The Evolution of Society and the Social Contract:
As evolving beings, humans have made significant strides in shaping their identity, morals, values, and principles. Unlike many other creatures, humans struggle to exist independently of society. This prompts the question: why do humans constantly seek validation from society? The foundation of society lies in the social contract theory, which posits that individuals live together based on an agreement establishing moral and political rules. The desire to feel a moral sense of belonging and support drives humans to live in a society. While the political dimension of society is governed by the state, it becomes an essential part of our living ecosystem. The state, with its authority, regulates affairs and exerts control over individuals. Despite the idealistic notion expressed by Abraham Lincoln of a government “by the people, for the people, to the people,” the reality is that the state wields significant power, often limiting individual autonomy. Over centuries, the state has constructed a formidable web, making it challenging for individuals to break free without facing resistance.
Emergence of Blockchain and Smart Contracts:
The fundamental question arises: does society hold supremacy over the state, or is it the other way around? In the modern world marked by globalization and liberalization, where diverse opinions are increasingly accepted, the concept of Blockchain emerged in 2008 through Satoshi Nakamoto. Blockchain serves as a decentralized, distributed public ledger facilitating transaction recording and asset tracking in a business network. In simpler terms, one of its most notable qualities is that it cannot be controlled by the state, representing both a strength and a weakness.
In 2014, as Blockchain technology underwent a separation from currency and its potential applications were being explored in various financial and interorganizational transactions, Blockchain 2.0 emerged to facilitate transactions beyond currency. Ethereum’s Blockchain system introduced Smart Contracts, which transformed computer programs into blocks representing financial instruments like bonds.
Smart contracts, typically composed of self-executing lines of code, are linked through an oracle. They can be categorized as weak or strong. Weak Smart Contracts are susceptible to modifications, while strong smart contracts remain unalterable once triggered by the involved parties. When parties engage in a smart contract, they commit to executing its functions. For instance, if ‘A’ wishes to rent an apartment from ‘B’, they can establish a smart contract that holds ‘A’s payment in escrow. The contract is programmed to release the payment to ‘B’ on the possession date. In the event that ‘B’ fails to provide the apartment keys by the agreed-upon date, the contract automatically refunds the payment to ‘A’. However, determining whether ‘B’ has indeed given the apartment keys to ‘A’, triggering the return of payment, involves the concept of oracles.
Oracles in Smart Contracts: Bridging the Gap Between Blockchain and Reality:
Blockchain operates independently of the internet, necessitating the use of an oracle as a connection point. This oracle serves as a conduit between the blockchain and the real world, conveying information about real-world events. However, the application of Distributed Ledger Technology (DLT) becomes constrained if a contract default results from a force majeure event. Oracles, whether individuals or programs, facilitate the transmission of information from off-the-chain, enabling blockchain platforms to engage with real-world entities and respond to external events. This functionality is employed to update contractual obligations, ensuring the reliable execution of smart contracts.
In a practical example, a third party, “C,” acted as an oracle by confirming that “B” had provided their keys to “A.” Consequently, “C” relayed this information to the blockchain, triggering the transfer of “A’s” escrow payment to “B’s” account. Human involvement as oracles becomes crucial in situations characterized by ambiguity or requiring a subjective evaluation of real-world occurrences.
Challenges in Smart Contracts and the Need for Decentralized Dispute Resolution:
Despite the efficiency and dispute reduction goals of smart contracts, conflicts may arise due to inconsistencies in the model. These issues include arithmetic errors, reentrancy, alterations, amendments, unchecked external calls, missing return values, access control problems, arbitrary jumps by attackers, backdoor threats, and typographical errors. The pressing question is which court should handle disputes, and which jurisdiction applies to contracts formed on decentralized platforms. The enforceability of smart contracts depends on factors such as the specific use case, the form of usage, and the applicable law.
Recognition of smart contracts has been formalized in certain states like Delaware, Tennessee, and Arizona. Therefore, parties seeking recognition for their smart contracts must adhere to the laws of these endorsing jurisdictions. This situation raises the ironic juxtaposition of a decentralized feature like smart contracts being governed by the laws of a particular state.
Blockchain Arbitration and Kleros: A Paradigm Shift in Dispute Resolution:
A preferable solution to the current situation involves utilizing blockchain arbitration. This method of resolving disputes offers a neutral platform, granting the involved parties the autonomy to select their preferred location, venue, and legal framework. This approach surpasses traditional methods in terms of efficiency and time taken for dispute resolution. Notably, one standout aspect of blockchain arbitration is its adaptability and the direct enforcement of arbitral awards as per the New York Convention. An example of a platform offering such services is Kleors, an Ethereum autonomous organization. Kleros serves as a decentralized third party, enabling operators to amicably resolve their disputes.
The foundation of Kleros is rooted in the Schelling Point concept, also known as Focal Points, introduced by Thomas Schelling. This concept addresses how people naturally coordinate their behavior in the absence of communication by gravitating towards what seems natural or relevant to them. In simpler terms, when communication is lacking, individuals tend to align their actions to reach a focal point, which is also referred to as the Schelling point. Building on this concept, Ethereum founder Vitalik Buterin proposed the development of a Schelling coin, a token incentivizing individuals to truthfully communicate in exchange for economic rewards.
