Self-Enforcing Blockchain Dispute Resolution: Justice Without the State Amid the COVID-19?
The COVID-19 outbreak is affecting every aspect of peoples’ lives around the globe, including their justice systems.[1] In the United States, legal professionals are turning to technologies to provide needed dispute resolution: judges are conducting hearings and trials via the online video service Zoom, exchanging evidence through email, and holding conferences on the phone.[2] Courts realize that, to provide timely dispute resolution and prevent heavy backlogs, they have to start increasing their use of technology.[3] Duffie Stone, the president of the National District Attorneys Association, stated that the virus has forced a long-overdue incorporation of technology into courtrooms.[4] Stone explained that after the outbreak is over, courts’ continuous reliance on technology can reduce costs, accelerate proceedings, and provide rural areas with access to justice.[5]
Blockchain enthusiasts have been striving towards incorporating technology to make dispute resolution fast, cheap, and accessible long before the COVID-19 disaster.[6] Because the blockchain-based dispute resolution (“BDR”) services have been largely used only for narrow types of disputes, these services have not generated widespread concerns regarding their ability to provide nonarbitrary and fair dispute resolution.[7] However, amidst the global pandemic, an increasing number of people adhering to social distancing may find it attractive to resort to BDR for handling a broader range of disputes. Therefore, the time is ripe to analyze BDR’s ability to provide justice.
Like the name indicates, a blockchain is a chain of digital data blocks that are timestamped and, therefore, are difficult to backdate or otherwise falsify.[8] This feature that provides the incorruptibility of documents inspired many crypto projects to use blockchain in providing dispute resolution services.[9] Furthermore, many blockchain enthusiasts saw the creation of a private system of BDR as a continuum of Satoshi Nakamoto’s (the pseudonymous inventor of the very first blockchain) vision of blockchain as a means of decentralized self-governance.[10]
Accordingly, entrepreneurs started developing arbitration services networks on top of existing blockchains using the multi-signature address.[11] This specific type of digital signature operates like a lock with two keyholes, which can be unlocked only using two keys.[12] To illustrate how this device works, imagine that Alice wants to send Bob payment in cryptocurrency—fifty Bitcoins—for creating a website for her business.[13] To send the funds from her digital wallet, Alice, like anybody else on the blockchain, would use her publicly displayed pseudonym, which is her public key, and her “password,” which is her private key.[14] Using both of her keys, Alice would create the multi-signature address to store her fifty Bitcoins until Bob actually creates the website.[15] Both Alice and Bob will receive a digital key to the address, and if no dispute arises, they can use the two keys to unlock Alice’s payment.[16] However, if Bob fails to fulfill Alice’s order, neither Bob nor Alice can access these fifty Bitcoins unilaterally.[17] Either of them can ask a private adjudicator to review the facts of the case and decide who is entitled to the disputed funds.[18] When the adjudicator decides in favor of, say, Alice, the adjudicator and Alice can unlock the funds and send them back to Alice’s digital wallet, thereby enforcing the results of dispute resolution without any state involvement.[19] Today, over thirty percent of the existing coins are stored on this type of address, and specialized networks—such as Jury.Online, Aragon Network, Jur, Juris, and Kleros—offer their users such dispute resolution services.[20] These networks claim that blockchains’ features—that allow the recording of the transactions in a verifiable and permanent way—guarantee the networks’ impartiality and incorruptibility in handling evidence and selecting the jury.[21]
Because the highest degree of trust can be provided only by completely decentralized networks—meaning that they are not controlled by networks’ developers, but by all of their users collectively—the business models of all of such networks contain a plan of ultimately reaching complete decentralization.[22] Indeed, in February 2020, Kleros, the most developed BDR platform, announced the launch of “Kleros Governor”— a smart contract that passes the reins of control from Kleros’ development team (Cooperative Kleros) to the wisdom of the crowd—thereby becoming the very first decentralized BDR platform in operation.[23] While it is clear that corporations and other large commercial actors will not entrust their high-stake disputes into the hands of Kleros’ nonprofessional and anonymous arbitrators, small businesses and freelancers should also be wary of the network’s ability to provide them with nonarbitrary and fair dispute resolution.[24]
To take advantage of Kleros’ network, the parties must indicate in their electronic agreement that a dispute arising out of it should be resolved by Kleros.[25] Although Kleros theoretically allows resolving dispute involving virtually any service and products, the examination of Kleros platform reveals that parties currently use it for relatively narrow types of disputes salient to online services and blockchains’ ecosystems (disputes over agreements to publish articles and videos online for advertising purposes and disputes over challenged tokens and crypto-asset transfer).[26] Anyone in the network can become an anonymous juror by depositing a token named “PNK.”[27] The more tokens potential jurors deposits, the more likely the software will select them to decide a case.[28] Interestingly, one token owner, by staking enough tokens, can get more votes (weight) in a dispute.[29] For instance, if a dispute requires five votes, and one token owner stakes predominantly more tokens than other jurors, this token owner would have two votes while other three jurors would get one vote each.[30] To incentivize jurors to vote fairly, Kleros uses the so-called game theory.[31] None of the jurors knows each other’s decisions on the case until they all make it public: the only thing they do know is that they all have to decide fairly.[32] Because jurors receive their deposited tokens back along with additional gains only if they vote with the majority, they are incentivized to render a fair decision.[33]
It could be argued that self-enforcement of BDR is nothing new; rather, it is a feature that other online platforms and electronic payment services—such as eBay, PayPal, Visa, or MasterCard—offer.[34] Although existent self-enforcing Online Dispute Resolution (“ODR”) services—such as eBay’s Money Back Guarantee—operate based on logic of private enforcement, they are distinctly different from Kleros because they are in the same position as other private actors that operate within existing legal frameworks.[35] It is important to note that eBay’s Money Back Guarantee is a service provided by a centralized body—eBay Inc.—which is a multinational e-commerce corporation.[36] Under the direct oversight of states where it provides its ODR services, eBay is highly incentivized to self-police itself and ensure that its policies are compliant with relevant laws and regulations.[37] In case of non-compliance, states and private plaintiffs can not only take actions against eBay Inc., but also require it to provide information necessary to identify parties who engage in its ODR to commence judicial dispute resolution de novo.[38]
