Is Arbitration the best Solution to Smart Contract Disputes?
“The future of money is digital currency.”
Cryptocurrency, blockchains, smart currency. These are some of the hottest topics in Silicon Valley right now. Since it inception in 2009, bitcoin has been the talk of the town. It particularly became famous in 2017 when its price hiked to approximately $20,000. Blockchain is an important feature of cryptocurrencies, and due to blockchain Smart Contracts are becoming more and more famous with each passing day.
A Blockchain is a list of records that linked together using cryptography. Each block contains the time of transaction and transaction data. One of the biggest advantages of blockchain is that it is highly secure, no transaction on blockchain can be altered. The best description of a Smart Contract is: “a set of promises, specified in digital form, including protocols within which the parties perform on these promises” (Nick Szabo, Smart Contracts: Building Blocks for Digital Markets, 1996). Take the example of a vending machine. Once you put in your coin and select the item that you want to purchase, nothing can stop the transaction from happening. The same goes for Smart Contracts. Once a Smart Contract is made buyer pays the money and it is sent to the seller only when the purchase is delivered. Smart Contracts are cheap and less time consuming as the middle man is cut out.
You might be asking “If Smart Contracts and blockchain are so secure and binding, then what is the need for arbitration and arbitrators?” Well nothing is perfect, Smart Contracts and blockchain have drawbacks.
Difficulty identifying someone to sue
Smart Contracts can be executed under a false name. Because of this it may become highly difficult to identify someone to bring a claim against. It may also become difficult in pinpointing someone who is responsible for the loss that has been caused by corrupted messages, or bugs in operating system.
Uncertainty over jurisdiction and governing law
Smart Contracts are not based on a single computer or server; the contracts are distributed over many computers based all over the world. It may become difficult to determine the governing law and jurisdiction because of this; the risk of satellite disputes is also increased over such issues.
Novel enforcement issues
One of the key characteristics of a Smart Contract, and what many see as an advantage, is that they are irreversible and the transaction is always recorded on the blockchain. However, this creates problems when a party is entitled to terminate or unwind a transaction and the record no long reflects the legal position.
How arbitration works in Smart Contracts
As discussed above, normal jurisdiction methods cannot work in Smart Contracts thus arbitration is the best option to solve Smart Contract disputes. There are many arbitration platforms e.g. SAMBA. These platforms provide a secure, timely and cost efficient manner of arbitration proceedings. They can work in a number of ways:
The user inputs his/her arbitration agreement and all other information into a request form and the request is then sent to the participating arbitration institution, arbitration proceedings began if the institution accepts request.
The investors use the help of a number of arbitrators or experts. The buyer and seller set milestones with the help of arbitrators/experts. When the milestone is reached funds pre-deposited funds are released for that respective milestone. However, if the seller disagrees the experts/arbitrators resolve or decide the dispute.
The user creates an account. After that he sets the price he is willing to pay an arbitrator and the advance payment. The user can also set a late fee. After that he puts in an arbitration appeal and confideal appoints a third party arbitrator. The arbitrator contacts both the customer and the contractor, reviews the case and carries out a resolution.
The platform uses a democratic manner for solving disputes. The arbitrator deposits tokens and the higher the number of tokens he deposits the higher the chance he has to be selected for a dispute. The arbitrators and their decisions are anonymous and the arbitrator only earns if his voting is coherent with majority. On the customer end it works in a way that when the arbitration request if put in, a panel of arbitrators (jurors) view the case and vote in the favor of the person they think is right.
There are many reasons as to why arbitration is highly likely to emerge as a way of resolving Smart Contract disputes and Smart Contract disputes in turn will drive innovation within arbitration as arbitrators and arbitration law will adapt to the changing dynamic of market.
Protecting proprietary information
Leaked source code and other proprietary information are big problems for many businesses. Some smart contract disputes are likely to include information about software and/or hardware. This results in high risk of classified information becoming public. With the help of confidential arbitration businesses can limit the risk of disclosure. Both parties can agree beforehand to use confidential arbitration to decrease these risks.
Tribunal with specialist technical knowledge
Some Smart Contract disputes will be simple contract law disputes. However, some may require technical knowledge to be solved, for example when the code does not work as expected. Some courts are experts are getting up to speed with changing technology but parties to a Smart Contract can agree to an arbitration clause which enables them to appoint someone who has an understanding of the issue both parties are facing. In the near future we are likely to see specialist pools of arbitrators who have relevant experience or blockchain-tailored procedures.
Bespoke procedures and automated enforcement
Arbitration offers parties the opportunity to agree to bespoke procedures that will help them overcome the challenges presented by the anonymous and irreversible nature of Smart Contracts. Technologists are looking at the idea of a decentralised arbitration in which the disputes related to Smart Contracts are are randomly referred to arbitrators and their decisions are recorded on the blockchain.
Ease of World-Wide Recognition and Enforcement.
Another advantage of arbitration is that it offers both parties the option to agree to procedures that may help them overcome the challenges they face because of Smart Contracts. Also, 159 jurisdictions have adopted the New York Convention which facilitates the process of recognition and enforcement of any arbitral award resulting from a smart contract dispute all over the world.
Smart Contracts are becoming more and popular with each passing day. The advantages that they have are great but nothing is perfect. There will always be disputes and we will always need a third person to solve these disputes. Currently arbitration seems to be the only way to solve Smart Contract disputes. The emergence of arbitration platforms is a great help for buyers and seller making Smart Contracts. The question really is whether arbitration will be the best dispute resolution method for smart contracts. The jury is out there.
(c) Adeyemi Agbelusi
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