Predicting the Emergence of Common Law Through Blockchain

By Dr. Federico Ast

Ast is currently the Co-Founder and CEO of Kleros, a blockchain dispute resolution layer for virtually everything.

A majority of the world’s economic activity now operates completely online. The Internet has surpassed regular jurisdictional avenues of governance and commerce channels. What’s more, the markets that were once regulated by bureaucratic, old-world systems are becoming increasingly more complex.

All of this digital activity is driving the need for new common law solutions. The infrastructure that exists today is not prepared to efficiently handle the billions of transactions and international trades that the new age of commerce has ushered in. Thankfully, there is a way for the world to create an efficient mode of control – and that’s with blockchain technology.

To understand how blockchain technology can disrupt and establish a common law on the Internet, look no further than TCP/IP and how this once nascent and obscure technology in the 1970s became the foundation of the Internet and e-commerce today.

Precursor of the digital revolution

First introduced in 1972, TCP/IP was used as the base technology behind e-mail by researchers in the U.S Department of Defense on ARPAnet. As many might know, this was also the precursor to what we know as the Internet today. TCP/IP eliminated the need for a private infrastructure line to communicate and the need for costly private lines, which were often controlled with 19th-century industrial management mindsets.

What’s more, the technology created an open and shared network without the need for a central authority. In a sense, this became the law of the land for global World Wide Web communication.

All of this also paved the way for commercialized browsers and programming languages. TCP/IP opened the doors for information technology companies to create and dominate within an entirely new digital economy. For example, news organizations began to see that they could move their businesses online, and companies like Amazon created the very concept of e-commerce.

Fast forward to nearly 30 years later, and the initial TCP/IP technology is now an invisible hand in the global digital economy. The majority of companies have established a foothold online in some way and would not exist if it weren’t for the technological advances of the 1970s. But if TCP/IP ripped up the road, then blockchain is now going to pave the way.

The new architecture of law

Every organization keeps an ongoing record of their transactions. However, these records are often segmented and kept private. Reconciling these transactions is also time-consuming and at the root of many organizations’ problems with efficiency. What happens behind closed doors can also be tampered with. Closed databases are privy to manipulation and do not foster an environment of transparency.

Another example is a stock transaction, which is executed almost instantaneously on an automated network. The means of transference for the stock from one individual to the next can take nearly a week to process. Similarly, bank transfers and other methods of payment are prone to this type of long wait time.

As Marc Andreessen stated in a seminal article in the New York Times in 2014:

“Bitcoin gives us, for the first time, a way for one Internet user to transfer a unique piece of digital property to another Internet user, such that the transfer is guaranteed to be safe and secure, everyone knows that the transfer has taken place, and nobody can challenge the legitimacy of the transfer”.

With a blockchain system, the decentralized ledger replicates the transaction into a number of databases, akin to the packet system used on TCP/IP networks. Once a transaction occurs, it is broken up into other copies and then all updated at once. In this case, there is no need for intermediaries to verify the transference of an asset. If an equities exchange occurred on a blockchain system, not only would the transaction take place instantly but it would also be settled within just a few seconds.

E-mail, which was the first use-case for TCP/IP, not only facilitated direct messaging but also enabled a rush of innovation in the communication space and beyond. Blockchain, another peer-to-peer network, was originally created as a means to perpetuate the decentralized virtual currency Bitcoin.

However, its use cases have since become limitless. While TCP/IP jumpstarted an economic juggernaut, it is blockchain that could be the inevitable next step towards regulation and reduction of costs online, acting as the ultimate recording source for transactions conducted everywhere and at any time.

When applied to law, everyone will have the potential to see there was a contract between Alice and Bob and that the parties complied (or not). Nobody will be able to challenge what is written on the stone of blockchain. Soon gone will be the days when justice is only served to those who can afford the best lawyers.

New blockchain-supported means of control could very well replace all outdated systems, and if mainstream adoption occurs, then there will certainly be another seismic shift in the way the world conducts business.

An answer to today’s transactional problems

In an increasingly globalized and digitalized world, the number of transactions conducted online between people all over the world is rapidly increasing. Unfortunately, with that, there comes additional problems and inevitable disputes. An estimated 3 to 5% of online transactions end with a dispute arising – in 2015 alone that amounted to 700 million disputes.

Here’s a conceptual example use case.

Alice is an entrepreneur based in France. She contracts Bob, a programmer from Guatemala, on a freelancing platform to build a new website for her company. After they agree on a price, terms, and conditions, and Bob gets to work. A couple of weeks later, he delivers the product. But Alice is not satisfied. She claims that the quality of Bob’s work is considerably lower than expected. Bob replies that he just did what was agreed. Alice is frustrated. She cannot hire a lawyer for a claim of only a couple hundred dollars with someone who is halfway around the world.

Now, imagine that, at the moment of their agreement, Alice and Bob had picked a standard off the shelf smart contract for website design freelancing. The contract had a clause stating that, should a dispute arise, it would be arbitrated on an arbitration network. After Bob stops answering her email, Alice taps a button that says “Send to arbitration” and fills a simple form explaining her claim.

Chief is a software developer who lives thousands of miles away in Nairobi, Kenya. While on the bus commuting to work, he is checking the internet to find some arbitration work. He makes a couple of thousand dollars a year on the side of his primary job by serving as a juror in software development disputes between freelancers and their clients. He usually works in the Website Quality sub-court, which requires skills in HTML, javascript, and web design. Chief activates tokens that are used select jurors for disputes. The more tokens he activates, the more likely it is that he will be drawn as a juror.

About an hour later, an email hits Chief’s inbox:

“You have been selected as a juror for a website quality dispute. You can access the evidence here. You have three days to analyze the evidence and submit your decision.”

Similar emails are received by Benito, a programmer from Cusco and Alexandru, from Romania, who had also activated their tokens for the dispute. They were randomly selected from a pool of almost 3,000 candidates. They will never know each other, but they will collaborate in settling the dispute between Alice and Bob. On the bus back home, Chief analyzes the evidence and votes which is right.

Two days later, after all of the jurors have voted, Alice receives an email: the jury has decided that she has won the dispute and will be awarded a settlement. Meanwhile, Bob gets an email saying he lost and that he has to pay. Jurors are rewarded for their work, and the case is closed.

In sum, the blockchain has the potential to set a new standard for trading, eliminating waste and middleman spending, and eventually, setting in motion a common system for global transactions once and for all.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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