When Online Dispute Resolution Meets Blockchain: The Birth of Decentralized Justice

executive summary

Online Dispute Resolution (ODR) was born in the 1990s. As the Internet becomes a part of people’s daily life, many people try to use the Internet to establish virtual courts to greatly improve the efficiency of dispute resolution procedures. However, this wish has not been fully realized so far. To a certain extent, the early ODR dispute resolution mechanism is an improvement, which simplifies the original alternative dispute resolution mechanism, but does not produce subversive innovation. In recent years, the popularity of some new information network technology innovations such as blockchain and cryptocurrencies has provided a new institutional design for online dispute resolution. Due to the decentralized nature of blockchain technology and juror networks, this emerging approach, known as decentralized justice, can greatly improve the efficiency of dispute resolution. This paper examines the main theoretical principles and early practical experiences of emerging decentralized justice.

directory

1. The Origin of Decentralized Justice

2. Decentralized Judicial Theory

3. Challenges Facing Decentralized Judiciary

4. Conclusion

The Origins of Decentralized Justice

(1) Online Dispute Resolution Mechanism and Trust Issues

Conflicts are bound to arise in market economic relations, and certain mechanisms need to be established to resolve them. This resolution mechanism needs to be consistent with social and economic conditions. Since the late 1990s, the rapid development of science and technology has led to the emergence of new transaction technologies and new types of disputes, as well as the emergence and development of an online dispute resolution mechanism (hereinafter referred to as ODR), which uses technology to resolve conflicts fairly and efficiently, and The void in digital justice”.

As early as the 1990s, some companies such as iCourthouse tried to use comprehensive artificial intelligence to resolve civil disputes. In the early 2000s, eBay set up a crowdsourced community court (ECRF) to resolve user disputes. In the early days, ODR was seen as a major change from traditional alternative dispute resolution (ADR) mechanisms such as mediation and arbitration. Cash and Rifkin introduced information technology as a “fourth party” in the dispute resolution mechanism. The focus of this approach is to highlight the role of information technology in guiding litigants to reach an agreement in accordance with the law.

ODR can enable various agreements to be concluded without anyone presiding over it, which can be said to be an important “legal turn” compared to the previous ADR, which operates through the server and can promote the relationship between the parties. A valid agreement is reached. Although ODR has great advantages over traditional justice, its development is still subject to many limitations. In addition to the reasons for the ODR design itself, there are other problems, such as limitations on the scope of application. Most automated negotiation systems are developed by private companies, and the agreements reached are still contractual in nature and can only be enforced if signed by the parties to the conflict. Therefore, the ODR itself has no national mandatory force, and even if the ODR makes a certain decision, it may not necessarily be accepted and implemented by all parties. Since ODR lacks judicial authority, it can only guarantee resolution in certain situations, such as disputes between insurance companies or consumers on large trading platforms such as eBay.

Rabinovich Aini and Cash point out that “ODR succeeds in achieving full trust, professionalism, convenience and efficiency.” Without any of these elements, the system cannot function. The key to dispute resolution is legality, but its fundamental premise is that the parties have trust in the system, in the procedure, and in the fairness of the outcome, and are willing to abide by the outcome on this basis. In order to promote the ODR system, an authority needs to be selected to initiate the process, track implementation, and ensure that it operates fairly and efficiently. However, authoritative dispute resolution methods are often expensive and have trust issues. For example, Defiance and Rousey argue that effective justice should not only provide good substantive and procedural norms, but should also inspire trust and respect among citizens. Guaranteeing the operation of judicial power should not only be considered from the internal dimension of the judicial system, but the legal and economic literature also shows that it also depends on the trust in the judicial institution.

(2) Blockchain and smart contracts

In October 2008, the author, who goes by the pseudonym Satoshi Nakamoto, published a paper on a cryptography online forum, which attempted to develop a decentralized cash-like electronic payment system that solves the problem in the absence of a central authority. The fundamental challenge of how to establish and transfer digital property rights in money.

