As usual, some users will try to abuse the system. But Kleros cannot be gamed. Manny learnt this the hard way. He had always thought of himself as the smartest guy in the room. When he found out about Kleros, he saw it as an opportunity to make some easy money. He bought some pinakion and started to activate them in subcourts with high arbitration fees. Of course that, when he was drawn as a juror, he would not even read the evidence. Manny just voted randomly, collected the arbitration fee and moved on to another dispute.

A couple of weeks into his “brilliant scheme”, he realized that he was suffering a net loss. Manny earned some money in arbitration fees. But, since his vote was often incoherent with the rest, he systematically lost pinakion. After a couple of weeks, he realized the net effect was negative and he abandoned his intention of trying to game the system.

Parameters of the Subcourt System

Different disputes require different types of proceedings. Token holders will have the right to make a number of decisions affecting how subcourts work. These decisions include policies, session time, arbitration fees, maximum number of jurors drawn and minimum number of tokens activated.

Policies

A dispute over inheritance rights will be different than a dispute over a freelancing contract or trolling on social media. Some will require communication between jurors and parties while others will not. Subcourt policies will help adapt subcourts to the specific features of the disputes to solve.

Arbitration Fees

Arbitration fees may range from a few pennies to millions of dollars, depending on the type of expertise required to solve a case. Simple disputes that do not require specific skills will probably have low arbitration fees. Complex disputes that require highly specialized (and scarce) skills will have high arbitration fees.

Fees are likely to evolve as to reflect the supply and demand of adjudication services. Subcourts with an excess demand of arbitration services (many disputes and few jurors) will have rising fees in order to attract more jurors. Subcourts with an excess supply of arbitration services (few disputes and many jurors) will have falling fees, driving jurors away. The price system will coordinate supply and demand of arbitration services towards equilibrium in each subcourt.

Session Time

Session time is the amount of time a specific subcourt will give jurors to vote a decision. It may range from a few minutes to years, depending on the nature of the disputes. Simple cases, which may be solved in minutes, will have low session time. Complex disputes, which require more time to properly analyze evidence and come to a decision, will have high session time.

Maximum number of jurors

When the maximum number of jurors is reached in a subcourt because there was a high number of appeals, the higher level subcourt will be called to make a decision.

Minimum amount of tokens activated

Setting a minimum amount of tokens to be activated in order for a user to have the possibility of being drawn as a juror gives parties some control about who can be drawn. The higher the number of pinakion to activate, the more likely it is that only highly committed jurors will be drawn.

Governance

As Kleros reaches a critical mass of users and is adopted in a rising number of industries, new subcourts will have to be created, changes will need to be made in subcourt parameters and the protocol itself will have to be updated to new versions. Since Kleros is a decentralized organization, no central authority will be able to make these decisions. Users will control Kleros governance with a liquid democracy mechanism. Each user will have a number of votes equal to the amount of pinakion he holds. Users will have the option of voting directly or delegating their vote. When a user fails to vote, his voting power is automatically transferred to his delegate.

Imagine a decision about updating Kleros to a new version, with the following token holdings, voting behavior and delegation:

In this example, A delegates his votes on B. Then B has 1500 + 1000 = 2500 votes. B delegates his votes on C. This means that C has 500 + 2500 = 3000 votes. Since C votes Yes, the delegation chain stops and 3000 votes are Yes votes. D also votes Yes with his 3000 votes. This amounts to a total of 6000 votes for the Yes option (3000 + 3000 = 6000). E delegates his 1500 voting rights to F and F votes No. The No option gets 4000 votes (2500 + 1500 = 4000).

The end result is 6000 votes for Yes and 4000 for No. The final result is Yes.

Kleros: a Multi-Purpose Adjudication Protocol

Cleisthenes, the father of Greek democracy. After leading a rebellion against aristocratic rule, Cleisthenes implemented a package of political reforms that decentralized power in Athens. Cleisthenes’ life after his reforms is unknown as no ancient texts mention him thereafter. Some historians believe that he went on a self-imposed exile. He created a new civic technology and gave it to the people. For his deeds, some dub Cleisthenes the ancient Satoshi Nakamoto.

