Smart Contract Dispute Resolution – The Need for an Open Source Blockchain Platform Ecosystem

by Wulf A. Kaal & Craig Calcaterra

Abstract

An open source platform ecosystem for dispute resolution of crypto transactions allows users to opt into a conflict resolution mechanism that enables more nuanced crypto solutions and produces greater certainty for legacy businesses than existing solutions such as the Aragon network or OpenBazaar. The ecosystem provides anonymized arbiter expertise via rankings in combination with a representation option for crypto disputes. It provides an effective resolution mechanism for legacy businesses that desire to participate in the growth of crypto business opportunities, hope to avoid legacy system intermediation and the associated transaction costs, but require legal legacy system assurances and crypto dispute resolution equivalence.

Introduction

Any existing business logic can be coded into a blockchain. Blockchain technology is a computer architecture for an open and secure distributed database. A blockchain, in essence, is an autonomous dynamically growing chain of blocks of encrypted data generated by a decentralized group of users. Most blockchains, such as Ethereum (but not Bitcoin) are Turing complete, or computationally universal, meaning any calculation possible can be simulated within a blockchain design. In other words, blockchain can do what any other computer program can do–from controlling a Mars lander to moderating online competitive video games between Europe and China. Accordingly, any existing business logic can be coded into the blockchain, giving it extremely wide applicability in almost all industries and subject areas.

Because of its very expansive and near universal applicability, it is crucial for the broadening evolution of blockchain technology to find jurisdictional means for the governance of the crypto economy that is facilitated and sustained by blockchain technology. A lack of governance and conflict resolution mechanisms would undermine the democratized trust created by blockchain technology and hinder its broadening evolution and applicability. Jurisdictional means are the basis for effective conflict resolution mechanisms applicable to crypto transactions in the blockchain. Not having the required jurisdictional means necessary for conflict resolution mechanisms for Ethereum blockchain-based smart contracting, may invoke consumer mistrust in the new technology. This can then undermine the evolution of the blockchain-based crypto economy.

Regulatory alternatives for blockchain-based conflict resolution are necessitated by the impossibility of consistently identifying the parties in any dispute in the context of crypto transactions on the blockchain and the associated problems of applying the existing legal infrastructure. We cannot conceptualize opportunities in the crypto transactional universe that could possibly enable and allow a court in the existing legal infrastructure to decide and enforce any disputes between crypto transactional parties. Because of the severity of these challenges for the existing legal and jurisdictional infrastructure, we conclude that the sensible approach for including good governance in crypto transactions necessitates instituting governance solutions inherent in the blockchain technology itself. Accordingly, we introduce the concept of a distributed jurisdiction, which we hereinafter evaluate.

Limited Regulatory Oversight

The regulatory oversight over blockchain-based transactions is severely limited. Courts arguably cannot have jurisdiction over blockchain-based smart contracts because it is unlikely a court could find out who transacted via the anonymized blockchain. Furthermore, the court could not change or otherwise affect the transaction as it was coded because once the coded parameters were fulfilled the transaction auto-executed on the blockchain. Because of automated execution, contractual breach and damages are less likely to occur in smart contracts, especially as compared to traditional contracts.  If a given smart contract transaction disadvantages one of the contracting parties, courts would have to change the blockchain in order to institute remedies in the traditional sense that could pertain to the smart contract in question. However, that scenario is computationally and practically impossible.

Assuming the parties to a given smart contract were known, courts could require the parties to create a new transaction to reverse undesirable outcomes of the coded and executed transaction that was disputed. This is a possible solution because courts are unable to affect the initial outcome of a disputed smart contract transaction. Courts cannot require a retroactive change in the blockchain because that is computationally near impossible. Given that the requirements for a court to exercise jurisdiction over a disputed smart contract are fundamentally different from courts’ jurisdiction over contracts in the existing legal infrastructure, contracting parties would likely second-guess courts’ decisions pertaining to smart contract disputes. In other words, real world court decisions even if attainable may not have the same legitimacy and authority as other intra-blockchain dispute resolution mechanism may have.  In summary, courts would only be able to force the parties to execute a secondary transaction or otherwise pay remedies for a smart contract that created damages for one of the parties. Courts would not be able to actually change or interpret the terms of the given smart contract that was executed according to its parameters and added to the blockchain where it is immutable.

