8 hours ago
Dispute Resolution: Is Decentralization The Answer?
Saro McKenna is the CEO of Dacoco GmbH and cofounder of Alien Worlds.
Although the godfather of online dispute resolution, Ethan Katsh, once observed that "the power of technology to resolve disputes is exceeded by the power of technology to generate disputes," as human beings, we cannot help ourselves. Even the prospect of AI sentience and bots capable of overpowering their flesh-and-bone creators cannot halt our penchant for relentlessly leveraging tech to achieve advancement in one area or another.
As far as disputes are concerned, the technology that has increasingly been used to intercede is blockchain. This is no surprise. Of all the suggested use cases for a censor- and tamper-proof decentralized digital ledger, jurisprudence rightly ranks high.
Over the past decade, many technologists have attempted to adapt traditional legal concepts and resolve conflicts on-chain, with mixed success. So, why is blockchain considered the best "lawtech" tool to settle disputes?
Decentralized dispute resolution is appealing because of its ability to bypass centralized authorities that are prone to bias or bureaucracy. Smart contracts and empowered jurors streamline arbitration, handling all kinds of disputes with transparency. As traditional legal systems often prove unwieldy or unfit for specific disagreements, DDR offers fast, fair outcomes.
Evidently, there are many factors that entice developers to build Web3 protocols that are concerned with dispute resolution. Blockchain, being apolitical, decentralized and transparent, is perceived to be perhaps the best vehicle for administering justice when two or more parties are in disagreement. These parties can consist of individuals or even companies and governments.
Perhaps blockchain is too broad a term, however, because it is often specific features of certain chains, like decentralized autonomous organizations (DAOs) and smart contracts, that prove useful in an arbitration capacity.
The economic incentives baked into blockchains are another important consideration, with the general idea being that users can become jurors, reviewing evidence and voting for the party they believe is right. In blockchain-based systems, jurors are usually financially motivated to make a sound judgment, i.e., one that accords with the majority.
Kleros is one of the earliest examples of a decentralized adjudication system, one that uses jurors and game theory to produce judgments in a secure and inexpensive way. Founded in 2017, the Ethereum-based arbitration service was designed to "resolve any kind of dispute," building on the work of early Web3 pioneers like Vitalik Buterin and Paul Sztorc, whose idea to use Schelling Point-based incentives for blockchain oracles gave rise to the notion of "decentralized truth-telling."
In the case of Kleros, the probability of crowdsourced jurors being selected is proportional to the amount of tokens staked. Staking, then, signifies one's willingness to participate in the adjudication process in contrast to the traditional court system, where jurors are selected at random. Arbitration fees, meanwhile, make it difficult for attackers to spam the system by creating frivolous disputes.
Many similar protocols appeared around this time, among them Jur (2018) and Aragon (2016). While the former focused on enterprise use cases and selected jurors based on their reputation rather than token stake, the latter favored a subscription model and was intended for arbitration within DAOs themselves. Although they held promise, neither project is currently actively maintained.
The popularization of DeFi around 2020 prompted renewed interest in dispute resolution, most notably in the case of the UMA protocol's Data Verification Mechanism (DVM), which resolves disputes about the price of a synthetic token derivative contract. This type of system, of course, has a much narrower focus than projects like Kleros, which seek to be multipurpose courts.
A watershed moment for DDR occurred in 2021 when a Mexican court enforced a decentralized arbitration award governed by Kleros, which related to a real estate dispute. Last year, Mexico also passed the General Law of Alternative Dispute Resolution Mechanisms, the first national legislation recognizing decentralized justice as a valid dispute resolution system.
Central to the premise of DDR is the idea that arbiters can come to a fair and transparent judgment based on the available evidence: the wisdom of the crowd, enforced on-chain.
Arbiters play a key role in the recently unveiled Worker Proposal System of blockchain-based metaverse Alien Worlds (which I cofounded), which is centered on the activity of various DAOs. While the system empowers users to suggest and execute new projects, arbiters act as neutral mediators in any disputes that arise. For example, arbiters can step in and cast a deciding vote when there is a disagreement about project milestones.
In this particular arbitration model, a blockchain escrow account is also used since the Worker Proposal System is designed to furnish the awarded party with tokens for meeting pre-agreed targets. Arbiters must complete an identity verification process, demonstrate a solid understanding of the Alien Worlds ecosystem, commit to a minimum term of four months to ensure continuity and dedicate specific weekly hours to their role. They are also paid a set rate for performing this role.
As the primary contributor to Alien Worlds, my company, Dacoco, takes a notable approach to dispute resolution by blending Web2 and Web3 concepts in a unique way. While disputes are enforced on-chain, and a DAO system transparently manages worker proposals, the arbiter functions similarly to an independent mediator in any traditional legal process. In other words, Dacoco is not relying entirely on blockchain to adjudicate.
In most cases, protocols promising to administer decentralized justice have failed to achieve their objectives, whether due to technical, market or other challenges. This is a great shame because on-chain arbitration offers many advantages over a sluggish legal system that is notorious for its inequity (the most powerful people can afford the best litigators) and complexity.
Although decentralized dispute resolution has yet to gain widespread adoption, and many challenges remain, expect lawtech solutions to grow more sophisticated over time and for traditional courts to follow Mexico's lead in recognizing such systems.
In a sense, it is analogous to the way in which the financial world has gradually recognized Bitcoin, a consequence of the number of individuals storing their wealth in the network. Ultimately, the best and most efficient solutions have a tendency to break into the spotlight.
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