Blockchain is a special kind of distributed ledger technology (DLT), a method of recording and sharing data across multiple data stores, where each data store has exactly the same data records and is A distributed computer server network of nodes is jointly maintained and controlled. There is no recognized validator in the system, but instead relies on a decentralized network of anonymous validators to maintain and update copies of the ledger. The key innovation of blockchain technology is that validators reach consensus in an ingenious way based on correct transaction records. This consensus has two requirements: (1) users do not spend money repeatedly; (2) trust validators to accurately update classifications accounts. Blockchain technology was initially applied in the financial field, including cryptocurrencies such as Bitcoin. However, blockchain also brings a potential answer to ODR’s earlier question of trust, that trust can be generated through mathematical algorithms.

In 2015, the introduction of the Ethereum blockchain brought the concept of smart contracts to the mainstream world. A smart contract is a program that is automatically executed when conditions are met. The coded agreement in a smart contract is irrevocably effective without a central agency executing the agreement. In this way, blockchains can process agreements and reduce speculation among participants, and can also provide legal certainty that traditional ODRs lack. The blockchain encodes the dispute resolution mechanism into a smart contract, which guarantees that its rules are enforced.

(3) Game Theory, Mechanism Design and Cryptoeconomics

Economists usually think that economic coordination is the result of the combination of organizations and institutions, such as corporate organization, club organization, commons system, market system, legal system, monetary system, participant system. These organizations and institutions are essentially rule systems. Economic coordination refers to the adjustment of incentives within a system of rules.

Mechanism design can be viewed as the “engineering” part of economic theory, where the designer starts with a desired goal and then designs mechanisms (incentives) to achieve that goal. This requires a systematic examination of the various value designs and how mechanisms affect the relationships among those who act to achieve their goals.

Early ODRs tried to build using information technology. In principle, they do not rely on a fixed mechanism design, Bitcoin is a successful example, mechanism design can effectively incentivize a distributed network of anonymous computers to reach consensus on a single state of the ledger. This new discipline of combining cryptography and economic theory to create decentralized networks is called cryptoeconomics and is seen as a branch of mechanism design.

After the pioneering design of Satoshi Nakamoto, people realized the potential of blockchain in building economic and social institutions. Cryptoeconomic scholars then explore designs that enable people to behave as intended. Therefore, blockchain is also a technology for creating and enforcing the rules of economic behavior (smart contracts, decentralized autonomous organizations). Design schemes related to cryptoeconomics can be applied to all fields of society. It achieves desired goals through appropriate incentives, and provides an innovative way to construct rules of conduct for participants in the absence of authorities. As discussed below, cryptoeconomics may also create a legal order that decentralizes justice.

Decentralized Justice Theory

(1) Definition of Decentralized Justice

Smart contracts deployed on the blockchain can provide legal certainty, but also have certain limitations, that is, smart contracts can automatically run according to programs, but cannot deal with issues involving subjectivity. For example, Alice and Bob signed a contract for the construction of a website. If the two parties have disputes over the subjective content of the contract, the smart contract alone cannot solve it. If the code itself cannot determine whether the delivered website meets Alice’s aesthetic and functional needs, the computer code cannot do anything for its legal certainty when the contract is flawed. Therefore, smart contracts must include an adjudication mechanism to resolve disputes involving subjectivity issues in order to avoid some kind of misstep in the system. To ensure legal certainty and decentralization, it is necessary to create fair, neutral and efficient methods that can be done by smart contracts. What are the characteristics of a decentralized resolution mechanism that can resolve disputes involving subjectivity issues in a fair and efficient manner?

From a legal epistemological point of view, court proceedings are seen as a cognitive engine, a tool for finding the truth from a complex set of clues and evidence. At the heart of the court system is the delivery of fair sentences, and courts that routinely convict the innocent and acquit the guilty will fail to gain the public’s trust. In addition to decision accuracy, other important criteria include efficiency and ethics. Efficiency is mainly related to cost and speed, the court should make a just judgment economically and quickly; morality means that the judgment should conform to the fairness and justice in social values.

To sum up, the core of the judicial system is: how to design a mechanism that can effectively and socially make fair judgments?

