*An article by Akram Mathu first published on medium.
Cryptocurrencies have really changed the way people transact. In this new age and time, one no longer needs a defined financial intermediary to send money. People have been given the power to transact at a peer to peer level. With new ways of transacting, comes challenges. This post will focus on arbitration using smart contracts.
An arbitrator is a person officially appointed to solve a dispute.
Currently, if Jane has some project work she’d like to outsource, she would post it on a freelancing website. Once the website helps Jane to look for a contractor, she eventually is able to find John.
Jane tells John that she will pay him using bitcoin instead of local currency. Jane negotiates that she will only pay once the job is done well. They both end up agreeing that Jane would send half the fee immediately and remaining half once the task is completed and reviewed for satisfaction. Their ownership of ether is associated with digital addresses.
Digital addresses are long strings of numbers that have two components; a public key that functions as an address and a private key that gives the owner exclusive access to any coins associated with that address.
Back to Jane and John. John then decides after getting half the payment, that he will not do the job. Jane becomes helpless because she can’t do anything to John because of her inability to detect John’s whereabouts. Jane, therefore, wouldn’t be able to go to court for a breach of contract. Even if John had a profile on the freelance website, he can still refuse or disappear from the platform.
In order to be able to transact using contracts, you need to be able to trust a dispute resolution mechanism or a trusted third party. Lately, multi-signature has been created in order to counter such incidences.
Multi-signature or ‘multi-sig’ is a form of technology that adds more than one layer of security for cryptocurrency transactions. This means that private keys are not one, they are two or more.
Multi-signature technology allows every contract to have private keys shared with both the peers and the arbitrator in case of any dispute or conflict arising.
Private key 1 – To help all parties (the two peers and arbitrator) see that the bitcoin to be sent to the other peer is first deposited in the escrow account/multi-signature address. But the bitcoin can’t be moved or withdrawn.
Private Key 2 – Is only accessible to the arbitrator and this key allows him/her to send the bitcoin to the party they think rightfully deserves the money if there’s a dispute or not.
When Jane wants to pay John, she sends her funds to a multi-signature address. This will require two signatures/ private keys from the group; Jane, John and the Arbitrator to redeem the money.
If Jane and John disagree on who should get the money meaning Jane wants a refund, while Bob believes he fulfilled his obligations and demands the payment, they can appeal to the arbitrator.
The Arbitrator will grant his second private key/signature to Alice or Bob based on their previously agreed terms and therefore one of them will end up redeeming the funds fairly based on the arbitrator’s judging. For the service provided, the arbitrator will charge a service fee.
In order to contract regularly, one needs to have a certain level of trust that the system will enforce your rights under the deal. If you can’t trust the other party, you can trust the arbitrator also known as the dispute resolution mechanism or trusted third party.
Arbitration will really help during the use of smart contracts.
The bitcoin network have firms such as Hedgy that use multi-signature technology.
The Ethereum Blockchain has an arbitration firm known as Kleros.
Kleros involves the use of smart contracts to lock funds and those funds are only distributed right after the end of the initially agreed contract between the two peers.
Finally, the newly launched EOS.IO Blockchain will also have an arbitration process. The exact process is yet to be clearly stated.
Overall, arbitration is an opportunity for existing lawyers to tap into by learning how to apply their existing legal skills in the Blockchain protocol.