The Kleros Case for Dispute Resolution and Legal Compliance

The increasing increase in activity through technological platforms has undoubtedly marked the possibility of migrating processes that were previously carried out in person to a virtual environment. In the blockchain world, there is a field (which has not yet been explored) that proposes decentralized dispute resolution through smart contracts. This article brings up the idea of ​​using blockchain for dispute resolution. In addition, I conducted an interview with Federico Ast, doctor of business administration at the IAE Business School and co-founder of the Kleros platform.

With a background in economics and philosophy from the University of Buenos Aires, he spent a long time writing about digital business and innovation for one of the most important Argentine newspapers and later devoted his PhD to analyzing how people coordinate to make decisions :

“As an Argentine, I am aware of the problems in my country, especially with the currency, that have been caused by high levels of corruption. It was at this time that I started doing research and learned about Bitcoin, a technology that doesn’t depend on governments. That was what caught my attention.

Regarding the underlying technology, the blockchain, I saw then that there were applications that went beyond cryptocurrencies. At that time there were already people working on using blockchain as a voting system so that there would be no fraud in the elections. And what interested me in the other part of governance was the judicial system. I am not a lawyer, but I realized that conflict resolution was a branch that was not well attended, very expensive, very slow and, most importantly, not adapted to the world of the future, where people from different countries hire providers from other countries ” .

Online dispute resolution

Online dispute resolution is not a very common case. In fact, the ones that have the longest time are the ones that are generated by domain name registration. When a user wants to make a claim, they should use an online ODR (ODR for the acronym in English) platform to create a statement of claim with the relevant facts. This can be accessed through the Center of WIPO Arbitration and Mediation, Internet ARBitration (net-ARB) and eQuibbly. In this area, a referee is selected from an existing list, who interacts with the participants. The tools in which it runs can be used via email for the presentation of the tests and also for video conferencing. According to the US regulation, Article II.1 of the New York Convention provides that an arbitral award be recognized. There must be a written agreement in place in the event of an international trade dispute.

The Kleros Case for Dispute Resolution and Legal Compliance
The Kleros Case for Dispute Resolution and Legal Compliance

At the same time we meet clergy, A platform that was created in 2017 as a judicial mechanism and combines three aspects: blockchain, game theory and crowdsourcing technologies. The platform is built on the Ethereum blockchain and resolves a dispute in which Kleros randomly appoints a jury of self-selected and collective participation experts to analyze the evidence and vote for a judgment. The voting system requires the participants to use a token which is transferred to the winning party via a smart contract. Some outstanding features are: independence, as cases are decided neutrally and anonymously; the experience of judges in dispute resolution and law; and impartiality and transparency as all procedures are documented and the community is the one who decides.

Federico points out that other online ODR systems could be used by companies like Facebook. However, it should be noted that in certain cases the model used by these companies may not apply:

“What would be most similar to Kleros is the Facebook or eBay customer service system with internal disputes that their platforms have. Without a doubt, Kleros will do that and much more. I think there are cases that 18th century technology, which are traditional legal systems, cannot be solved. Blockchain will replace some activity but not lawyers. That said, there are cases that lawyers fail to solve and that technology could address. So the lawyers will keep their cases going, but those that are smaller can be treated on a platform like Kleros. “

Up to this point, it is assumed that online disputes have been resolved for some time, even without blockchain. The question then is whether ODRs, if scaled, would be solved more effectively with the help of blockchain or whether existing governance solutions such as courts would be even more efficient.

Adapting disputes to the digital environment

In 2018, Ashish Chugh wrote that international arbitration was simple, but the spread of legal norms made it more complex. TO Even so, he pointed out that blockchain is not the right technology for arbitration because it is “quite slow and expensive to store huge amounts of data”. He even claimed that getting rid of documents wasn’t a good argument either, as modern practices can effectively solve this with services like Dropbox, Amazon AWS, or Google. In contrast, Federico Ast has strong reasons to believe that with blockchain it is possible to provoke a democracy without having a central unit that confirms a judgment, as this is done together:

“All of this coming economy is incompatible with the traditional justice system that we have. If you are controversial with people in other countries, the judicial systems are inadequate. So how do we reinvent justice systems to adapt them to new needs? What we saw with blockchain technology was that it gave you the guarantee that no one could tamper with it. This could eliminate corruption. “

Settling disputes in a digital environment is not trivial if you don’t have the system in place to at least ensure the impartiality and immutability of the settlement. One of the proposed solutions is to do this through a community where there is no central entity and where decisions are made democratically. To do this, it combines the concept of crowdsourcing and blockchain:

“Crowdsourcing has been used in legal applications since the 1990s. In the end, it’s a judgment, it’s a system where the people who are part of it will make a decision based on certain evidence and certain rules that they must respect. So it was a little bit to think of blockchain technology as a system building and crowdsourcing system for quick decisions. If a dispute arises, it is sent to the Kleros platform and resolved. This leads to a transparent bureaucracy. “

Federico sees the potential of using blockchain in optimizing costs from a different perspective, as there are litigation that the lawyers themselves are unlikely to be willing to try, especially when it comes to disputes where the cost of settling is low are:

“From the point of view of Legaltech and the lawyers, Kleros offers a platform on which many people can register using the token and take part in various cases. So if there is a very large community in the long run, there is potential for the cost of dispute resolution to be very low. When the supply is high, the cost per case resolved can be this low and the disputes that can be resolved for amounts of $ 100 for amounts that neither lawyers nor online systems resolve today. What now exists are online mini-trials (some zoomed), but they work just like traditional cases (two parties and a judge).

