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Disputes in decentralized finance — how to resolve them?

DeFi Talents
June 2022

Exceptional solutions require exceptional methods. The same is true of decentralized finance, which has created the opportunity and space for the development of a protocol of justice that operates in a very interesting way.

An article by DeFi Talent Raphael Prabucki

Source of foto: Raphael Prabucki

The resolution of token disputes seems relatively revolutionary. This is because the intention was that the use of a programming language for contracts would minimize disputes. Those fascinated by cryptography and programming have noted that contracts constructed by lawyers have a very strict purpose — to establish a certain state of trust between the parties. It would seem that using a programming language to build what is already known in theory as smart contacts will result not only in advanced self-executed but also in a lower number of party disputes. However, the vision that lawyers are the evil of the world has not quite worked. Even if we acknowledge that smart contracts do allow for self-execution, they remain not as smart as they seem to be. The Ethereum-based developing digital economy with all its innovations continues to generate and will continue to generate disputes.

Dispute resolution for tokens seems very specific as, by assumption, the use of programming language in contracts is aimed at minimizing disputes. Additionally, it would seem that using a programming language to build smart contacts, already known in theory, would result not only in advanced self-enforcement but also in decreased litigation by the parties. However, the vision that lawyers would cease to be required and needed has not quite worked out. And further, as noted by those fascinated by cryptography and programming, that after all, the role of lawyers is extremely important, as the contracts they construct are supposed to fulfill a very strict and necessary purpose — to establish a confident state of trust between the parties.

Let’s set up a court

Within Defi, something called justice protocols quickly emerged. Generally, from the point of view of those who have looked at these new creations, they should be classified as private courts. They function internally for one type of disagreement — on-chain disputes. Some who remain in the nomenclature of contractual provisions qualify them as the equivalent of an amicable settlement provision, as a certain method of ADR. However, from a legal point of view, it seems that the approach in viewing them as private courts is more correct. Their operation is based on the drawing of 3 persons or more (always odd) who have purchased tokens of a certain court and have decided to be the adjudicators of the dispute, and who, from the position of the platform, receive the case and pass their judgment as to which side of the dispute is right.

Example of Aragorn Court. Source: https://www.nomos-elibrary.de/10.5771/9783748922834-29/algorithmisation-and-tokenisation-of-law?page=1

The mechanics of encouraging you to work as a dispute adjudicator are simple — you have to vote like the rest of the adjudicators to get paid. If you’re one of those who file a dissenting opinion, then you have a problem. Common sense looks pretty good. The use of mathematics ensures that the judgment will be relatively sensible and that those making the judgment must make the right decision. As long as we are talking about transaction disputes this sounds very attractive. Moreover, the only criteria to be this kind of judge is to buy tokens and join the project. You don’t need to have a law degree. Generally — if you have a dissenting opinion too often then the system will reject you on its own.

People are indispensable, required, and necessary

Once again, an interesting phenomenon can be observed — smart contracts have not eliminated people. Whether we like it or not, disputes are and always will be. Even rules expressed in programming code will not be able to change it. At the moment the solution seems to be satisfactory — once again such traits of human nature as the power of motivation or greed were used (you want tokens, then settle the things), once again such a field as mathematics (game theory) was used thus allowing the introduction of different rules and solutions and once again, the final solution was achieved. Admittedly, for the transactions themselves only, the positive effect is certainly that a group of judges in decentralized finance has emerged.

The Aragon Court, for instance, requires several judges. They are called guardians and it is vital to underline that the judging operates with the principle of “plurality wins”. It is also important to add that each guardian has three options to choose from. He can be for, against, but he can also abstain. This solution seems interesting and reasonable in a situation in which someone can accurately assess whether the evidence is sufficient or insufficient. The question also arises here as to whether a person without legal knowledge is also able to make such an accurate assessment, and whether he or she is not afraid of the consequences — for abuse of this option is not permitted.

