As an emergent form of organizing and coordinating activities, decentralized autonomous organizations (DAOs) are changing the landscape of governance. DAOs are essentially entities that operate without a central authority, through rules encoded in computer programs known as smart contracts. By redefining the dynamics of organisational governance and coordination, DAOs are becoming increasingly significant players in the digital economy.
DAOs offer a new paradigm for organizational governance and coordination. However, as with any organizational model, DAOs are not exempt from conflicts. As DAO adoption grows, effective conflict resolution mechanisms tailored to these structures will be crucial. While DAOs promise accountability and transparency, disputes between members are inevitable in any collective endeavour. The more these systems are adopted, the more important it becomes to have effective ways to resolve such conflicts that are specially designed for this unique structure.
This is where decentralized dispute resolution (DDR) enters the picture. DDR is a system for resolving disagreements in a decentralized context. It takes advantage of blockchain technology to provide mechanisms that are transparent, efficient, and particularly suited to the digital environment where DAOs operate. In essence, DDR can be thought of as a judicial system built specifically for the decentralized world.
Traditional legal systems often struggle to provide efficient resolution for parties interacting in a decentralised, borderless manner. Litigation can be slow, opaque, and jurisdictionally complex for international DAOs. Existing court procedures are not optimised for disputes centred on blockchain activity and assets. Traditional courts, with an often slow pace and sometimes unclear rules, may not be the ideal solution for these DAOs with international members where jurisdiction becomes a complex issue.
The Canadian cryptocurrency exchange QuadrigaCX showcases how litigation can be slow, opaque, and jurisdictionally complex for blockchain-based organizations. When the founder of QuadrigaCX, Gerald Cotten, unexpectedly passed away in 2018, he left behind a convoluted mess of missing funds amounting to $190 million in cryptocurrencies. Given the international nature of the exchange's operations, the ensuing investigation involved several legal jurisdictions, making the process incredibly complex and slow-moving. To this day, the resolution of the case is still underway, underscoring the inefficiency of traditional legal systems in dealing with such scenarios.
In 2017, Tezos, a blockchain project, faced a series of class-action lawsuits over its initial coin offering (ICO), which raised $232 million. The lawsuits, filed in the U.S., led to a two-year legal battle. The disputes centred on whether the Tezos tokens should be classified as securities under U.S. law and whether the sale had complied with regulations. Jurisdiction became a contentious issue as Tezos, although operated by a U.S.-based company, was formally domiciled in Switzerland. This exemplifies how existing court procedures are not optimized for disputes centred on blockchain activity and assets.
The same technology that makes DAOs possible also offers a solution for resolving their conflicts - decentralized dispute resolution (DDR). DDRs provide a way for DAO members to settle their disagreements efficiently and transparently, using the same principles of blockchain that underlie their organizations.
DDRs are akin to virtual courtrooms where disputes are resolved by crowdsourced jurors. These jurors are incentivized to make fair and accountable decisions, using cryptographic tokens staked on their judgments. Everything happens transparently on the blockchain, making the process not only efficient but also transparent.
Smart Contract-based Arbitration
Platforms like Kleros and Aragon Court showcase the potential of smart contract-based arbitration. In these platforms, participants appoint jurors who stake digital tokens on their verdicts, effectively committing a form of digital currency towards their decision. This serves as an accountability mechanism. Through crypto-economic incentives and game theory, decentralized arbitration aims to produce "wisdom of the crowd" judgements.
As an instance, Kleros, which has arbitrated real-world cases such as disputed domain sales, is now exploring integrations with international DAOs such as dxDAO. However, concerns around juror qualifications remain. Participants are anonymized, making it hard to verify expertise. Allowing jurors to disclose qualifications or enabling customized juror selection could enhance reliability for complex disputes.
Kleros is built on the Ethereum blockchain, allowing users to resolve disputes in a fair and transparent manner, without the need for a centralized authority. Jurors are randomly selected from the Kleros community and are rewarded with PNK tokens (Kleros' native cryptocurrency) for their participation. To become a juror, users must stake a certain amount of PNK tokens. When a dispute is submitted to Kleros, it is assigned to a panel of jurors. The jurors then vote on the outcome of the dispute. The majority vote determines the outcome of the dispute. If a juror's vote aligns with the final decision, they earn arbitration fees and PNK tokens. However, if their vote contradicts the final decision, they may lose some PNK tokens.
The system encourages jurors to carefully consider cases and vote honestly to maintain coherence with the final result. To prevent collusion or bias, communication channels like WhatsApp or Telegram groups are not allowed among jurors. Jurors are selected randomly for each case, ensuring a diverse and unbiased pool of decision-makers.