The judicial system changes with the technological and moral level of the society in different periods. In ancient Athens, judgments were decided by referendum of a large number of randomly selected citizens; medieval merchant courts were composed of merchants serving as judges according to the commercial custom of the time; modern legal systems delegate judicial power to professional lawyers and judges. From the 1990s to the present, the Internet has greatly changed the world economic system, improving human ability to organize social cooperation, and globalization has enabled people to collaborate online in unprecedented ways. With the development of the times, swarm intelligence has successfully created collaborative encyclopedias such as Wikipedia, complex systems such as Linux, and digital currency systems such as Bitcoin.

Swarm intelligence can lead the transformation of ODR. The decentralized judicial field seeks to use the blockchain mechanism to establish an efficient and fair new type of dispute resolution mechanism in the digital age. Decentralization means that the process is completely driven by equal subjects and based on blockchain technology, not controlled by any participant. Since this design itself follows the fair concept and conditions of the applicable object, it is easier to achieve fairness than traditional justice.

(2) Characteristics of Decentralized Judiciary

The author believes that a qualified decentralized judicial mechanism should meet the following three conditions: first, a Decentralized Autonomous Organization based on blockchain technology; second, a mechanism design based on cryptoeconomics ; Third, have a sense of justice.

1. Decentralization and the rule of law

The rule of law is a necessary feature for the emergence and continuation of legal order. The law should be produced according to the rules set in advance by the members of the community and applied equally to all citizens, and the same procedure should be followed in the same case, regardless of whether the person involved is black or white, rich or poor. According to Hadfield and Weingast, the rule of law has the following six characteristics: first, the logic of adjudication is open; second, the institutionalized resolution of disputes; third, the logic of decision-making is stable; fourth, the outcome of the case is predictable Institutional guarantee; fifth, the decision-making mechanism is objective and not affected by the rank or status of the parties; sixth, the rules can be improved according to public opinions.

In the real world, societies establish checks and balances and bureaucratic procedures to prevent powerful actors from improperly influencing the legal system to achieve their desired outcomes. In the digital world, a decentralized autonomous organization (hereinafter referred to as DAO) based on blockchain technology is similar to a stable bureaucratic organization. A DAO is actually a set of bound smart contracts, a digital organization that operates according to specific rules and procedures. Decision-making programs in DAOs are directly coded in computer code and deployed on a decentralized computer network. Members can participate in decision-making through voting methods similar to cooperatives or democratic participants. The combination of program and blockchain immutability and governance rights of the community public is a key feature of decentralized justice. Decentralized judicial systems built by decentralized autonomous organizations on blockchains such as Ethereum conform to what Wengast and Hadfield call the rule of law:

(1) The logic of the referee is public. As an open source project, the decentralized justice system deploys its code on a public blockchain, which can be inspected and copied by anyone.

(2) Institutionalized dispute resolution. Different courts in a decentralized judicial system handle different types of cases, and each court has a clear set of evidentiary rules and judgment standards.

(3) The decision-making logic is stable. The general procedural rules of the decentralized judicial system and the specific trial rules of each court tend to be stable and will not change frequently.

(4) Institutional guarantee that the outcome of the case can be expected. Guidance and precedent accumulated by courts in past decisions can help predict the outcome of a particular case.

(5) The decision-making mechanism is objective. When a user interacts with the decentralized judicial system under a pseudonym (such as an Ethereum public address), the true identities of the parties and jurors are hidden, which facilitates objective verdicts.

(6) Rules can be improved based on public comments. A decentralized judicial system could allow users to propose improvements to the system’s underlying protocols, including the creation of new courts, the formulation of court rules, the determination of adjudication fees, and software development.

These characteristics ensure that decentralized justice meets two key characteristics that people expect from justice: First, the system is trustworthy. Since the entire process of the blockchain code (evidence review, jury opinion, and judgment execution) is run in a fully automated and immutable manner, the decision-making process is guaranteed to be carried out exactly as set by the code, without being subject to “special decisions” No participant or institution can interfere unilaterally or arbitrarily in the decision-making process. Second, the system is governed by the public in the community (usually made up of users who hold crypto tokens). Changes to program content must be voted on, and information about how rule changes are implemented is publicly available to all participants in the network.

The combination of these characteristics gives the key features of decentralized justice: civic equality, predictability, and community governance. This constitutes the first point of consideration for assessing whether a dispute resolution mechanism meets the requirements of decentralized justice, including the following aspects:

(1) Is the dispute resolution process encoded as a decentralized autonomous organization on the blockchain?