Because of these inherent limitations, courts will generally not be able to effectuate resolutions to disputes arising from blockchain-based smart contracts. Courts do not have the power over the coder and the code that was used by the parties that may have been injured. Courts do not have the authority to dictate to a programmer how, when, and where to change the existing code used by consumers.  Even if courts were given such authority, no programmer so coerced by the court would be able to override the will of the majority of anonymous international blockchain users to make an effective change. Therefore, blockchain-based resolution mechanisms are the only possible recourse for smart contract disputes.

Our proposal for courts to leave dispute resolution to blockchain-based mechanisms is not a mere theoretical postulate. Rather, this need was already introduced in the second and third prongs in Aragon’s whitepaper about blockchain-based solutions for consumers facing code execution problems in smart contracts.

Anonymity of Blockchain Transactions

The lack of identifiable parties in crypto transactions creates a distinct separation between real world and crypto transactions that has lasting implications for the application of existing jurisdictional principles. The aforementioned anonymity gained by the use of public-key encrypted identities and VPNs prevents the identification of the parties to a smart contract.  Without identifiable parties, jurisdictional principles such as subject matter jurisdiction, personal jurisdiction, diversity jurisdiction, and federal question jurisdiction become irrelevant. To illustrate this point, proving personal jurisdiction by means of 1. Physical Presence, 2. Domicile/Place of Business, 3. Consent, and 4. Minimum Contacts becomes impossible as none of these elements are known of the parties in a smart contract. Physical presence is anonymous, as is domicile, consent, and minimum contacts. Subject-matter jurisdiction, e.g. a given court can exercise power over a claim that the laws of the jurisdiction authorize such court to hear, is inapplicable because no given law would be able to authorize such power. But even if a given State or even the Federal Government were to pass a law that would grant such authority to a court, it is hard to see how the court would in fact exercise such authority, short of limiting access to the internet itself.

Not all smart contracts are fully anonymous and untouchable by traditional jurisdictional means. Some smart contracts will not automatically anonymize the parties because there is a physical element to such a consumer contract. For example, a powerful traditional corporation may wish to execute a complicated, non-hostile takeover of another company, using their reputation as leverage. The transparent, public, and perfectly logical structure of a smart contract could theoretically improve communication in such a negotiation. However, many other smart service contracts can be completely anonymous. For instance, a service contract involving services pertaining to cyberspace, such as programming services to create a given webpage, will be completely anonymous. It is important to note that as the technology becomes more widely accepted, such service contracts are going to become a highly important part of any given economy.

Even outside of cyberspace services, it is clearly possible that bounties for anonymous work executed via smart contracts will make traditional service contracts that require personal knowledge and physical appearance redundant. A bounty contract for anonymous work allows an anonymous employer to put a bounty on a given job and offer such a job on an anonymous smart contracting network to an anonymous counterparty. The contract acceptance and performance is dictated to some extent by reputational factors that link the counterparty and the performance under the contract. Part of the value of anonymity in such instances is the clear efficiency advantage. The bureaucracy that attends traditional employment is in this case greatly reduced, if not eliminated.

Enforcement of Smart Contracts

The enforcement of smart contracts with traditional legal means is limited. First, disputing a smart contract with traditional means (in court, arbitration, mediation, etc.) is only marginally possible because of the aforementioned anonymity in blockchain transactions. Moreover, while smart contracts are coded as self-executing contracts, they do not necessarily provide effective mechanisms for enforcement if one party breaches his or her obligations in the smart contract. Semantically, it may be argued that breach of a smart contract is not even possible: the contract simply will not execute if a parameter is not fulfilled.

The literature is split on remedies for breaches of smart contracts. Some argue that because the smart contract replaces the existing legal contract in some circumstances, the smart contract will be governed by the same legal principles as the existing legal contract. Others argue that the breaching party may not live in an area where the courts have jurisdiction, thus the breaching party cannot be liable. In that case, assuming the operator knows the identities of the contracting parties, the operator of the blockchain platform should have a legal obligation to identify who the breaching party was and serve as the counterparty in a dispute scenario.  These experts argue the operator of the blockchain should establish governing rules of the blockchain and specifications for dispute resolution. However, these specifications would have to be disclosed upfront and agreed upon by the parties to the smart contract in order to be enforceable.