Kleros Arbitration Mechanism:
To gain a deeper understanding of this concept, it is essential to delve into the workings of Kleros. In order for Kleros to function as an optional judicial system, the involved parties in a smart contract must actively choose Kleros as their arbitrator. Upon selecting Kleros, they are also given the opportunity to designate a specific court to adjudicate any potential disputes and determine the number of jurors responsible for resolving the matter. In situations where the complexity of a case demands expertise from professionals in a particular field, parties have the freedom to opt for a specialized court.
Within Kleros, users are influenced economically to serve as jurors. Prospective jurors are required to bid tokens known as Pinakion (PNK). The likelihood of being chosen as a juror for a particular dispute is directly proportional to the quantity of tokens a juror stakes. Essentially, a higher token stake increases the probability of being selected as a juror.
Addressing Challenges and Future Prospects:
However, a notable drawback in the arbitrator selection process is the absence of any qualification requirement. The bidding of tokens serves as the determining factor for arbitrator selection, enabling individuals, even those lacking legal expertise, to arbitrate on matters. Consequently, a 16-year-old with technological knowledge but limited or no legal understanding can participate in the arbitration process while maintaining anonymity within this decentralized blockchain framework. Once jurors are randomly selected, they evaluate the presented evidence and cast their votes in favor of the respective parties.
Consider this scenario: Arjun from Bangalore engages in a smart contract with Pragya from Bihar to complete a research project. Following Pragya’s submission of the work, Arjun takes the matter to Kleros, alleging incomplete research. The contract outlines a panel of three anonymous jurors, each located in different parts of the world, tasked with arbitrating the dispute between the two parties. Upon entering arbitration, Kleros automatically forwards the evidence to the randomly selected jurors.
The jurors are then faced with the decision of either reimbursing Arjun for the unfinished work, compensating Pragya for the completed work, or granting Pragya an additional week to finalize the task. The economic motivation for jurors lies in aligning their decision with the majority. The jurors are unaware of each other’s choices. Those whose decisions align with the majority receive a 10% payment from the tokens staked by the dissenting juror, while those with independent decisions incur a 10% loss of the total tokens staked.
This model assumes that human nature is inherently honest, fair, and reasonable. However, real-world applications may involve cases with gray areas where voting for the right or wrong thing is challenging. Jurors may opt for a “maybe” option, which could be more suitable than a binary “yes” or “no.”
A potential drawback is the lack of a robust mechanism to address jurors who reveal their votes prematurely. For instance, if Arjun bribes one juror on the panel with an amount exceeding the token value to disclose their vote early, the remaining arbitrators may adjust their decisions to align with the revealed vote, considering the economic incentives tied to the majority decision. This scenario allows Arjun to achieve his objective without bribing all three jurors.
The 2016 DAO incident serves as evidence that smart contracts are not immune to sybil attacks. Perpetrators can present deceptive scenarios and exploit the principle of proportionality to manipulate the blockchain. Despite the implementation of deliberate measures to reduce the risk of such attacks, smart contracts are not entirely impervious to them. While Kleros is designed to withstand bribery attempts during appeals, it remains vulnerable to juror bribes in general courts.
Conclusion:
In conclusion, the journey from the traditional social contract theory to the emergence of decentralized systems and smart contracts reflects humanity’s continuous quest for autonomy, fairness, and efficient dispute resolution. The evolution from the dominance of state-controlled governance to the decentralized nature of blockchain and smart contracts underscores the desire for a more inclusive and transparent approach to societal interactions.
Looking ahead, the potential developments and improvements in decentralized systems and smart contracts hold promise for addressing existing challenges. The blockchain landscape, characterized by its decentralization and resistance to state control, may see advancements that enhance security, usability, and scalability. Innovations in smart contract technology could lead to more robust solutions for handling complex real-world scenarios, reducing conflicts, and ensuring greater precision in executing contractual obligations.
As blockchain technology continues to shape societal structures, the need for effective dispute resolution mechanisms becomes paramount. The current reliance on traditional courts poses challenges in terms of jurisdiction and enforceability for decentralized platforms. However, the emergence of blockchain arbitration, exemplified by platforms like Kleros, introduces a compelling alternative. This decentralized dispute resolution model, rooted in the Schelling Point concept, not only provides autonomy to involved parties but also leverages economic incentives to foster honest and fair judgments.
While Kleros and similar platforms show promise, it is essential to address certain drawbacks, such as the lack of qualifications for arbitrators and potential vulnerabilities to premature vote revelations. Future developments may involve refining the selection process for arbitrators and implementing stronger safeguards against manipulation.
The ongoing exploration of these possibilities holds the potential to redefine the dynamics of governance, trust, and cooperation in ways that align more closely with the ideals of a decentralized and interconnected global society.
(This post has been authored by Maahi Agarwal, a student at NLUJA, Assam.)
CITE AS: Maahi Agarwal, “From Social Contracts to Smart Contracts: Navigating Decentralization, Blockchain, and Kleros Arbitration”(The Contemporary Law Forum, 18 March 2024) <tclf.in/2024/03/18/from-social-contracts-to-smart-contracts-navigating-decentralization-blockchain-and-kleros-arbitration/>date of access