In the rapidly evolving world of blockchain technology, smart contracts have emerged as a revolutionary tool for documenting transactions. These self-executing contracts, with terms transcribed directly into code, are designed to automate and enforce agreements without the need for intermediaries. Despite their goal of reducing disputes, however, smart contracts have brought with them an increasing number of legal conflicts, creating a need for a specialized form of dispute resolution tailored to blockchain technology. In a recent paper, I explore the trade-off between transparency and anonymity in smart contract arbitration (SCA) and offer a new model that shows how balancing these tradeoffs can change the effectiveness of dispute resolution in blockchain.

SCA strives to resolve disputes efficiently and transparently while adhering to the decentralized ethos of blockchain. Platforms like Kleros provide innovative crowd-sourced and game theoretical models to settle disputes arising from smart contracts and off-chain transactions. These platforms leverage blockchain’s characteristics, such as anonymity, immutability and decentralization, as novel parameters. However, a critical issue in SCA is how to preserve anonymity while being transparent and ensuring proceedings are fair. Traditional arbitration emphasizes transparency, making arbitrators’ identities and qualifications public to promote impartiality and trust. By contrast, blockchain’s decentralized nature advances anonymity and hides arbitrators’ identities and qualifications, especially in crowdsourced arbitration models where anyone can be a juror regardless of qualifications and experience.

An advantage of SCA is that it protects arbitrators from external pressure by concealing their identities. Parties to disputes are also anonymous because of the nature of blockchain. Thus, anonymity can also minimize possible bias toward parties, ensuring decisions are based solely on the facts. Yet transparency can build trust in the arbitration process. Knowing arbitrators’ qualifications helps parties feel confident that competent and impartial experts are resolving their disputes.

It bears noting at this point that ensuring and verifying the qualifications of arbitrators in SCA platforms while not disturbing blockchain’s anonymous nature is a delicate balance. Thus, in my paper, I delve into the double-blind peer review process (PRP) because of its similarities to SCA on the issue of anonymity. Reviewers and authors are also anonymous in double-blind PRP. However, editors choose reviewers based on their qualifications. Therefore, a similar editor-like model may be implemented in SCA platforms to verify registered arbitrators’ skills before any assignment. It may be helpful to achieve a more transparent and fair process on SCA platforms.

To address the disadvantages of SCA, a new model could be designed that balances transparency and anonymity. One potential solution is verifying arbitrators’ qualifications and experience through an editor-like independent entity when signing up for SCA platforms. After signing up, each arbitrator will have an experience indicator. Each assignment as an arbitrator increases experience. Moreover, a coherent vote with the majority of arbitrators of a dispute brings even more experience. It accurately reveals the qualifications and experience without disclosing arbitrators’ identities. This approach could provide the necessary transparency to build trust while preserving the anonymity that makes blockchain attractive. It would also help ensure that arbitrators are competent and experienced. At the same time, it would protect arbitrators from external pressure while maintaining the decentralized nature of SCA platforms.

This model strikes a balance between the benefits of traditional arbitration and SCA, and would SCA to offer more transparent, efficient, and trustworthy dispute resolution. This balance will be crucial in ensuring that smart contract arbitration can effectively address the unique challenges posed by blockchain technology and gain widespread acceptance as a reliable dispute resolution mechanism.

This post comes to us from Bahadir Köksal at the Institute of Law and Economics, University of Hamburg. It is based on his recent paper, “A Trade-Off in Smart Contract Arbitration: Sacrificing Arbitrators’ Anonymity for Transparency?” available here.