Courts may be substantially challenged in interpreting smart contracts. Unlike the interpretation of a contractual dispute in the existing legal infrastructure where courts will assess what the contentious language in a given contract may mean to a reasonable human observer, smart contracts are not coded for a human observer. Rather they are intended for computer programming in a network of nodes (and in the future for artificial intelligence). To the extent that consumers are using smart contracts, the human element may be increased via the coding of graphical user interfaces. The basic premise of smart contracting remains emphasized on computer programming (and in the future artificial intelligence) not human interaction. Because of the emphasis on code for computer programming (and artificial intelligence), courts may not be able to hypothesize a reasonable human’s interpretation of a given smart contract. Courts may also be limited in their ability to consult programmers to interpret the coded language at issue in a given case because the meaning and logical reasoning of coded language is substantially different from human language.

From an evidentiary perspective, it is unclear who would own smart contracting blockchain contributions and whether there would be any applicable protections, such as work product or confidentiality. Without ownership rights for a blockchain transaction, it is also unclear who would be able to claim privileged information or how discovery would operate via existing laws. However, when the parties to a smart contract choose to reveal their identities, arguably privileged information or discovery laws should apply as if it was a written contract despite the fact that the contract was written in code.

Contract law remedies may not apply to smart contracts which raises possible enforceability issues. If a transaction in a smart contract fails to be completed or is partially completed but not added to the blockchain, it is unclear how liability will be allocated if those eventualities have not been accounted for in applicable code. Because of the blockchain’s decentralized nature, it is unclear who or what is accountable and could require regulation. Without solutions for those issues, liability for failed transactions or conflicts between parties have little guidance as to being resolved.

Distributed Jurisdiction

The nature of smart contracting necessitates crypto dispute resolution mechanisms. Problems with smart contracts tend to be two-fold. First, while smart contracts can be coded for and encapsulate a substantial portion of possible breaches of contract, subjectivity in human relationship, bounded rationality of coders and contracting parties, incomplete foresight, incomplete information, and opportunistic behavior will make breaches or other problems in smart contracts inevitable. Second, the first DAO has demonstrated that software and coding bugs will be inevitable in the evolution of the crypto economy. As the existing jurisdictional infrastructure is bound to produce suboptimal results for such crypto disputes, intra-blockchain distributed jurisdictional means are needed.

Our proposal in this paper for a distributed jurisdiction over blockchains has to fulfill two core requirements: 1. The anonymity of blockchain-based smart contracting has to be maintained as the technology evolves. Without anonymity of blockchain-based smart contracting the existing jurisdictional means (in personam jurisdiction) can apply to smart contracting which would undermine the evolution of the crypto economy and make distributed jurisdictional means unnecessary. 2. Distributed jurisdictional means necessitate governance from within the blockchain technology itself to effectively address the problems inherent in blockchain-based smart contracts. Without internal blockchain-based governance, a fully self-sufficient crypto economy may not be possible as legacy systems and governance intermediaries in the existing legal infrastructure will attempt to interfere with crypto transactions, resulting in suboptimal outcomes that cannot be fully resolved in the existing legal infrastructure.

Both requirements for the development of distributed jurisdictional means, full anonymity and intra-blockchain jurisdictional means, can already be accomplished. First, the Ties Network project demonstrates that anonymity can be perpetuated in blockchain technology, despite blockchains’ eternal storage of information and its growing size working against anonymity. Second, the Aragon Network demonstrates that the technology itself offers means of internal controls that help ensure effective governance in the continuing evolution of the technology.

