Dispute decision protocols may help firms undertake blockchain

The blockchain industry will experience another boom towards the end of 2020. Bitcoin prices are hovering around all-time highs, decentralized finance or DeFi seem to be looking for new offers every week, and technical experts like PayPal are integrating crypto into their offers.

These developments are positive news as we continue to strive to build the infrastructure of the future. They also include areas of design and development where we need to do additional research.

Stephanie Hurder, a CoinDesk columnist, is a founding economist at Prysm Group, a business consultancy focused on implementing new technologies, and a research fellow at the World Economic Forum. She has a PhD in business administration from Harvard.

This week, together with partners from the World Economic Forum and Latham & Watkins LLP, we published the report "Bridging the Governance Gap: Dispute Resolution for Blockchain-Based Transactions".

As more and more projects have invested in research and development related to governance, the area of ​​dispute resolution, especially for transactions in the chain, has been addressed less frequently. The report focuses on enterprise applications and examines examples across industries. It describes the economic and legal importance of dispute resolution and provides a framework for types of dispute resolution systems.

  • Private in-network solution in which disputes are settled by the network operator or a committee of a network
  • Private in-network solution in which disputes are settled by the network operator or a committee of a network
  • Semi-Private Industry Fora, where disputes are resolved by industry participants who may be involved in resolving other disputes
  • Litigation where disputes are settled in court under the applicable legal system

What all these models of dispute resolution have in common is that people with different levels of expertise must be involved in resolving disputes. These persons can be members of the network itself, industry participants or participants in the relevant legal system.

The reason for this is an economic concept known as contractual incompleteness. There are circumstances in an agreement or contract that cannot be foreseen or taken into account in the original planning. When these events happen, attendees may not know what to do or they may want to renegotiate and determine a new course of action.

For blockchain projects, this means that the original protocol or project code will never be a full and comprehensive specification of what should happen under all circumstances. Unexpected events and upgrades need people to be addressed.

As the complexity increases, the effects of contractual incompleteness will only increase over time.

These kinds of unexpected unknowns are also the reason for the need for governance. As we saw in DeFi this year, projects that attempt entirely new endeavors often face hacks and unexpected events.

According to Prysm Group's analysis, by June 2020, more than 5% ($ 50 million) of the $ 1 billion involved in DeFi projects at the time were at risk from hacks and other unexpected platform exploits. Since then, as the total value of DeFi projects has increased nearly 15x, projects have continued to be compromised by technical and economic hacks ranging from re-entrant to oracle manipulation. In each of these cases, stakeholders had to work with each other and with others to diagnose the problem, propose upgrades, and reevaluate it based on unpredictable results in ways they did not expect.

See also: Stephanie Hurder – The Fourth Era of Blockchain Governance

Blockchain projects are technical innovations, but also economic ones. Studies like the World Economic Forum report can show us that systems ultimately perform better, at least for the time being, with predetermined, predetermined locations where human judgment is taken into account. The report highlights the importance of including dispute resolution as a core element of blockchain projects for businesses.

Will blockchain grow out of or evolve from the need for governance and dispute resolution? Most likely not. As the blockchain matures and the design improves, projects also become interdependent. Using the DeFi example, credit and trade products almost always rely on multiple layers of borrowed and borrowed existing tokens and protocols as security for their own products. These interdependencies make it difficult to anticipate all the potential events that may occur and to predict the impact of an unexpected shock on any single company in the industry.

As the complexity increases, the effects of contractual incompleteness will only increase over time. It will only be more difficult to anticipate all the ways in which an ecosystem of complex protocols and systems can interact and cause misfires. And for the foreseeable future at least, the only solution to mitigate this is through systems like governance and dispute resolution that use good old human judgment.

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