Aragon Court similarly leverages Ethereum for secure arbitration. Jurors stake Aragon Network Tokens (ANT) and vote on disputes. Incentives align juror decisions with what is reasonable and fair through the use of crypto-economic incentives and game theory. The Aragon Court protocol manages non-objective disputes that require the evaluation of human jurors. It utilizes a decentralized oracle system to handle disputes brought forward by ecosystem members. ANT is used for platform governance, and it can also be used as a bond to create the ANJ token, which is specifically designed for the Aragon Court dispute resolution mechanism. Aragon Court organizations can use the platform to arbitrate disputes that they are unable to resolve internally. When a dispute is escalated to the court system, the organization must deposit collateral and pay fees. Jurors are then randomly selected from the juror pool, which individuals can join by staking ANT tokens that are converted to ANJ.
Here are some of the benefits of using DDR’s for dispute resolution:
Transparency: All DDR disputes are recorded on the blockchain, which means that they are transparent and verifiable.
Fairness: The DDR system is designed to be fair and impartial, as the jurors are randomly selected and their votes are weighted equally.
Efficiency: DDR disputes can be resolved quickly and easily, as there is no need for a centralized authority to intervene.
Cost-effectiveness: DDR disputes are relatively inexpensive, as the only cost is the staking of tokens by the jurors.
Some of the current challenges include:
Immaturity - As a relatively new technology, DDR systems are still evolving. There may be vulnerabilities that have not been fully tested.
Limited legal enforceability - It is currently unclear how decentralized judgments would be treated and enforced under traditional legal frameworks.
Trust - Users must trust the dispute resolution protocol and jurors. Manipulation by bad actors remains a risk without established reputation systems.
Scale - Can decentralized mechanisms handle high volumes of disputes? Throughput and scalability is still being optimized.
Complex disputes - Systems like Kleros may not be ideal for highly complex or subjective disputes. Traditional arbitration still has advantages for certain cases.
User adoption - For successful juries, the protocols need to build up substantial communities of verified jurors. Bootstrapping new users could be challenging.
Juror drop-out - Jurors may "snipe" disputes to earn quick rewards then cease participation. Incentive structures must retain long-term reliable jurors.
Cryptoeconomic attacks - Hackers could potentially exploit the staking or voting mechanisms if vulnerabilities exist, compromising fairness.
Aragon’s template-based design allows non-technical users and those that are new to the space to launch a DAO without having to understand code or governance design. Aragon actually began as a decentralized dispute resolution protocol and is one of the only DAO frameworks to incorporate such a mechanism. DAO Masters
Case Study: Kleros
To address these challenges faced by DDR platforms, various strategies and solutions are being implemented. For instance exploring enforceability frameworks to address the challenge of limited legal enforceability. Kleros has been working on enforcing its dispute resolution decisions in traditional courts. In a case in Mexico, a court recognized and enforced an arbitral award that was substantially governed by the Kleros protocol, showcasing the potential for hybrid concepts of arbitration that combine traditional proceedings with decentralized protocols.
Moreover, to overcome the challenge of scalability, DDR platforms are implementing scaling solutions. For example, Kleros is actively working on optimizing throughput and scalability to handle high volumes of disputes. The platform is exploring various techniques, such as sidechains and layer 2 solutions, to enhance its capacity and efficiency.
In a recent (2022) interview Clement Lesaege, co-founder of Kleros, shared key metrics and use cases including one of the most famous cases involving Omen, a prediction market where people could bet on whether Trump would win or not. Kleros has resolved approximately 1400 cases, with 779 active jurors within the network as of the recording.
Many platforms in web 2 have their own dispute systems, but they are centralized and biased towards protecting the platform rather than the user e.g. Upwork, Fiverr, E-bay and Twitter (historically). In crypto, there is a need for decentralized dispute systems like Kleros to ensure fairness and impartiality. Integrating Kleros offers time and resource savings for platforms that want to focus on their core project instead of building their own dispute system. By using Kleros, platforms can benefit from a larger and more secure system compared to relying solely on their own coin value for security.
Clement envisions decentralized dispute resolution disrupting traditional centralized platforms like eBay and Amazon. By combining blockchain-enabled consensus with advanced reputation systems, a more inclusive environment can emerge. He highlighted innovative models like assigning negative "solvent tokens" for actions like failing to repay loans. As solutions develop, users may migrate from current markets if decentralized alternatives become more beneficial. He sees an opportunity to set new standards of fairness and transparency as the technology matures.