The Need for an Open Source Blockchain Platform Ecosystem for Smart Contract Dispute Resolution

Based on the concept of a distributed jurisdiction, we suggest an open source platform ecosystem of smart contracting dispute resolution that allows users to opt into the conflict resolution mechanisms that enable more nuanced crypto solutions and produce greater (legal) certainty in the process. First, an open source platform based ecosystem for dispute resolution of crypto transactions could help ensure anonymity in blockchain transactions by facilitating anonymity for transaction parties to opt into the platform. Second, the platform would allow users to identify the highest possible expertise of their judges and arbitrators by way of reviewing the record of decisions of their judges across different fora and different types of conflicts. The proposed platform ecosystem would significantly boost consumer confidence in the non-arbitrary and fair resolution of their disputes. Our proposal constitutes an open source ecosystem hybrid that provides effective solutions for the shortcomings in the Aragon and OpenBazaar models.

In contrast with the OpenBazaar solutions, our proposed open source ecosystem allows dispute resolution only if and when a smart contract has resulted in a dispute. This solution ensures that smart contracting transaction costs remain near zero and the cost of paying an arbiter/notary/judge only occurs in cases of smart contract dispute resolution issues which will be a fraction of the overall quantity of smart contracts executed in the evolving crypto economy. As such, our proposal helps stimulate the evolution of the crypto economy. We envision a further improvement in comparison with OpenBazaar’s approach which includes an open review system for evaluating the reputations of arbiters. Arbiters would submit their judgements to the community for review, removing all personal information to ensure anonymity. The community could upvote or downvote such judgments. Arbiters could improve their reputations by submitting comments and counter-judgements for upvotes in an open forum.

This proposal has several benefits that can be distinguished from the Aragon network in several important ways. It involves the same necessarily democratic solution as in the Aragon system, except for several core differences: 1. The cases are not bound to binary decisions (it’s unclear how 5 anonymous judges would collaborate to give a nuanced answer in Aragon). 2. Crowdsourcing the judgments leads to more efficient appeals. 3. Decisions would be open to re-evaluation for all eternity, so the judges’ reputations are subject to a greater ideal than mere contemporary popularity. Further, this approach still promotes the eternal anonymity of parties and arbiters, as judges who revealed private information would be severely downvoted.  Thus, our proposal provides more nuanced and better outcomes with better representation for parties in smart contract dispute resolution.

By way of analogy, just as federal courts in the existing legal infrastructure often provide better outcomes for litigants than state courts, because of the better qualifications of judges and the higher stakes involved, among other factors, our open source ecosystem would allow litigants more choice among dispute resolution mechanisms, enable better representation, and facilitate increased quality of arbiters. For claimants who have an interest in the best possible outcomes and are willing to wait analog times (≈1 month) the platform provides ideal fora to settle disputes.

Legal Equivalence

Stakeholders in legacy systems will likely hesitate transferring their legacy infrastructure businesses, and revenue streams derived therefrom, to an uncertain blockchain infrastructure and crypto systems without significant and sufficiently incentivizing assurances that they are not sacrificing any attained existing legal rights in exchange for smart contract efficiency in a blockchain system. Accordingly, the adjudication, dispute resolution, and enforcement of smart contracting disputes in the evolving crypto economy have to provide equivalent measures that assure legacy businesses that they can operate in crypto systems without a surrender of existing rights.

Legal equivalence can be assured in the implementation and transition phase of the crypto economy via dual integration. Dual integration refers to the use of legacy legal infrastructure in smart contracting dispute resolution, such as via the Ricardian contracts, among other measures, in combination with intra-blockchain systems for the resolution of smart contract disputes.

For participants in the crypto economy who wish to minimize the transaction costs of dual integration and retain anonymity our proposed open platform ecosystem is more likely than all other solutions to provide legal equivalence of dispute resolution mechanisms. Our proposed system would maintain the importance of good education and reputation on the principles of law. Yet, it would still eradicate much of the corrupting collection of power that specialized knowledge and relationships give to analog lawyers.

Anonymous Arbiter Expertise

The platform ecosystem would allow users to identify the highest possible expertise of their anonymous judges and arbitrators by way of reviewing the record of decisions of their judges across different fora and different types of conflicts. We propose using the open and eternal ledger for purposes of listing the following information pertaining to a given decision maker in smart contracting disputes: 1. Contractual Subject Matter, 2. Cases, 3. Decisions, 4. Justifications for Decision, 5. Dicta. Based on such disclosures, we propose an open system that allows comments which could be up-voted or down-voted.

