Since the dawn of Bitcoin, the decentralized and immutable properties of blockchain technology have been beneficial for a variety of sectors from insurance to healthcare. More recently, dispute resolution was added to the list of use cases.
Online dispute resolution is nothing new. There have been various attempts at using online tools to solve disputes, which have largely failed as they simply brought them into a digital medium rather than delivering a completely new approach to solving them.
The emergence of blockchain technology changes that, enabling new models of arbitration through the concept of decentralized justice – a sort of crowdsourced blockchain legal system involving automated dispute resolution mechanisms based on game theory and crypto-economics that allow outcomes to be enforced via smart contracts.
So how does it work, and who are the pioneers of decentralized justice developing the platforms that could deliver crypto’s next killer use case?
How Does On-Chain Dispute Resolution Work?
As an example, in a task transaction between two parties, smart contracts can be used requiring the deposit of funds into the smart contract by the client, who will confirm the release of funds when the task is completed by the service provider.
If the service provider deems the task complete, but the client does not confirm the release of funds from the smart contract, an automated dispute resolution mechanism can be triggered. This freezes the funds and incentivizes randomly selected independent members of the same blockchain network to vote on whether the task has been completed or not, automatically transferring the funds to the winning party.
If adjudicators go against the consensus, they lose the incentive. As individual adjudicators believe most of the other adjudicators will vote for the fairest outcome, voting for the consensus is the best way to gain more incentive rewards.
Pioneering Decentralized Justice
Kleros was the first system to explore using secure and transparent blockchain technology in arbitration and has launched a fellowship for continued research into decentralized justice.
Its open-source online dispute resolution protocol, built on top of the Ethereum blockchain, uses crowdsourcing and game-theoretic incentives to fairly, quickly, and reliably adjudicate disputes.
Kleros acts as a type of decentralized Supreme Court layer used by businesses for arbitration in their contracts. If there is a challenge, a dispute is created in Kleros, and a panel of jurors is randomly selected. Parties to the dispute pay a fee in Ether to the jurors. The selected jurors stake the Kleros native token (PNK) to participate in the process and adjudicate on the evidence submitted. If jurors independently vote with the majority, they keep their tokens and are rewarded with a share of the tokens forfeited by those who voted with the minority, incentivizing backing consensus on the fairest outcome.
Another pioneer in this area is the smart contract creation and dispute resolution platform Jur, focussed on helping individuals and businesses to gain global access to affordable justice at various levels.
Jur offers a crowdsourced open layer aimed at small value disputes incentivizing adjudicators with JUR tokens, a community layer with independent experts in the same field who can make judgments, and a court layer with legal practitioners who can provide arbitration across 166 countries.
It utilizes VeChain’s blockchain-based ecosystem for recording agreements via DIY smart contracts, and providing legally binding dispute resolution that is 80% faster than the traditional system.
Aragon Court also emerged, serving as the legal component of the Aragon Network (ANT) – a platform built on the Ethereum blockchain used to create and maintain decentralized autonomous organizations (DAOs).
The Aragon Court dispute resolution protocol comprises jurors that are financially incentivized to participate in arbitration disputes amongst DAO participants. ANT is staked as collateral to mint ANJ that jurors require to be able to work for the Aragon Court system.
Now, Splyt has entered the field with an alternative pre-dispute resolution protocol to manage disputes on its decentralized e-commerce platform, powered by the Polkadot multi-chain network.
Splyt simplifies the e-commerce supply chain by assigning unique eNFTs (e-commerce non-fungible tokens) to every inventory item, functioning similarly to a global blockchain SKU number. Brands synchronize their inventory with the platform, which is automatically tokenized as eNFTs on Splyt’s inventory catalog.
Splyt’s native SHOP token is designed to escrow funds on a purchase to protect buyers. Once the buyer receives an item, the funds are released to the seller and any affiliates. If the item is not delivered, the buyer can initiate the Splyt dispute protocol.
In the legacy system, the ability for parties to settle a dispute between themselves is key to reducing the time and cost of litigation. Splyt is designed to leverage the same incentives through automated means that alleviate the cost and time barriers associated with arbitration, encouraging parties to settle disputes between themselves first and only providing arbitrage if they cannot.
Sellers must deposit a small number of SHOP tokens when they list an item. Any party interested in disputing the seller’s good faith behavior may stake a matching number of SHOP tokens to indicate skepticism regarding a transaction. A seller may then concede that there was poor behavior, like a missed shipping deadline, and surrender their initial deposit to settle the dispute.
Alternatively, if the seller is confident in their behavior, they can stake additional SHOP tokens up to the same first deposit amount. The disputing party can then either surrender their original stake to concede that their skepticism was unwarranted or place a second matching deposit to indicate continued skepticism. If both parties double-stake, and can’t settle between them, then the case is sent to a third party who can analyze the evidence and arbitrate the dispute. A portion of the double-staked tokens will go to reward the arbitrator for their efforts and the rest will go to the winner of the dispute.
Any amounts involved in a transaction, including the entire price of an item bought, will be held in escrow until the time window to challenge the item has expired, ensuring every party has an opportunity to initiate a dispute. If a dispute is initiated, then the disputed amount will be held until the parties either settle or a third-party can resolve the dispute.
Users can stake SHOP tokens to become arbiters. Arbiters are chosen at random to resolve disputes and earn more tokens in return. The more tokens staked, the higher the financial value of dispute arbiters can be a candidate for, allowing for any e-commerce dispute resolution to be managed entirely on-chain.
The Missing Link in Dispute Resolution
Blockchain-based dispute resolution is still in its early stages. As the decentralized ecosystem continues to grow, and transaction agreements are increasingly carried out using smart contracts on public blockchains, the game theory and token-economics of decentralized justice provide the ideal crypto-native solution to manage disputes and enforce outcomes in a rapidly evolving space. We are witnessing the birth of a new industry built on blockchain technology that delivers faster, cheaper, and more accessible dispute resolutions on-chain.
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