In this paper, we have focused on a software development dispute as an example of the Kleros adjucation proceeding. However, Kleros is a multi-purpose protocol which may be used to adjudicate a wide variety of claims. Some of them may be workable in the near future, while others will probably work in the longer term.

Small Claim Arbitration

In the early 1960s, 11.5% of cases in American federal courts went to trial. In 2002, the number had fallen to just 1.8%. The decline is not the result of fewer disputes, but the consequence of the growing use of alternative processes to deal with problems (Katsh and Rabinovich-Einy 2017, p. 14). In order to cut costs, governments have promoted the use of alternative dispute resolution (ADR) in areas such as commercial disputes, consumer protection and employment. Early applications of Kleros will probably include small claim arbitration.

The credit card chargeback system is the most frequently used dispute resolution process in America, but it can be slow and unsatisfactory to consumers protesting a charge. Imagine a credit card holder (Client) who files suit alleging that the Bank breached the Account Agreement when it “failed to properly review and reverse” a disputed transaction. The decision may be done in Kleros and be enforced by the government, such as any small claims court, where the judgement of a third party is already accepted.

Kleros may also be used in a large number of small claims such as car repairs done wrong, landlords refusing to return a deposit to tenants, telecommunication customers billed for a service they claim they did not purchase, an online buyer claiming that he was sent a defective product, among many others.

Online dispute resolution (ODR) methodologies are currently being tested in government courts beyond small claims. In January 2015, a report by an ODR Advisory Group to the Civil Justice Council recommended the establishment of a court the would handle civil disputes with a value of up to ₤25,000 through ODR in the United Kingdom. Cases would be decided online, and would be binding and enforceable in the same way that traditional court decisions are.

Freelancing

The global workplace is switching from traditional employer-employee relationships to arrangements involving distant, cross-border and flexible work by freelancers (Friedman 2005). Disputes in such agreements require fast and simple responses. The Alice vs. Bob case explained earlier is a typical freelancer dispute. Another conflict may involve a freelance writer who gets his project rejected by a client, leaving him without pay, only to find out that the client ended up using the product anyway.

Apart from a few exceptions such as Alibaba and Upwork (10), online dispute resolution processes are rarely used for disputes involving temporary labor. Amazon Mechanical Turk, a leading platform in the gig economy, generates many disputes but lacks a dispute resolution service. Uber offers drivers very little assistance to address problems such as disputed rankings by customers. A large number of horror stories in apartment rental on Airbnb platform can be seen in the website AirbnbHell.

These platforms see themselves as technology companies that merely connect supply and demand. They usually do not take responsibility for disputes. The Kleros arbitration system could be an important solution for disputes arising in these global platforms.

Crowdfunding

Crowdfunding, a rising source of funding for entrepreneurs, raises a number of concerns regarding scams and false promises on a team ability to deliver on the results promised to backers.

A software startup may create a crowdfunding agreement stating that funds will be transferred after certain development milestones are reached. Next payment will be made after V.2.0 is launched. However, some backers may claim: “This is just V.1.0 with some trivial extra features and some make-up”. Kleros proceeding could analyze the evidence and make the decision (11). Future crowdfunding contracts could have a clause having Kleros as default arbitration procedure.

Social Media

As an increasing number of social interactions start to take place online, harassment, invasion of privacy, false information and bad reviews become important problems. Such interactions may result in reputational and monetary loss as well as psychological damage.

Imagine Soushiant and Uri are having a discussion on a decentralized social media platform. As they heat up, Uri flags Soushiant for a comment that violates the terms and conditions of the platform. Soushiant replies: “My comment did not violate the terms and conditions. It’s not my fault if Uri is too sensitive”. The evidence is analyzed by a jury in Kleros, which decides that Soushiant’s comment indeed violated the terms and conditions and makes him lose 20 reputation points.

Healthcare

Healthcare is increasingly centered on data documented in electronic health records (EHR). Medical services are becoming more entwined with the digital environment under the form of telemedicine and apps for the management and monitoring of medical conditions and medications, or the experimental use of sensors and robots (Katsch and Rabinovich-Einy 2017: p. 107).

