John R. Van Winkle: How to arbitrate disputes over cryptocurrency and more

A recent article in the ABA’s Dispute Resolution Journal, “From Code to Court and Beyond,” discusses the use of online arbitration to address disputes arising at the intersection of smart contracts, blockchains and cryptocurrencies.

Ironically, the dispute resolution method of the future for billions of probable internet transactions on decentralized platforms may be traceable to tenets and practices of the ancient Greeks.

Economic relationships increasingly flow through a narrowing band of global platforms. Transactions occur in cyber space, with the parties to those transactions often continents apart, with the only communication between them being clicks on computer programs.

Currently, it is estimated that there are perhaps 5.44 billion persons online, spending an estimated $4.3 trillion in USD in e-commerce. It is also estimated that disputes arise in 3 to 5% of these transactions. These commercial relationships are generally created and controlled by “smart contracts.”

Smart contracts are nothing more than self-executing computer programs or protocols and they range from the very simple (think vending machines) to the very complex (think programs running on blockchains, multiple platforms and servers and involving crypto-currency.)

The sheer scale of the number of disputes expected to arise from these transactions begs the question as to how these millions of disputes can be addressed.

Given the worldwide nature of the communications and the relatively small amount of money involved in any one dispute, resorting to traditional civil justice forums and processes is not practical. Not surprisingly, these dynamics have resulted in the creation of companies seeking to become the dispute resolution forum for e-commerce disputes.

Kleros

One of the companies offering dispute resolution services for cryptocurrency disputes is Kleros.

According to its website, Kleros is a decision-making protocol which uses blockchain and crowdsourcing for adjudicating claims. The stated goal of Kleros is to become the standard adjudicating network for the decentralized internet, serving as arbitrators not only in disputes involving crypto-currencies but in all e-commerce.

Again, according to information on its web pages, Kleros has been “live” since 2018 and has handled and ruled on more than a thousand different cases.

Kleros, although only one of the multiple companies seeking to serve as dispute resolution forums for internet interactions, has been the subject of several law journal and industry articles, and the Kleros protocol is discussed and highlighted here not to vouch for the accuracy of the website information but to consider the potential long term implications of its core processes.

Kleros states that its protocol “promises to transform the field of dispute resolution in a way similar to how Wikipedia revolutionized encyclopedia publishing.”

Whether written into smart contracts as the ADR provider or contracted directly by disputants, the basic Kleros process is simple: disputes are submitted to a panel of arbitrators randomly selected from a larger number of anonymous individuals who pay a fee to be included on the panels.

The parties also pay an administrative fee in crypto-currency (“gas”) and pay additional amounts to be held in escrow pleading the decision of the jurors.

Kleros claims that its “approach to arbitration is radically different to traditional court systems and ADR methods”. This statement is graphically underscored by the method of the selection and the compensation of jurors.

Any individual can anonymously apply to be included on a universal panel of jurors. So far, nothing radical; however, the system also requires that jurors make payments to Kleros to be included on the panel and, further, the more money that a prospective juror pays, the more likely that he or she will be chosen to participate in the arbitration.

Further, perhaps the most radical feature, a juror receives additional compensation if he or she rules with the majority of the particular panel.

Kleros’s public explanation of the basis for its “pay to play” practice is that it is founded in ancient Greek traditions of justice, supplemented by the Focal Point or Schelling Point concept of game theorist Thomas Schelling.

The Schelling Point in game theory is a solution that people, not in communication with each other, tend to choose because it seems natural or intuitive or just and fair and in line with what they think others’ responses will be.

For example, in response to a challenge to meet a stranger tomorrow at some time and in some place in New York City, game theory predicts that a large percentage of people can be expected to choose “noon at the information booth in Grand Central Station.”

The Kleros protocol extends the Schelling Point and incorporates other tenets of game theory that theorize that the collective result of a large enough group of people deciding a dispute on the same set of facts will, on the whole, produce a fair or just or correct result, as measured by social norms and expectations of justice.

Therefore, Kleros concludes, if individual jurors are incentivized—paid—to rule with a majority, their decision will more likely be in line with that collective “true” result.

In addition to game theory, Kleros claims that it looked to ancient Greece to design a system that would provide “true” decisions in a costly and timely manner. Kleros cites the historical practice of Athenians submitting disputes to a large body of ordinary citizens.

In Athens, when a trial was to be held, citizens wanting to serve as jurors would gather at the courthouse, where identification tokens were fed with slots in an allotment machine called a Kleroterion which randomly selected jurors. Those selected to serve were paid.

In summary, Kleros claims that its protocol uses blockchain and crowdsourcing to adjudicate claims and that its system relies on incentives derived from the game theory of Schelling’s Point to incentivize jurors to rule “correctly.” Kleros, which means “chance” in Greek, relies on a selection process used by Athenians over 25 centuries ago, resulting in a peer-to-peer decentralized public system.

Although there are only 703 Kleros jurors currently reported on its site and it has handled only about 1600 cases since its inception, the interesting question is, as the world continues to move online, whether the Kleros model is a preview, not only of the future of ADR but of certain aspects of the general civil justice system.

Although the Kleros materials recognize that to address all but the very simple binary disputes involving relatively small amounts of money, a second tier of the arbitration process will need to provide a more sophisticated and robust forum.

Given, however, the staggering numbers of transactions that are and will continue to be handled online, perhaps the future reality is that parties to the vast majority of e-commerce transactions will have to embrace the form of crowd sourced justice that the Kleros model anticipates.

That principles of Athenian justice could be the basis for potential aspects of the arbitration process of the future is perhaps illuminated by the reality that current day mediation was foreshadowed by the same Athenians—as evidenced by this quotation from Plato’s Republic, published around 375 BC:

“If we were to oppose him with a parallel set speech, then another speech from in him turn, then another from us, we should have to count and measure the blessings mentioned in each side, and we should need some judges to decide the case. If, on the other hand, we investigate the question by seeking agreement with each other, then we can ourselves be both the judges and the advocates.”•

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John R. Van Winkle, of Van Winkle Baten Dispute Resolution, was a participant in the founding and was the second chair of the American Bar Association’s Section of Dispute Resolution. Opinions expressed are those of the author.