In today’s rapidly evolving digital commerce, where millions of cross-border transactions occur in milliseconds, our overburdened judicial systems struggle to keep pace - much like a 16th-century carriage trying to compete in a Formula One race. Despite efforts to modernize through Online Dispute Resolution (ODR) systems, these solutions often fall short, constrained by legacy structures and rigid legal frameworks. The complexity is further heightened in the global digital landscape, where disputes frequently span multiple jurisdictions, complicating the question of who must decide. As a result, it’s not uncommon for users to abandon minor e-commerce issues or stop using the platform. While artificial intelligence (AI) presents a promising alternative to address these challenges, its use in dispute resolution raises concerns. There remains significant hesitation around replacing crucial human judgment and discretion in resolving conflicts, particularly given the risks of algorithmic bias in decision-making. At the end of the day, what we seek is not just greater simplicity, but also transparency in how our rights are exercised and upheld. Well then, why not consider using the ingredients from the Bitcoin recipe to find a solution?
That’s exactly what Kleros did. Kleros is a decentralized, blockchain-based arbitration protocol that leverages game theory, particularly the concept of Shelling Point to create a system for resolving disputes. This innovative approach has been gaining traction in Latin America, with successes in Argentina and Mexico. Kleros' foundation is reminiscent of ancient Greek democracy, specifically the 'kleroterion' system, where public officials were chosen by lottery. Whilst allowing participants from all walks of life to contribute to the decision-making process, they ensure that justice is both impartial and transparent. The logic of collectiveness behind Greek democracy continues to permeate our times. We've seen how this influence remains strong as the power of cooperative intelligence has proven capable of creating global platforms like Wikipedia, Uber and Airbnb, where user-driven content and services have replaced traditional models. Just as Yelp! replaced professional critics with user reviews and Wikipedia allowed the public to generate knowledge, Satoshi Nakamoto's creation of Bitcoin and blockchain represented the next leap in this collaborative economy. Bitcoin showed that, given the right incentives, decentralized users could maintain a global financial system without relying on national authorities. The system relies on cryptoeconomics, which combines cryptography, computer science and game theory to build secure, decentralized networks. While this approach is well-known for its financial applications, its potential extends far beyond, offering possibilities in a variety of fields, including the often overlooked, dispute resolution systems.
How Kleros works: blockchain and cryptoassets in action
Kleros uses blockchain technology to create decentralized justice system powered by cryptoassets. Disputes are resolved through jurors selected from a decentralized pool of participants who stake Pinakion (PNK), Kleros’ native token, to participate in cases. The use of blockchain ensures that all aspects of the case - evidence submission, jury selection and verdicts - are transparent, tamper-proof and publicly verifiable.
Game theory and Schelling Points in Kleros
One of the core innovations of Kleros is its reliance on game theory, specifically the use of Schelling Points, a concept popularized by Nobel laureate Thomas Schelling. Schelling Points refer to solutions that people naturally gravitate toward in the absence of communication, based on what they believe others will choose. Kleros use this concept to guide and incentivize jurors to reach the most just verdict. Jurors are motivated to reach decisions that they believe will align with the majority based on the evidence that is presented. Each juror knows that the most obvious or fair decision - the Shelling point - is likely the one that other jurors will choose as well. This incentivizes jurors to evaluate the case fairly and choose the most just outcome, as aligning with the majority rewards them. If the jurors deviate, they risk losing their staked cryptoassets. This system ensures that jurors act impartially, as their incentives are directly tied to delivering a fair verdict that should be aligned with the evidence presented. The decentralized nature of Kleros allows for participants from around the world to contribute to the resolution of disputes without needing prior coordination, ensuring that the system remains unbiased and free from local influences.
Historically, there have been attempts to incorporate crowdsourcing into dispute resolution. One of the most well-known examples is the Community Review Forum created by Colin Rule for eBay, where users acted as "jurors" to resolve disputes on the platform. Another instance is Valve's Overwatch system, where Counter-Strike players evaluated and resolved complaints against other players. However, these initial crowdsourcing efforts faced a significant issue - they were centralized systems managed by single companies. As a result, they many lacked the neutrality and transparency typically expected from a dispute resolution process.
Kleros in Latin America: case study in Argentina with Lemon
In Argentina, Kleros has been integrated into the dispute resolution process of Lemon, a leading cryptocurrency exchange. Lemon allows users to escalate their claims to Kleros when they are unsatisfied with the outcome provided by Lemon’s internal customer service team. They just need to fill in a form where they can describe their issue and upload supporting evidence (e.g., screenshots, photos or audio). The disputed amount must be less than $300 or the equivalent in local currency or cryptocurrency) and must involve a specific amount of money (a quantitative dispute). A decision is reached within five business days, and the entire process is capped at 10 business days. When the jurors reach a decision, then, if the user wins: Lemon is required to comply with the verdict within two days; and, if the user loses: the user can still pursue the case through traditional centralized courts, meaning they do not lose the right to seek justice elsewhere. So far, the system has proven particularly effective in addressing common types of disputes, including unrecognized transactions, transaction errors, failures in crediting fund, etc. Additionally, Kleros provides users with support for creating their submissions. Through AI-powered tools, Kleros helps ensure that both parties have equal access to high-quality documentation, preventing asymmetry in the quality of the evidence presented to jurors.
Source: Kleros
Mexico: pioneering legal recognition of blockchain arbitration
While Argentina leads in practical applications, Mexico has taken significant steps toward legal recognition of blockchain-based arbitration. The country's MASC (Mecanismos Alternativos de Solución de Controversias) regulation acknowledges decentralized arbitration systems like Kleros as legitimate alternatives to traditional court proceedings. In a landmark case in Mexico in 2021, two parties involved in a real estate lease dispute included a Kleros-based arbitration clause in their contract. When a dispute arose, Kleros was used to resolve the case. The Mexican courts subsequently recognized and enforced the decision, marking a major milestone in the legal legitimacy of blockchain arbitration (the original Arbitration Agreement is added as annex in this article).
It’s worth noting that the potential applications of this system go far beyond the crypto space. Industries such as digital banking, insurance and online marketplaces are actively exploring the advantages of decentralized dispute resolution. Governments are also beginning to recognize blockchain’s ability to alleviate pressure on traditional court systems. For instance, the municipal court of Lavalle in Mendoza, Argentina, is currently testing a pilot program with Kleros to resolve small-scale disputes. In June, it reached a unanimous decision in its first case, marking a significant milestone for the initiative.
We will see how Kleros continues to develop but, without a doubt, a system that successfully strikes the right balance between technology's efficiency and the human need for fairness in dispute resolution should offer a significant advantage over the current alternatives in the digital world.
This article first appeared in Digital Bytes (8th of October, 2024), a weekly newsletter by Jonny Fry of Team Blockchain.