(2) Does it meet the characteristics of the rule of law required by Hadfield and Weingast?

(3) Does the system have a governance mechanism for users to improve and improve the system?

(4) Does any participant have a “special right” to change the program?

2. Cryptoeconomic incentives for decentralized justice

The premise of traditional dispute resolution mechanisms is that judges or arbitrators must shoulder the duty of good faith, judges or arbitrators must abide by professional ethics, and are prohibited from accepting bribes or doing behaviors that may lead to favoritism. In contrast, a decentralized judicial mechanism does not depend on the morality of the participants, but on strict economic incentives. Decentralized justice expects participants to act honestly (neutral decision-making) not based on morality, but on the corresponding institutional rules: only acting honestly can guarantee its own economic interests.

The idea that rational, egoistic behavior of agents can lead to desirable social effects can be traced back to Adam Smith’s metaphor of the “invisible hand” and is the basis of agency theory. Satoshi Nakamoto’s seminal paper on Bitcoin was based on this theory, arguing that as long as the economic incentives were designed correctly, many anonymous agents would cooperate to maintain a distributed ledger of currency transactions. Decentralized judicial mechanisms are based on a similar principle: agents (participants of the program—translator’s note, the same below) use their “computing power” (time, technology, etc.) to resolve disputes in the network, the better the performance, the reward the higher. While these mechanisms are highly fungible, they all share the common feature of not relying on moral expectations of agents to “do the right thing”, but instead relying on adjusting economic incentives to facilitate achievement of desired goals , even if the individual behavior is biased, it will produce desirable results overall.

Early models of decentralized judicial mechanisms were inspired by the concept of “focal points” proposed by game theorist Thomas Schelling. Schelling describes it as “everyone’s expectation of what other people expect him to do”. In other words, focus is the solution people tend to choose when they can’t communicate, because that’s what people are used to. The focus concept can be illustrated with an example: Consider a specific scenario in which multiple participants must independently choose one of the following numbers: 3785, 4903, 5232, 9864, 3927, 1214, 1000, 2783, 4287, 3893, 2398 , 8538. Participants were told they would earn $20 if they chose the same number as the majority. If they choose a different number, there is no income. In this decision-making scenario, everyone often chooses 1000. Even though any of the 12 options are equally acceptable, people tend to choose 1000 because they want everyone else to choose that option. In this case, 1000 is the focal point, as well as the one expected.

Existing decentralized justice platforms such as Kleros, Aragon require users to deposit a crypto token and keep the crypto token as a deposit. A certain number of jurors are randomly selected from all users who have deposited tokens, and once drawn, the jurors will independently analyze the case evidence and vote for the party they think is correct. If jurors vote with the majority, they will be rewarded with crypto tokens; if they disagree with the majority, they will be penalized with a deduction of the token deposit. As a matter of personal interest, jurors are incentivized to vote on the truth that may be agreed upon in the dispute. At this point, the truth is the focus of the jury’s tendency to agree in order to get paid.

As with other cryptoeconomic protocols, there are many game-theoretic defenses in decentralized justice mechanisms to defend against malicious users. Some users abuse the mechanism for their own interests, prompting the decentralized judicial platform to adopt a better mechanism design, that is, users can make a fair verdict while only seeking their economic interests and ignoring the morality of jurors. Users who attempt to disrupt the mechanism (e.g., by accepting bribes or voting without evidence of censorship) will incur financial losses because they do not agree with the majority vote. Conversely, users who behave honestly (e.g., do not accept bribes, exercise due care when reviewing evidence, etc.) will vote in line with the majority for financial gain.

Therefore, to evaluate whether a dispute resolution mechanism conforms to the characteristics of decentralized justice, the second point of consideration is: Does the mechanism design generate economic incentives for the system to make fair decisions regardless of the user’s moral level?