In contrast, because Kleros blockchain is decentralized and autonomously run, there is no operator or governing body that can bear a legal responsibility for its internal governance if it leads to bluntly unfair depute resolution’s outcomes.[39] Rather, Kleros blockchain is fully maintained and owned by a distributed group of anonymous users around the globe.[40] The blockchain’s nodes and information they contain do not have any physical location: they exist only in cyberspace.[41]
Further, there is an argument that the automatic enforcement of Kleros dispute resolution is simply the enforcement of international arbitration awards, which is prescribed by the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention”), that the vast majority of the countries ratified.[42] Indeed, blockchain dispute resolution and international arbitration have shared characteristics: “they are both private systems of cross-border adjudication, operating independently from state courts and functioning as a largely self-standing legal phenomenon.”[43] Just like Kleros’ users, parties to a traditional international arbitration are free to determine applicable procedural rules on their own and produce a potentially enforceable resolution. Also, similar to Kleros’ jury, traditional arbitrators “draw their authority and rules from arbitration contracts themselves and they are not necessarily bound to a specific domestic law.[44]
However, in order to be enforceable, a traditional arbitration award has to confirm to due process principles of international arbitration.[45] In traditional (“off-chain”) international arbitration—aware of the prospect that losing parties will not comply voluntarily with arbitrators’ awards and the possibility that courts will not recognize such awards—the parties and arbitrators are incentivized to ensure that the arbitration process confirms to at least minimum standards of fairness.[46] In contrast, in “on-chain” dispute resolution, where arbitration awards will be enforced automatically, parties and jurors lack these basic incentives.[47] While states and courts can still deny recognition of Kleros arbitration awards and order prevailing parties to return their awards through off-chain mechanisms, the practicability of such ex-ante remedy is highly questionable in light of prevailing anonymity in Kleros’ BDR.[48] The lack of identifiable parties to Kleros dispute renders it virtually impossible to challenge Kleros’ arbitration awards through traditional jurisdictional means.[49] This extremely limited ability to challenge an award rendered by anonymous jurors eliminates safeguards that ensure a minimal degree of fairness and nonarbitrary proceedings. Lacking adequate incentives to conduct nonarbitrary and fair dispute resolution, Kleros arbitrators have a high degree of discretion in deciding which substantive and procedural rules, if any, they want to follow.
In a traditional arbitration, when the parties do not determine—either before or after their dispute arose—applicable substantive and procedural law, arbitrators are nevertheless bound to follow certain governing rules.[50] Particularly, procedural rules would be determined by the seat of the arbitrators and governing substantive law would be determined by focusing on a connecting link of the parties’ contract, such as the place of performance or the place where the contract was made.[51] Also, when parties consent to arbitration by a particular private institution—for instance, the American Arbitration Association (“AAA”)—and accept its procedural rules, they are confident that those rules provide at least minimal degree of procedural fairness.[52] After all, if the AAA’s arbitral awards were routinely not enforceable because its arbitrators follow questionable procedures, the AAA would have been driven out of business.
In contrast, because the enforcement is not an issue for Kleros, the network is not sufficiently incentivized to ensure that its substantive or procedural rules conform to a basic standard of fairness. A lack of adequate procedural rules is evident in Kleros’ white paper. The paper states that users may agree that if one party fails to deposit the arbitration fee, “the smart contract will consider that the court ruled in favor of the party who deposited the arbitration fee (without even creating a dispute in the [Kleros’] court).”[53] This scenario, which Kleros’ white paper explicitly endorses, raises concerns regarding parties’ proper notice and their opportunity to present the case.[54] Moreover, the anonymity of Kleros jury eliminates any reputational sanctions that exist in traditional arbitration.[55] Furthermore, while off-chain arbitrators are required to disclose their conflict of interests to ensure the enforceability of their decisions, such a disclosure requirement is lacking in Kleros.[56] The anonymity of Kleros’ jurors keeps the parties in the dark regarding any potential conflicts.[57] It is hardly a stretch to imagine a situation where Kleros jury—by request of their friend who also happened to be a party in Kleros’ dispute—stake more funds than other jurors in order to get more “weight” in the voting process.[58]
Finally, Kleros jurors’ economic incentives to adhere to the majority vote (because they keep their bond if they vote with the majority), call into question their ability to decide nonarbitrary and fairly.[59] For instance, what if a freelancer is hired to create a webpage for an organization with a bad reputation? Imagine that otherwise legitimate organization is stigmatized by people worldwide because it is considered responsible for covering up the early development of COVID-19.[60] Knowing the predominant popular sentiments and incentivized to vote with the majority, Kleros jury may rule against that organization even if the freelancer never delivered the promised website.[61]
Providing enforcement of arbitral awards without any state assistance, BDR is a unique form of self-sufficient transnational dispute resolution.[62] While such self-sufficiency provides a high degree of finality and cost-savings, it also introduces concerns that are distinct to BDR: decentralized dispute resolution networks lack basic incentives—that other alternative dispute resolution systems have—to provide minimum safeguards that its jury’s decision-making process is nonarbitrary and fair.[63] Although BDR can be a tempting means of addressing disputes amid the mandated quarantine, resorting to traditional dispute resolution services, which are increasingly offered online, may be a safer way of weathering the pandemic.
Footnotes