An increasing number of life or death decisions will rely on data that may not be accurate and on devices (pacemakers, defibrillators, insulin pumps, etc.) which may fail (eg., software failure, premature shutdown, failure to restart, unexpected depletion in battery life, faulty detection of patient events). A large part of medical malpractice in the future may transition to errors in healthcare records (eg., a typo leading to a medication error) and negligence in the use or transmission of information.

Identifying and responding to these challenges requires less the assistance of lawyers and courts than the use of informal technology-based dispute resolution and prevention processes. Kleros could provide assistance in solving disputes regarding the failure of such devices. A jury of doctors or technicians could analyze the log of the devices and vote on whether a failure existed, which would result in compensation to victims (12).

Intellectual Property

Decentralized music platforms such as Ujo Music will enable musicians to upload music and receive payments using smart contracts. This will generate a number of claims regarding copyright infringement.

Imagine the rock band The Misfits uploads its new song on to Ujo Music. Another band, The Holograms, claims that the song infringes their copyright. In a centralized platform such as YouTube, this claim is solved with the proprietary algorithm Content ID, which blocks any content identified as copyright infringing by matching between materials submitted by a user and copyrighted files. Concern has been raised about the lack of transparency of Content ID and the lack of accountability mechanisms (13).

In decentralized music platforms, the dispute is sent to Kleros and jurors produce a decision: “The Holograms are the rightful owners of the song. All revenue generated by the song is automatically redirected to The Holograms account”.

Online Gaming

League of Legends is a very popular online battle video game with over 100 million players every month. The 2016 World Championship had a total prize pool of over 6 million dollars. To make sure that the game happens in a safe environment, the creators introduced a system for using the community for disciplining bad players. The tribunal is composed of voluntary players, who are empowered to vote on punishment for abuse. Penalties go from a mere warning to a ban. A similar system was implemented by Valve. Kleros could work as a similar, yet decentralized, system for solving disputes in online gaming.

A Justice System for the Decentralized Internet

A kleroterion with some pinakion inserted in the slots.

A large part of our lives happen online. Our social and economic connections are increasingly intermediated by global Internet platforms connecting content producers, consumers and advertisers (Facebook and YouTube), buyers and sellers (Amazon and eBay), drivers and riders (Uber) and travelers and hosts (Airbnb).

If the blockchain promise holds true, the coming years will bring the disintermediation of centralized global platforms and their replacement by distributed models. People will transact goods in decentralized versions of eBay (e.g., Open Bazaar), will contract rides in a decentralized Uber (e.g., Arcade City), will stream music in a decentralized Spotify (e.g., Ujo Music), will contract labor in a decentralized Upwork (e.g., Ethlance) and will connect in decentralized Reddit platforms (e.g., Steemit).

These platforms will use some shared building blocks. For example, they may all use IPFS for storing files and Golem for sharing computing resources. When disputes arise between the users of decentralized platforms, efficiency considerations suggest that they should also use a single decentralized adjudication network. We do not need two separate networks for decentralized storage, for decentralized prediction markets, nor for claim adjudication.

Kleros will become the unified, decentralized, network of jurors for adjudicating claims in different industries. It will become a fundamental part of the infrastructure for the decentralized Internet.

Kleros will become the standard adjudication network for the decentralized Internet. Different subcourts will handle disputes coming from these different DAOs.

The Kleros network will enable the widespread use of smart contracts in a growing number of economic activities. Smart contracts self-execute when the predefined conditions are met. However, automatic enforcement by code is at odds with a key principle of the philosophy of right: all contracts are incomplete. At the moment it is signed, no contract could ever foresee every possible situation that could arise until the time it is to be enforced. Sometimes, strict enforcement may result in an unfair situation. And this cannot be solved exclusively by computer code.