Traditional Alternatives
Traditional alternative dispute resolution options like mediation & arbitration may be better suited for certain types of disagreements. Both methods involve third party facilitation - either to find consensus or make a binding decision. In mediation, a neutral mediator helps the disputing parties identify mutually agreeable solutions but the process is non-binding. The parties must implement any agreement themselves. Arbitration provides more definitive resolution - a neutral arbitrator hears arguments and then issues a binding decision enforced on the parties. However, arbitration is typically more time-intensive and costly than mediation. While DDR offers efficiency and transparency, very complex or subjective disputes may benefit from the flexibility of mediation or authoritative resolution of arbitration. Parties weigh factors like cost, time, and binding nature when choosing between these options.
Optimized arbitration procedures aid in managing disputes within blockchain contexts, which often require swift resolution, digital evidence submission, and cryptocurrency-based settlements. The United States and the United Kingdom offer two advanced institutional contexts within which to examine recent application of these models.
UK
The UK Jurisdiction Task Force's Digital Dispute Resolution Rules (DDRR) is an optimized framework that facilitates a more streamlined arbitration process tailored for blockchain disputes.
The DDRR, which is an initiative under the LawTech Delivery Panel (LTDP) of the UK government, provides a set of procedures for the rapid resolution of disputes arising out of novel digital technologies, particularly those involving cryptocurrencies, smart contracts, and blockchain applications. They seek to establish a quick, cost-effective, and legally sound way to resolve such disputes.
Under the DDRR, key innovations include:
Shorter Timelines: Arbitration under DDRR aims to achieve final resolution within 30 days of the appointment of the tribunal. This quick turnaround time is essential in the rapidly moving world of blockchain and cryptocurrencies, where asset values can fluctuate significantly in a matter of days.
Blockchain-Compatible Evidence Requirements: The rules accommodate digital evidence in formats that are common within the blockchain sphere. This could include on-chain transaction data, smart contract code, or digital records stored in a decentralized manner. This compatibility is critical because much of the information in disputes relating to blockchain and crypto assets is in digital form.
Narrowed Award Criteria: DDRR tailors the remedies available in dispute resolution to be relevant for blockchain contexts. This includes remedies in cryptocurrency, directing the parties to perform obligations under a smart contract, or ordering a party to do (or refrain from doing) something in a digital context.
The Taskforce views these adaptations as "training wheels" for traditional courts adapting to Web3 [decentralized internet enabled by blockchain]. By providing this framework, they are paving the way for legal systems to understand and navigate the unique challenges that disputes in the digital realm bring, ensuring that as the adoption of blockchain and related technologies increases, there are robust and effective dispute resolution mechanisms in place.
These changes and others point towards the UK considering that it can set itself apart from old and new competitors, including EU jurisdictions, not by financial deregulation, but by ensuring the UK maintains the highest regulatory standards, and has a sustained focus on fostering technology and innovation. Covington (2021)
US
The United States also has several initiatives and frameworks for managing disputes within blockchain contexts.
American Arbitration Association (AAA) and International Centre for Dispute Resolution (ICDR): The AAA and ICDR have been leading global arbitration and mediation initiatives for more than two decades. They provide a set of procedures for the resolution of disputes arising from digital technologies, including cryptocurrencies, smart contracts, and blockchain applications.
Smart Contract Dispute Resolution: Smart contracts are self-executing contracts with the terms of the agreement between buyer and seller being directly written into lines of code. Disputes arising from smart contracts can be resolved through arbitration that incorporates a blockchain, which is considered the most effective method for resolving disputes that arise on a blockchain.
National Court System: From a common law perspective, arbitration may be a more attractive option than litigation in the national court system. This is because arbitration is generally faster, less expensive, and more flexible than litigation.
Overall, the US has several initiatives and frameworks for managing disputes within blockchain contexts, including the AAA and ICDR, smart contract dispute resolution, and the national court system. These frameworks aim to provide a quick, cost-effective, and legally sound way to resolve disputes in the rapidly evolving world of blockchain and cryptocurrencies.
Avoiding gridlock
Effective dispute resolution design is crucial for DAO resilience. Without procedures to break deadlocks, governance can grind to a halt over single objections.
In a recent update, Kleros revealed significant growth, resolving over 1000 disputes in 2022 across sectors like insurance, prediction markets, NFTs, and identity. It continues to research improvements like integrating soulbound tokens for juror selection and griefing analysis to bolster security. Kleros' V2, currently in development, will offer enhanced flexibility and efficiency. New products like Kleros Moderate for content moderation and the Vea bridge expand use cases. Ongoing collaborations with traditional legal bodies promote decentralized justice adoption.