3. Fairness

The core value of the court system lies in the fairness and impartiality of the trial results. Fairness is a difficult concept to define, and philosophers have different definitions of fairness. Daniel Dimov has been working on developing a model for evaluating procedural fairness in crowdsourced online dispute resolution (CODR). Procedural fairness refers to a number of criteria that determine whether a particular procedure contributes to a fair outcome. Dimov examines two types of procedural fairness: objective procedural fairness (the extent to which the procedure meets fairness standards as defined by the EU Consumer Alternative Dispute Resolution Directive) and subjective procedural fairness (individuals’ subjective perceptions of procedural fairness ), which are then combined into a framework that can be used to assess the overall fairness of the dispute resolution process. Dimov’s framework argues that the impartiality of crowdsourced online dispute resolution systems can be assessed in fourteen ways:

(1) Professionalism: A neutral third party should have the necessary knowledge and skills in the field of dispute resolution.

(2) Independence: Jurors must be free from any coercion in adjudicating disputes.

(3) Impartiality: A neutral third party must not have any inner prejudice against certain parties or certain elements of the subject matter of the dispute.

(4) Transparency: The dispute resolution process should be open and reproducible if necessary.

(5) Fair Hearing: The parties shall be provided with a notice of the initiation of the dispute resolution process and an opportunity to present their views and refute the opposing party.

(6) Balance: The previous imbalance in the financial situation and computer skills of both parties should be eliminated.

(7) Reasonable procedural period: The adjudication result of the dispute shall be made within 90 calendar days from the date of receipt of the complete prosecution documents by the dispute resolution agency.

(8) Provide reasons: The juror must explain to the parties the reasons for the verdict.

(9) Process control: increase the management and utilization of case information, which will form the basis of adjudication, thereby enhancing procedural fairness.

(10) Decision Control: Parties can appeal against decisions made by third parties.

(11) Consistency: Dispute resolution procedures must treat all parties equally, giving each party the same time schedule.

(12) Accuracy: The factual information of the case used in the dispute resolution process shall be agreed by both parties in advance.

(13) Correctability: The opportunity to correct a decision enhances the fairness of the decision-making process.

(14) Ethics: Compliance with ethical standards can improve procedural fairness.

The evaluation of these criteria helps to judge the fairness of the dispute resolution process, and a decentralized judicial mechanism needs to meet most of these criteria.

Therefore, for evaluating whether a dispute resolution mechanism meets the requirements of decentralized justice, the third point of consideration is: Can the mechanism design ensure the fairness of procedures and adjudication?

When Online Dispute Resolution Meets Blockchain: The Birth of Decentralized Justice

In order to meet the requirements of decentralized justice, the ODR needs to meet the following characteristics:

(1) The mechanism is a DAO deployed on the blockchain. The program is fully automated and coded in a smart contract. Participants can make changes to the system through mechanisms with clear rules.

(2) The mechanism uses cryptoeconomics to motivate participants to make fair decisions and does not depend on the morality of participants.

(3) The mechanism has a fair procedure and makes a fair decision.

Challenges to Decentralized Justice

As a new industry and field of research, decentralized justice faces many challenges.

(1) Technical challenges: Is decentralized justice feasible?

Decentralized justice relies on game theory and mechanism design to make fair decisions more efficiently. However, how to better design this mechanism remains to be discussed:

(1) Can cryptoeconomics create a decentralized judicial mechanism that is both effective and secure?

(2) Can the incentives guide the average user (whose behavior may deviate from rationality) to act according to the design of the mechanism and make a fair decision, while excluding users who have other intentions and users who deliberately disrupt?

(3) Is Schelling Point (focus) the best design theory for a decentralized judicial mechanism? Or are there other better game theories?

(2) Market challenges: Can decentralized justice generate economic benefits?

The rapid growth of the network economy and the rise of petty disputes require a more efficient dispute resolution method than traditional ODR. Regarding the economic sustainability of a decentralized justice mechanism, and where it could have a greater impact in the long run, the following questions arise:

(1) Can a decentralized judicial mechanism design a lower-cost dispute resolution method that is applicable to the large number of small claims disputes that lack effective resolution today?

(2) How to promote and apply the decentralized judicial mechanism?

(3) What is the business model that reflects the value of the decentralized judicial mechanism?

(4) Is the decentralized judicial mechanism only applicable to the field of digital disputes? Can it be used by traditional judiciary?

(5) Compared with other emerging dispute resolution technologies such as artificial intelligence, what is the status of the decentralized judicial mechanism in the market?