The Greek called epikeia a moral principle that exempted a citizen of strict compliance with a positive law or contract in order to be faithful to its spirit. Modern legal systems also recognize that parties may be relieved of the obligation of compliance if such obligation has become unreasonable after a change in context. Massive adoption of smart contracts require an “escape hatch” mechanism for when strict compliance would produce undesirable or unfair consequences. But how to create a procedure for an escape hatch without using a centralized decision maker that introduces a new single point of failure into the system?

Kleros can become this method for “error correction”, a decentralized escape hatch to revoke smart contracts when compliance has become unreasonable. It can comply with this, without reintroducing arbitrariness and corruption into the system.

Conclusion

In the past years, e-commerce has been growing at double digits and is expected to total a 2 trillion dollar market in 2020. Key components of the sharing economy (travel, car sharing, finance, staffing and streaming) are expected to reach $335 billion in spending by 2025. Around 2,000 platforms of equity crowdfunding exist in 2016 and the World Bank predicts that crowdfunding investments will be a $96 billion a year market in developing countries alone by 2025.

The legal systems of the nation state era were successful in creating an institutional framework for economic growth and social prosperity. In the wake of the digital revolution, however, they are reaching their complexity limits. While the new economy requires a deep institutional rethinking, few people are conducting research on legal infrastructure from a system level perspective. Lawyers research what the law is. Economists study what the law should be in order to promote trade or improve incentives for workplace safety. But hardly anyone studies how law works as a system, what determines the system’s costs and efficacy (Hadfield 2015: p. 215).

Inability of legal systems to solve the disputes of the Internet Age led platforms such as eBay or Alibaba to develop their own arbitration mechanisms. However, no horizontal system emerged to be used across the board and that could gain from increased specialization over time. Kleros seeks to become this system.

While Kleros relies on cutting edge technologies in blockchain, cryptography, game theory and collective intelligence, its fundamental logic is still based on a principle the Greek knew 25 centuries ago: justice can be served on a peer-to-peer basis. Bitcoin is helping advance the cause of financial inclusion. Justice inclusion is an equally important goal. Just as Bitcoin is bringing banking for the unbanked, the Kleros promise is to bring justice for the unjusticed.

Want a shorter version of this paper? Go here.

Want to learn about the cryptography, math, economics and computer science behind Kleros? Check out a technical version of the paper here.

Want to know more about the project? Interested in joining our team? Visit our website.

The Authors

Federico Ast graduated in economics and philosophy from the University of Buenos Aires. He holds a PhD in management from IAE Business School. He was a participant at Singularity University Global Solutions Program in 2016. He hosts a Coursera program on blockchain to be launched in January 2018. He is founder of Crowdjury and Kleros, projects that leverage the use of blockchain and collective intelligence applied to justice systems.

Clément Lesaege graduated in computer science at the Université de Technologie de Compiègne. He holds a masters degree in computer science from the Georgia Institute of Technology. He follows blockchain technology since 2013 and has found vulnerabilities in several smart contracts.

Footnotes

(1) Alejandro Sewrjugin is a blockchain writer and researcher based in Buenos Aires. Lately, he has focused on the economic applications of blockchain, in connection to income distribution. See his project Phi Economy.

(2) Legal epistemology is a subfield of social epistemology that studies whether the rules that govern judicial proceedings are genuinely truth-conducive (Laudan 2006).

(3) In the 420s BC, jurors were paid three obols for a day’s work. While it was not a grand sum, it was enough to make a difference in the way a man lived and more than enough to sustain mere existence.

(4) Kleros, the name of the project, comes from the use of sortition for jury selection and transparent justice. In governance, sortition (also known as allotment or demarchy) is a method of selection of political officials as a random sample from a larger pool of candidates.

(5) Notably, the United States judiciary kept some of the spirit of Athenian courts in using citizen juries. This participatory feature of the American political system was greatly admired by Tocqueville: “The jury, and more especially the civil jury, serves to communicate the spirit of the judges to the minds of all the citizens; and this spirit, with the habits which attend it, is the soundest preparation for free institutions (…) It invests each citizen with a kind of magistracy; it makes them all feel the duties which they are bound to discharge toward society; and the part which they take in the Government” (Tocqueville 1961: p. 336–37).