Partnerships with insurance providers explore "asymmetric arbitration" models where rulings are binding on companies but not users, mitigating legal uncertainty. Kleros acts as an impartial arbitrator for DeFi claims, demonstrating real-world impact. Kleros faces ecosystem challenges like the blockchain industry downturn. However, progress continues on its mission of justice inclusion. Robust user growth and development show the promise of decentralized dispute resolution.
“In 2017, we figured out that DAOs need to grow outside of their blockchain and machine-powered smart contracts. DAOs need subjective agreements. DAOs and their users need an equivalent of the legal system, but fully native to them.” Launching Aragon Court
Aragon, JUR, Delphi, Rhubarb, Jury Online, and OpenCourt are some of the competitors and alternatives to Kleros in the decentralized dispute resolution space. Each of these platforms has its own unique features and progress.
Aragon court is a decentralized governance platform that also offers dispute resolution mechanisms. It allows DAOs to create their own decentralized courts and resolve disputes within their communities. Aragon's approach focuses on providing governance solutions alongside dispute resolution.
JUR is a blockchain-based dispute resolution platform that aims to provide a decentralized and efficient alternative to traditional legal systems. It utilizes smart contracts and a decentralized jury pool to resolve disputes. JUR emphasizes the use of legal frameworks and compliance in its dispute resolution process.
Delphi is a decentralized arbitration platform that aims to provide fast and cost-effective dispute resolution services. It utilizes a decentralized network of arbitrators who review evidence and make binding decisions. Delphi focuses on providing a streamlined and efficient arbitration process.
Rhubarb: Rhubarb is a blockchain-based platform that specializes in resolving disputes related to smart contracts and digital assets. It utilizes a decentralized jury pool and a token-based incentive system to ensure fair and impartial decisions. Rhubarb focuses on providing dispute resolution specifically tailored to the blockchain industry.
Jury Online: Jury Online is a decentralized dispute resolution platform that utilizes blockchain technology and a decentralized jury pool to resolve disputes. It aims to provide a transparent and efficient alternative to traditional legal systems. Jury Online emphasizes the use of technology and transparency in its dispute resolution process.
OpenCourt: OpenCourt is a blockchain-based platform that aims to provide decentralized and transparent dispute resolution services. It utilizes a decentralized network of judges who review evidence and make binding decisions. OpenCourt focuses on providing a fair and accessible dispute resolution process.
These platforms offer alternatives to traditional court systems by leveraging blockchain technology and decentralized decision-making. They aim to provide faster, more cost-effective, and transparent dispute resolution processes. However, it is important to note that these platforms are still evolving, and their effectiveness and adoption are subject to ongoing development and refinement.
The Future of DDR
Decentralized dispute resolution is still in the relatively early stages of development and adoption. However, its disruptive potential is immense given the limitations of traditional legal systems and alignment with Web3 values.
As blockchain technology proliferates across finance, governance, identity, supply chain and other sectors, demand for fast, fair conflict resolution tailored to digital interactions will skyrocket. As DAO adoption grows in particular, purpose-built decentralized dispute resolution will likely emerge as the preferred recourse. The blockchain-native design aligns with DAO principles and dovetails with niche requirements.
DDR has the opportunity to scale exponentially as real world activity shifts increasingly on-chain. Proponents envision DDR expanding beyond niche blockchain disputes to encompass high-value use cases like commercial arbitration, cross-border trade disputes, consumer claims and even interpersonal conflicts. Advancements in jurisdiction frameworks and integration with legal systems will also expand applicability.
Platforms are rapidly innovating with novel mechanisms like oracle-backed arbitration, soulbound token juror identities, interoperability bridges and optimized procedures. Research into game theory, cryptoeconomics and cognitive biases continues to enhance system design. Decentralized dispute resolution supports the vision of a new form of justice—transparent and efficient, grounded in technology and shared incentives. Just as centralized authorities may struggle to regulate the permissionless web, traditional courts may be mismatched for decentralized organizations.
While challenges around maturity and adoption remain, DDR is poised for massive growth in coming years. Its ethos of efficiency, transparency and decentralization positions it as a next generation alternative as legacy institutions struggle with gridlock and opacity. DDR could form a core pillar of Web3 justice infrastructure alongside identity, reputation and governance systems. The blockchain space is still exploring optimal mechanisms for security, fairness and scalability. But decentralized dispute resolution offers a compelling model for conflict resolution of the future. Its blend of innovation and effectiveness sets a new standard, offering a clear path forward in the digital realm where consensus reigns supreme.
References
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Mundi, J. (2021). “Evaluating the UK Jurisdiction Taskforce’s “Digital Dispute Resolution Rules, 1.0” Blog. https://blog.jusmundi.com/evaluating-the-uk-jurisdiction-taskforces-digital-dispute-resolution-rules-1-0/
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