Such a question arises only to take into account the human factor — in the judiciary in many countries some people judge simple cases without possessing the relevant legal knowledge or sufficiently long experience, such as a justice of the peace. In the case of Defi, however, we are talking about random people from all over the world who may have different educational backgrounds and knowledge, with a programming code overseeing the whole operation. There may appear to be some doubt about their judgment. However, an interesting solution has been found and applied to avoid this kind of situation.

It is worth adding that a participant who is dissatisfied with the verdict may appeal against the decision of the guardians as many as four times. It should also be noted that a situation in which someone may want to provide additional evidence may also occur. So it seems safer for the guardian to cast a vote for or against without risking the consequences. Choosing not to vote is not a good option as it is forbidden not to vote. Making such a decision results in the punishment which in turn involves financial consequences. Some other human weaknesses such as attempting to collude, are also punished. It is also worth remembering that voting with the minority results in loss of funds.

There’s also a kind of punishment if one doesn’t make the effort to investigate the case thoroughly and does not do the best one can. On the other hand, what if we happen to end up with a majority that has chosen the wrong option all along? This is theoretically possible, but taking into account the possibility of an appeal, it seems that it can be excluded.

The path to On-line Disputes Resolution

Aragorn Court was established in 2020. In social media on the Internet, you can find such type of information that someone is suing someone through Aragorn Court. However, when you enter the court website, the project looks a little underpowered. The descriptions on the Aragorn Court website may seem very interesting, but it is futile to try to follow the links on the page, as they do not work — for example, such an important link “Terms of Service” appears to be inactive. Furthermore, the number of guards is strangely small — only 106. Does this mean that the idea of a justice protocol is fading away or what is even worse disappearing?

The ‘terms of service’ file do not exist — well, that is a bit of a bad sign for an innovative solution in dispute resolution.

Fortunately, there are some other projects. A quick search allows us to find more projects that target disputes: Agrello, Sagewise, Jur, Oath Protocol, Mattereum, I-cash, OpenLaw, Kleros. Not all are focused by their mechanics on dispute resolution — Agrello, for example, offers contract compression with a program we know as ‘smart contract’. So it serves more to reduce the risk of a dispute. Some, like Oath Protocol, seem very close in concept to Aragorn Court. Other projects try to build something universal, which would be a kind of new way of On-line Disputes Resolution (ODR), e.g. Jur.

When I started writing this article the price of Jur tokens was falling downwards. However, something has changed this month. Could it be that the project is about to move?

Kleros reports that he already has some achievements. Although an internal search engine finds information about this, the information itself is no longer available at https://eic.ec.europa.eu/index_en

However, the most interesting of these seems to be Kleros. Its authors have published a handbook of several hundred pages on dispute resolution! They were also recognized with an award by the European Innovation Council. What is even more important information — it is developing, growing strongly, and is even experiencing a boom — they have already had 1110 disputes on their agenda, possess 764 active judges, the key to their real success may appear to be the embracing of a form of arbitration with their solution. An experiment of this kind took place in Mexico. Naturally, the court first analyzed the arbitration provision. It then analyzed the procedure itself and, having found that it did not violate the law, recognized the award and ordered its enforcement. It is important to note that the parties named an arbitrator who was to resolve their dispute using the protocol of Justice Kleros, so in essence, it was a hybrid action — a combination of justice protocol and the traditional element of an arbitrator.

This is what the court panel looks like — now all that remains is to buy tokens and act.

Nevertheless, it is a step towards a new type of ODR. Perhaps it represents an evolutionary step toward a new justice in web 3.0…

Bibliography:

[1] Kleros.io, “Dispute revolution. The Kleros handbook of decentralized justice”: link;

[2] R. Prabucki, R. Skibicki, D. Szostek, J. Wyczik, “Algorithmisation and Tokenisation of Law” [in] D. Szostek, M. Załucki, “Legal Tech”: link;

[3] World Economic Forum, “Bridging the Governance Gap: Dispute resolution for blockchain-based transactions”: link;

[4] M. V. Carrera, “Accommodating Kleros as a decentralized dispute resolution tool for civil justice systems: theoretical model and case of application”: link.

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An article by DeFi Talent Raphael Prabucki originally published on Feb 10th 2022 here.

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