SMART CONTRACT DISPUTE RESOLUTION: THE INESCAPABLE FLAWS OF BLOCKCHAIN-BASED ARBITRATION.

• Author: Buchwald, Michael

Introduction 1370 I. OVERVIEW OF TECHNOLOGY AND EXISTING LITERATURE 1374 A. Blockchain Technology 1374 1. Blockchains Generally 1375 2. Decentralization 1376 3. Immutability 1377 4. Pseudonymity 1378 B. Smart Contracts and Oracles 1379 C. Existing Literature 1382 II. ON-CHAIN DISPUTE RESOLUTION PLATFORMS EXPLAINED 1384 A. Agreement Formation 1385 B. Dispute Resolution Initiation 1387 C. Evidence and Arguments 1388 D. Juror Selection 1389 E. Juror Decision-making and Financial Incentivization 1390 F. On-Chain Appeals Process 1391 G. Types of Disputes 1392 III. DISTINCTIVE FLAWS OF ON-CHAIN, DECENTRALIZED 1393 ARBITRATION SYSTEMS A. Flaw 1: Inability to Compel Discovery 1394 1. Current Flaws with On-Chain Discovery 1394 2. Methods for Compelling Discovery Off-Chain 1396 a. Traditional Tribunals 1396 b. Arbitration Tribunals 1397 c. Online Arbitration 1399 3. On-Chain Update Infeasibiilty 1400 a. Pseudonymity of Third Parties 1400 b. Decentralization Compromised 1402 B. Flaw 2: Unavoidable Juror Incentivization Schemes 1403 1. Current Flaws with On-Chain Incentivized Voting 1404 a. Popular vs. Correct Opinions 1404 b. Lack of Legal Structure or Guidance 1406 2. Off-Chain Incentivization Schemes 1408 a. United States Federal Court 1408 b. State and Foreign Courts 1409 c. Arbitration Tribunals 1410 3. On-Chain Update Infeasibility 1412 a. Standardized Frameworks and Precedential Decisions 1412 b. Decentralization Concerns 1413 c. Juror Filtering 1414 d. Remaining Incurable Incentivization 1415 C. Flaw 3; Platform Scalability 1416 1. Structured Discovery Processes at Scale 1416 2. Advocacy and Fact-Finding at Scale 1417 IV. OPTIMAL PATH FORWARD 1420 A. Small Scale Disputes 1420 B. Large Scale Disputes 1422 Conclusion 1423 INTRODUCTION

Over two hundred and fifty million transactions occurred on the Ethereum blockchain in 2018. (1) This staggering level of digital commerce was powered almost entirely by "smart contracts," or self-executing chunks of computer code that immutably transfer assets between users. (2) Proponents of blockchain technology see these automated, irreversible agreements as one of Ethereum's greatest innovations, offering a virtually costless contractual enforcement mechanism. (3) Some early adopters have even claimed that electronic asset-transference has rendered traditional contract law entirely obsolete. (4)

Despite such assertions, pre-coded agreements are riddled with a host of practical and governance-based complications. As Ethereum users have repeatedly discovered, simply because an agreement is self-executing does not mean that it will deliver an intended result. (5) This routine divergence of outcomes and intentions have naturally left some unsatisfied parties reaching for legal recourse. (6)

Unfortunately, smart contracts possess certain inherent characteristics that make ex-post legal enforceability a dubious proposition. In addition to doctrinal woes concerning contract formation and term definitiveness, practical hurdles--namely smart contract self-execution and pseudonymous counterparties--present seemingly insurmountable barriers to obtaining one's day in court. Even if one assumes such a day in court is possible, blockchain proponents may not wish to subject their pseudonymous transactions to traditional forms of adjudication. In many ways, reliance on a centralized third party greatly undermines the theoretical and philosophical bedrock of blockchain technology. Placing oneself at the mercy of a government to amend on-chain mistakes negates the core purposes of a public blockchain: decentralization, (7) consumer autonomy, (8) and complete transactional privacy. (9)

Thus, the practical and ideological disconnects between crypto-commerce and legal proceedings suggest that smart contract adjudication is not long for traditional tribunals. While certain states have enacted legislation aiming to legitimate these disputes and introduce them into their courtrooms, (10) these attempts are sorely misguided in light of Ethereum's pseudonymous nature. (11)

Given that traditional tribunals do not present a viable method for smart contract adjudication, the salience and importance of alternative recourse options will only continue to increase. The ever-growing volume, size, and complexity of transactions on Ethereum (12) will shine an increasingly brighter light on immutably unsatisfactory smart contracts. (13) In turn, current and potential Ethereum users may become fearful of "on-chain" (14) contractual obligations, ultimately deterring widespread blockchain adoption and slowing the once-potent decentralization movement to a definitive stop.

