbitrary.
- Low to zero-transaction cost.
- Crowdsourcing judgments lead to more efficient appeals.
- More choices among dispute resolution with better representation and an increased quality of arbitrators.
Just as you would rate a restaurant, the open-source dispute resolution platform allows the community to upvote or downvote judgments which ultimately affect the arbitrators’ rating. Anonymity is ensured as judges who reveal any private data are severely downvoted.
Blockchain Arbitration Rules
Legacy businesses must be assured that they can operate in crypto systems without compromising their existing rights. However, even real-world court decisions do not have the same authority and legitimacy as intra-blockchain dispute resolution platforms.
To test this theory, the Munich based blockchain solutions provider Datarella teamed up with the international law firm CMS to conduct an arbitration proceeding using blockchain technology and established rules. Blockchain expert and CMS lawyer Dr. Markus Kaulartz was appointed as arbitrator to conduct the test proceedings. Datarella developed a set of blockchain arbitration rules for Dr. Kaulartz to use to govern procedurals aspects in the event of a conflict.
The system explicitly allows documents and other critical information to be shared using the blockchain as a verification mechanism. Additionally, included in the code of the smart contract is an arbitration library that can be immediately accessed by the arbitrator. The test-run was a complete success. It demonstrated that using the combination of the arbitration rules with the library can preserve the benefits of a smart contract in the case of disputes.
Breaching a smart contract is never easy in the blockchain because it self-executes. The smart contract alone does not provide any self-enforcement mechanism to ensure one party does not drop the agreement. However, some people may argue breaching is impossible because without meeting parameters, the contract will not self-execute.
It’s all about the code and establishing an open-source dispute resolution platform to stop a breach from happening in the first place. Blockchain-based resolutions can also be established with arbitration rules and resources that a professional arbitrator can access.
When done correctly, there is no such thing as breaching a smart contract. A governance process that both parties mutually agree upon during the initial phase of the contract is the only plausible solution. Provisions to change the code for dispute resolutions, sanctions for violating rules, and procedures for enforcing penalties will establish a solid foundation for intra-blockchain governance.
Given the inability of courts to adjudicate smart contracts effectively, the idea of diving into the blockchain itself seems the most practical solution. Using the DNA of the technology to create dispute resolution mechanisms will ensure that both parties are mitigating risk and establishing trust. The entire concept of blockchain is about self-help so resolving your issues shouldn’t be any different. You’re using the system to solve the system and that’s a win-win for all parties involved.