The system allows for the expertise of judges to be determined by anonymous rating systems or anonymous reputational reporting.  In a DAO tokenholders can earn additional tokens by making proposals for the improvement of the DAOs.  If a tokenholder’s proposals was voted in by the DAO community but the tokenholder proponent whose proposal was voted in cannot perform in the implementation of such proposal, such proponent will rarely get a second chance at making and implementing a given optimization proposal. We see our system of anonymous rating for judges as a parallel to the tokenholder voting system for optimization proposals in a DAO. Judges who do not receive sufficient upvotes simply may not get additional chances to work as a judge in a given smart contracting dispute.

To mitigate the inevitable centralization that comes with expert involvement in a decentralized dispute resolution platform and ecosystem we provide several solutions. Because our proposed system is based on upvotes from users who have an interest in the subject, abuse of authority that happens naturally in the non-anonymous world (on mathoverflow among others) would be rather limited if not non-existent. And, crucially important for the success of the system in a legal realm, any abuse of authority would quickly be dis-incentivized by the deluge of downvotes such infamy would bring. Our solution allows anonymous contributors to gain reputation in certain areas of disputes based on whether their opinions are well-received. Such systems already exist in non-dispute resolution contexts. Reputation may also accrue and promote decision makers in dispute resolution by means other than erudition, such as network recognition, connectivity, among others.

Optimized Representation

The open source platform ecosystem of dispute resolution in a distributed jurisdiction also facilitates optimized representation of a given party who in the Aragon system would only informally be able to use lawyers and perhaps would use lawyers from the existing jurisdictional infrastructure. The ecosystem allows for a more diverse allocation mechanism for smart contracts disputes to the most appropriate decision-making body/forum. But also, a platform ecosystem of dispute resolution fora would allow the integration of user representation in a given dispute.

The Aragon network does not facilitate a representation system for dispute resolution. In the Aragon network, a user who wishes to dispute the execution of a contract in the Aragon Network posts a bond and prepares a brief on their argument. Such briefs are not necessarily written by a representative of the user. However, as the stakes get higher in the crypto economy and smart contracting, users may want to seek smart contract representation on their behalf to optimize their chances of success in front of decision makers in their respective disputes. Such representation in the platform ecosystem of decentralized jurisdictions would be enabled. The ecosystem would allow for a matching of representation and dispute resolution fora.

Conclusion

Distributed jurisdictional means for blockchain technology enabled smart contracting provides much needed governance from within the blockchain technology itself. Intra-blockchain distributed jurisdictional means such as via distributed jurisdiction are needed because the existing jurisdictional infrastructure produces suboptimal results for smart contract disputes. Distributed jurisdictional means effectively address the problems inherent in blockchain-based smart contracts. Our proposal in this paper for a distributed jurisdiction over blockchains ensures the maintenance of anonymity of blockchain-based smart contracting as the technology evolves.

Building on the concept of distributed jurisdiction, we propose an open source platform ecosystem for smart contract disputes. Our proposal ensures full anonymity in blockchain transactions by instituting a requirement of anonymity for transaction parties to opt into the platform.  The platform also ensures users can identify the highest possible expertise of their judges and arbiters. Our proposed system maintains the importance of good education and reputation on the principles of an evolving crypto law. Yet, through its anonymization it also eliminates the corrupting collection of power that specialized knowledge and relationships give to analog lawyers.

Implementation of the proposed platform ecosystem for smart contract disputes would significantly boost consumer confidence in crypto transaction through the non-arbitrary, low to no-transaction cost, inducing effective and fair resolution of possible crypto disputes.

For participants in the crypto economy who wish to minimize the transaction costs of dual integration and retain anonymity, our proposed open source platform ecosystem is more likely than all other available solutions to provide legal equivalence of dispute resolution mechanisms. For legacy businesses that desire to participate in the growth of crypto business opportunities, hope to avoid legacy system intermediation and the associated transaction costs, but require legal legacy system assurances and crypto dispute resolution equivalence, our proposed system offers a preferable and indispensable solution. By attracting legacy businesses and instilling confidence in the legal equivalency of dispute resolution in crypto transactions, our proposed solution makes an indispensable contribution to the evolution and significant growth of the crypto economy.

 

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