Considerations for Dispute Resolution Mechanisms in Enterprise Blockchain Networks

A key tenet of cryptoeconomic design is to avoid relying on the subjective judgment of a central authority for consensus, and, instead, reach consensus regarding transactions in an automated and prescribed manner. However, as occurs in all networks, transactional disputes between counterparties nonetheless arise periodically, necessitating mechanisms and procedures for their resolution, which are not necessarily cryptoeconomic in nature. The question of how and where dispute resolution should occur in enterprise blockchain networks is the central topic of the World Economic Forum’s (WEF) “Bridging the Governance Gap” report, published December 2020.  

Specifically, the report discusses the role of dispute resolution mechanisms in resolving on-chain, business-to-business transactional disputes, whose causes can range from oracle and smart contract failure to insufficient collateralization and human error. Concluding that the lack of clearly defined and legally-sound dispute resolution mechanisms is a key barrier to blockchain adoption by enterprises, in that enterprises tend to prefer increased assurance prior to engagement, the report’s authors explore the various types of available dispute resolution mechanisms, which they characterize as existing on a spectrum from private to public:

  • In-Network resolution represents the most private means of resolving transactional disputes within enterprise networks. In this generalized model, central operators, human or automated, are tasked with developing and overseeing standardized processes by which network participants themselves resolve transaction disputes with one another.
  • Industry Fora resolution involves the creation of resolution processes and adjudication of disputes by a semi-private industry consortium or regulatory body. Such models are most appropriately applied to disputes with greater significance to a given industry at large.
  • Arbitration involves dispute resolution conducted by recognized and neutral third-party arbitrators not necessarily otherwise involved in the industry. This process must be structured such that arbitrators’ decisions are final and enforceable, regardless of legal jurisdiction.
  • Litigation represents the most public and typically burdensome method of dispute resolution, wherein claims are adjudicated in a real-world court of law in the relevant jurisdiction. More authoritative than previously discussed methods, litigation may be appropriate when one or more parties is uncooperative.

The report reasons that the goal of any dispute resolution mechanism should be to minimize any detrimental impacts from automation. Thus, dispute resolution mechanisms should generally forgo the inclusion of automated mechanisms in favor of processes largely reliant on human judgement. In that same vein, reliance on certain automated aspects of these networks, including oracles, smart contracts and zero-knowledge proofs, should likewise be limited. In practice, the report recommends that individual networks adopt a dispute resolution mechanism in one of the categories, with consideration for a network’s operational goals and the types of disputes likely to arise from pursuit thereof.

As cryptoeconomic designers, we agree with the latter notion that individual mechanisms must be individually designed such that they compliment the larger cryptosystem in which they operate, yet we are hesitant to accept the former statements regarding automation and, more generally, the idea that cryptosystems should in every instance be designed to rely on external adjudication in the manners recommended by this report. That said, one can also acknowledge that the motivation for the WEF’s approach to this issue is understandable and perhaps reasonable from the perspective of established corporate groups. Given the stated goal of onboarding non-crypto-native enterprises, and accepting the assertion that lack of clarity surrounding dispute resolution is often a primary source of reluctance for traditional firms considering engaging with decentralized systems, presenting such enterprises with dispute resolution options based on or that map more easily to established, real-world models with which they are familiar, and which can like be more easily integrated into existing corporate structures, is likely to lessen these somewhat understandable concerns. The same may not be always true for more game theory-oriented, cryptoeconomic incentive structures aimed at resolving disputes, but there is reason to suspect that much corporate resistance to engaging with decentralized systems is as much related to an incomplete understanding of these systems as an actual fundamental objection to the ways these systems function. As such, efforts to ensure better understanding of the goals and mechanics of these systems may meaningfully contribute to a wider acceptance of the many novel and/or streamlined features and capabilities they can offer corporate groups.

That said, we feel it prudent to discuss additional considerations to be made when developing a dispute resolution mechanism for an enterprise blockchain network. First, a cryptosystem’s primary method of dispute resolution should occur in-network, if not directly on-chain; blockchain networks are designed to achieve group consensus and, thus, distributed consensus via cryptoeconomic design, even if overseen by an autonomous central entity, such as an arbitration smart contract, should be the first method applied to resolve disputes when possible. This is further appropriate given the report’s insistence on speed and affordability. Second, independent of the first consideration, there exists too much uncertainty surrounding the legal interpretation of smart contracts and blockchain networks for use of the legal system as a primary dispute resolution mechanism to be reliable. Third, the notion that reduction or elimination of oracles and smart contracts reduces the risk of disputes is falsely premised: these technological mechanisms are nearly always essential to achieving the goals of an enterprise blockchain network and, at the very least, necessary to realizing the full benefits of distributed ledger technology. Admittedly, as cryptoeconomic designers, we too approach this topic from our unique perspective, and the non-comprehensive considerations we propose above undoubtedly reflect this. Ultimately, there exist myriad possible models for dispute resolution and, as one seeks to design such a system with the specific needs of a given cryptosystem in mind, one needs also to critically evaluate the considerations and models being presented as well as the motivations of those doing so.