(6) Previous attempts were made to use the bitcoin blockchain for arbitration with multi-signature (multisig) addresses. These addresses require more than one key to authorize a transaction. An initiative in this sense is Bitrated that leverages multisig transactions where a trusted third party is selected to solve disputes in case of fraud. However, the limited features of the Bitcoin blockchain are insufficient to handle more complex transactions.

(6) A smart contract is a set of self-enforceable instructions built on blockchain technology.

(6) Pseudonimity is a critical feature of the Kleros adjudication process. It may be seen both as an advantage as well as a disadvantage. It is an advantage from the point of view of protecting jurors from possible retaliation from the parties. However, the lack of identity may turn the system undesirable for cases when individual accountability of jurors is required or when jury must be drawn from a pre-defined pool of candidates.

(7) The name is a reference to the pinakion, the bronze plaque that each Athenian citizen used to be drawn in popular trials. In the Kleros network, the pinakion represents a possibility to be drawn as jurors and therefore to earn arbitration fees. Pinakion will initially be given to people who have taken part in the crowdfunding of the decentralized court. A lesser part of them will be given to project contributors.

(8) Had Bob chosen to keep on appealing, the number of jurors would have doubled plus one again and again in each round. Generally speaking, appeals will be uncommon. However, the appeal system is an important mechanism against bribes. Bribing a small jury is relatively easy. But since the victim always has the right to appeal, the attacker would have to keep bribing larger and larger juries at a steeply rising cost. The attacker would have to be prepared to spend an enormous amount of money to bribe jurors all the way to the General Court and would very likely lose in the end.

(9) Token redistribution is done according to the following formula:

alpha*min_activate*weight.

The alpha parameter determines the number of tokens to be redistributed. The alpha value is decided at the court level depending on the dynamics of the voting environment. The weight parameter is the number of times that a token holder was drawn for the dispute. The amount of tokens a juror will gain or lose will depend on the voting power he had in the dispute.

(10) Upwork is a freelancing platform for technology, writing, translation and design, which has an online dispute resolution service. Contracting parties are instructed to communicate through the assigned workspace so as to document all their agreements, communications and updates on the freelancer’s progress. Failure to document agreements on the workspace will result in the loss of Upwork protection for parties if a dispute arises in the future. Parties use the tools provided to resolve the problem on their own in 3% of the jobs. Users contact Upwork customer support only in 1% of the jobs. The types of problems that arise usually have to do with nonpayment on the freelancer end, or payment for an incomplete job on the client’s end; the average value of disputes is $200. (Katsh 2017: p. 143) Upwork offers a payment mechanism in which money is placed in escrow. After milestones are met and portions of the work are performed satisfactorily (and it’s the client’s obligation to review and object to payment within a specified time), then money is released.

(11) It is possible that a contract of this sort could have been useful to return funds to backers in the DAO hack event in June 2016. Money could have stayed in escrow and jurors could have decided that the DAO had failed to meet some security milestone. After Kleros decision, funds would have been returned to backers.

(12) “Computerized medical devices can fail in many ways, including through programming errors, incorrect calibration, and exposure to malicious intrusions, as well as physical or medical errors. Over a thousand recalls were issued on software-based medical devices from 1999 to 2005. Hundreds of deaths have been attributed to software failure in medical devices.” Long Comment Regarding a Proposed Exemption Comment of a Coalition of Medical Device Researchers in Support of Proposed Class 27: Software — Networked Medical Devices, at 2, U.S. Copyright Off. Libr. Congress.

(13) “Appropriation of existing material is a venerable and necessary practice. As the economists Romer and Arthur remind us, recombination is really the only source of innovation — and wealth. I suggest we follow the question, “Has it been transformed by the borrower?” Did the remixing, the mashup, the sampling, the appropriation, the borrowing — did it transform the original rather than just copy it? Did Andy Warhol transform the Campbell’s soup can? If yes, then the derivative is not really a “copy”; it’s been transformed, mutated, improved, evolved. The answer each time is still a judgment call, but the question of whether it has been transformed is the right question” (Kelly 2016: p. 209).

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