A study by Allen et al. to the. (2020) emphasizes that While blockchain-based smart contracts have created new problems related to ODR, i.e., through problems with contract violations and automatic execution, the technology has also provided new opportunities for these challenges. In the short term, they even foresee a dynamic between the new settlement systems that use blockchain and the existing dispute settlement mechanisms.. The above confirms the ideas of Ast who pointed out:

“On the side of the crypto world today there are many different DAOS projects and also applications with intelligent contracts. The problem is that when you have more subjective cases they are not as efficient because you end up needing human intervention to evaluate what to do, what the judicial systems are doing, where there are two parties that say things differently and after all, the judge is the one who has to decide. Kleros can be more efficient and economical, and also covers what was not covered in the past by online systems, which are basically online mini-tests. It has the potential to be cheaper and more efficient. ”

Justice in a decentralized world

In the past few months we’ve seen the DeFi ecosystem grow exponentially. Every day we see more projects in this ecosystem that offer different decentralized functions, and with it new risks and weaknesses have emerged that can hardly be solved by the simple fact that there is no regulatory or validation body. With this in mind, Ast believes that many of the problems in DeFi can be solved while maintaining the spirit of decentralization:

“Kleros is a fundamental infrastructure for the blockchain world. For example, how can you resolve a controversy in the DeFi ecosystem? Options are reduced to the development team taking care of the solution, or there is a transparent system, but when there is one person who has the key to being able to tell what is happening; In either case, however, the whole sense of decentralization is destroyed. “

“DeFi still has a lot of problems that need to be solved before it can work. If you think we are in a future where there may be a lot of tokenizations, the chances are that many tokens are fake, many of which are listed on decentralized exchanges, and the question is, how do you decide which ones Tokens can be accepted? a decentralized exchange? Kleros supported that, and it was the use case that worked the most. We created a fork of Uniswap and in this exchange we created the tokens listed were chosen by the users. “

On the other hand, Some legal lawyers have pointed out that blockchain is causing more problems than it can actually solve due to the uncertainties involved, which range from definition to the notion of decentralization. This is not necessarily typical of blockchain. For centuries there have been regulations that have evolved organically, such as the Lex Lexatoria commercial law system, which came about through the practices of traders (Allen et al.,. 2020).

Federico Ast associates the concept of decentralization in the blockchain as the mechanism that enables the creation of a fairer legal system. A decentralized legal system is possible when you combine game theory and blockchain as it creates a more equitable solution system that is virtually unbreakable and also provides incentives that encourage participation::

“You can call your friends, but to be a jury you need to use a token, put them in a court of law, and make sure your friends are selected. First you would need to make sure that it is your case as there can be 1000 cases that are randomly assigned. However, let’s imagine if you could attack the court 51%, considering three jurors, two against me and one for. Then it could happen that if I feel hurt, I can appeal, there are twice as many juries plus one, then there are 7 judges. To win the process you would need to have at least 4 judges and that would mean you would use more money to buy tokens and distribute them in the voting system. It is not economically viable to try to damage the system. “

Community validations for regulatory compliance

One of the blockchain applications that is likely to be transcendent occurs in the area of ​​regulatory compliance, as immutability provides the ability to monitor the processes that a particular regulation requires. This would allow the authorities to track and validate every single step. This would significantly reduce the amount of time and effort financial institutions spend on regulatory reporting. Likewise, they could have more confidence in the process and monitor it practically in real time via the blockchain. In this regard, Federico Ast and his team have found an important “beta” on their platform:

“When we started with Kleros, the use case was the escrow case and it turned out that the use case that started first was content curation. In 2019, we conducted an experiment called “Token Create Registry” with the exchange Ifinex (ally of Bitfinex). If you wanted to list in Ifinex, the first step was to send the token to a list of tokens and then to other users can review the rules they need to follow in case they want to be accepted. If the token did not meet the rules, it was brought to court via Kleros and a jury resolved the token situation. This was the case with the greatest pulling power and opened up a lot of prospects for us as we realized that Kleros can not only act as an instrument for dispute resolution, but can also be used for legal compliance. “

It is true that blockchain still has applications that are in the experimental phase. In the case of regulatory compliance, the main challenges are related to data protection and infrastructure, as not all participants would consent to their information being published. However, Federico Ast is thinking about the use of blockchain, which is applied to fulfillment not only of people but of projects, mainly in the DeFi ecosystem, through voting in the network:

“DeFi is starting now and there will be euphoria, but then there will be the real use cases. When it was the ICO bubble we saw a lot of projects that were fraudulent as there was no clear method of evaluation. If we had Kleros Compliace at this point, people would have to go through Kleros before the ICO to be validated by the community. In the traditional world, the SEC or the Nasdaq review certain characteristics. However, if the market guarantees you meet the conditions, you can exit. Kleros can do these validations because governments cannot. How will the SEC go through all of the tokens in existence?

Blockchain experience and final comments

For Federico Blockchain technology not only helped him realize the idea of ​​crowd democratization and dispute resolution, it also enabled a greater connection to the world:

“I came into the world of blockchain for personal reasons, because I went underground in Argentina and can’t send money abroad or work for a client. because if they send you money from abroad, the government keeps ¾ of the money. I came to Bitcoin and Blockchain for the story of my life and lived in a country with so many money problems. Many people in Argentina cannot be integrated into the world of payments.

“At Kleros we have a global team that would not have been possible 10 years ago. It’s on the edge of an industry’s knowledge, game theory, and earlier this could only have happened in Silicon Valley, but now we see talent is more evenly distributed around the world. There was no internet in the 80s; Then there was the Internet, but there was no way to make payments. With technology, we have been able to obtain resources from different parts of the planet. I am an example of how blockchain can help a person include it in the global economy. It gave me friends all over the world and also international recognition. For me it was a great thing. One of my goals is to give others the opportunity that I have had. “

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