In an attempt to cure crypto-commerce of this inherent technological shortcoming, Ethereum application developers have begun to introduce on-chain dispute resolution systems. Despite the infancy of these platforms, supporters are quick to claim that they will usher in "a new era of low cost and universally accessible justicef.]" (15) While each currently available application differs from its peers in certain key respects, (16) every application flows from the same basic premise: arbitration that incorporates a blockchain is the most effective method for resolving disputes that arise on a blockchain. In practice, this means that emerging Ethereum platforms such as Kleros, (17) JUR, (18) Aragon Network Jurisdiction, (19) and OpenCourt (20) enable contracting parties to precode an option for ex-post, fully decentralized arbitration.

As a succinct elevator pitch, blockchain-based arbitration seems like a promising and practical solution to suboptimal self-executing smart contracts. If blockchain technology is truly an anchor for the next phase of electronic commerce, then a digitized and decentralized dispute resolution process will be necessary for its success. (21) As the argument goes, on-chain arbitration offers the best of both worlds, allowing disputants and jurors to remain pseudonymous without sacrificing the right to expedient, cheap, and satisfactory adjudication.

But blind deference and acceptance of such tools, based on perceived convenience, has troubling justiciability implications. It would be foolish and dangerous for lawmakers, programmers, and platform users to simply assume the efficacy of these mysterious computer programs. As soon as one pushes past the veneer of alleged superiority, a multitude of problems quickly begin to arise. Thus, before reliance on blockchain-based dispute resolution systems expands any further, two vital policy questions must be answered: (1) Does blockchain-based dispute resolution suffer from inherent technological flaws that inhibit adequate adjudication? And (2) if so, are any of these on-chain options still somehow equivalent or superior to off-chain alternatives?

This Comment will attempt to answer both questions. Part I will first offer a brief overview of both blockchain technological processes and existing academic literature concerning smart contract dispute resolution. Part II will elucidate the realm of current and forthcoming blockchain-based arbitration applications. Part III, the heart of this Comment, will then identify the inescapable shortcomings associated with these applications. Specifically, it explores three gaping issues inherent in blockchain technology: (1) those associated with the discovery process; (2) those associated with juror voting incentives; and (3) those associated with platform scalability. Part IV will finally consider whether these dispute resolution platforms, despite their distinctive flaws, are an improvement upon off-chain adjudication options available to Ethereum users. Ultimately, this Comment concludes that it is impossible for on-chain dispute resolution to successfully emulate any off-chain alternative without sacrificing the guiding principles of blockchain. Users will not be able to remain pseudonymous, nor will decentralized decision-making ever be able to efficaciously resolve disputes at scale. No literature currently exists which comprehensively examines the feasibility of such on-chain decision making systems. Thus, this Comment will serve as a useful guidepost to policymakers, businesses, and developers as application adoption expands.

1. OVERVIEW OF TECHNOLOGY AND EXISTING LITERATURE

   1. Blockchain Technology

      Many blockchain-focused articles begin with an in-depth explanation of the technology itself. While these comprehensive descriptions are useful and informative, they are also plentiful (22) and laborious. (23) Lengthy discussions of key blockchain concepts such as decentralization, hashing, mining, and immutability tend to be exhausting, confusing, and occasionally downright maddening. (24) Luckily, such discussions are unnecessary for present purposes. This Comment is far more concerned with what these technological processes enable and far less with how the technology works. Thus, before exploring on-chain dispute resolution application feasibility, this Comment need only provide an extremely brief overview of key blockchain concepts. Specifically, it touches upon the general structure of a public blockchain, as well as those technological features that may restrain the functionality of on-chain dispute resolution systems. Importantly, readers familiar with the technological concepts surrounding public blockchains can skip the following background section. These readers may resume at Section I.C, Existing Literature.

      1. Blockchains Generally

         At the highest level, a public blockchain is a decentralized and immutable digital ledger of transactions. (25) The latter half of this definition--a digital ledger of transactions--is readily understandable, familiar, and hardly disruptive. For example, any Venmo user who has ever examined her history has interacted with a simple digital ledger. (26) It is instead these first two definitional components--decentralization and immutability--that excite "cypherpunks" (27) and confuse casual...