(3) Legal challenges: Is decentralized justice legal?

The operation logic of the decentralized judicial mechanism runs counter to the dispute resolution mechanism constructed by traditional courts and the arbitration framework based on the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (hereinafter referred to as the New York Convention). There are many conditions for its implementation in member states. New forms of decentralized justice pose many challenges to the relationship between traditional law and blockchain law, some of the key issues include:

(1) From the point of view of the actual court’s treatment of the effectiveness of its rulings, is decentralized justice legal?

(2) Are decisions made under the New York Convention subject to judicial review by a real court?

(3) Does the decentralized judicial process comply with the substantive due process principles of international arbitration, such as independence, impartiality, jurisdiction, effectiveness, accessibility, freedom, legality, expertise, and procedural fairness?

(4) Moral Challenge: Is Decentralized Justice Fair?

Decentralized justice is an entirely new method of dispute resolution that introduces economic incentives independent of the ethics of decision makers. To thrive and gain recognition, it must convince the public and policymakers that it adheres to the conditions of impartiality in resolving disputes. Some emerging issues include:

(1) What are the criteria for evaluating a decentralized judicial mechanism?

(2) In certain fields or types of cases, is it more fair to apply a decentralized judicial mechanism?

(3) Are certain cultural domains or communities more likely to see decentralized justice as a fair method of dispute resolution?

Epilogue

In 2001, Ethan Cash, the father of online dispute resolution, pointed out: “The power of technology to generate disputes exceeds the power of technology to resolve disputes.” In this context, decentralized justice emerged as a new dispute resolution method.

This paper presents the concept, predecessor, definition, and future challenges of decentralized justice.

The first part analyzes the development of some academic fields and social and economic development trends involved in the birth of decentralized justice. From a theoretical perspective, decentralized justice comes from research in the fields of cryptography, computer science, game theory, and swarm intelligence.

The second part introduces the main features of decentralized justice. Decentralized judicial mechanism is defined as: a decentralized autonomous organization that conforms to the characteristics of the rule of law relies on cryptoeconomics to design incentives, and adopts fair procedures to obtain fair rulings.

The third section presents the technical, market, legal, and ethical challenges for decentralizing justice to become a viable and effective dispute resolution mechanism. The advent of the Internet brought new rules, which came in the form of information laws. It is a system of customary rules and technical standards developed by interacting users on the global Internet. The system operates across borders, independent of national borders and domestic laws. Online service providers unilaterally impose information laws on their users by restricting the types of actions that can be performed on digital platforms. But these specifications are not a direct expression of the wishes of users, and only represent the interests of those responsible for maintaining the platform.

Currently, online dispute resolution platforms are not having a huge impact because they are simply leveraging digital tools to simplify old court procedures, rather than thinking about how to use digital tools to re-establish dispute resolution mechanisms, such as blockchain technology that can generate digital rule of law capabilities. Blockchain technology enables a new mechanism that relies on technological means to regulate human behavior. The rules established by the blockchain protocol are formulated by the public community and must be enforced through a distributed consensus mechanism of network participants. Blockchain creates an entirely new legal system consisting of self-enforcing smart contracts and rules governed by decentralized organizations. The new system, which some call Lex Cryptographia, operates independently of third-party agencies or intermediary operators. A decentralized judicial mechanism based on an innovative cryptoeconomic system can improve the efficiency of dispute resolution and enforcement of rulings. But whether it can be widely adopted also needs to meet people’s pursuit of the rule of law, that is, transparency, accountability, accessibility, fairness and due process.

Decentralized justice is still in its infancy and has great potential for innovation and improvement. Its goal is clear, that is, to create a basic governance mechanism native to the Internet era. Just as cryptocurrencies bank the unbanked, decentralized justice can help the “unjust” get justice.

By Federico Ast, Founder and CEO of Kleros Justice Blockchain. This article is part of the author’s presentation at the seminar “Blockchain and Procedural Law: Law and Justice in the Age of Disintermediation” held by the Max Planck Institute for Procedural Law in Luxembourg. Bruno Deffains is a professor at the University of Paris II.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/when-online-dispute-resolution-meets-blockchain-the-birth-of-decentralized-justice/
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