Decentralized Autonomous Organizations: How to Resolve Disputes

Baozou Shiguan : However, the scheme is not perfect yet, because artificially selected legal persons are obviously unable to bear some legal responsibilities. And the practice of relying on a third party obviously also hides great risks. So it seems that the only way is to avoid disputes and rely entirely on trust between the contracting parties. Because built-in protocols such as Bitcoin can promote legal activities through interest associations. It is just that as trading activities change, new legal enforcement guarantees are needed, which provides impetus for the development of related technologies.

Translation: Height difference signal is full

CoinTelegraph continues a series of articles discussing how decentralized autonomous organizations (DAOs) could change traditional markets and law enforcement. This time we discuss possible methods of dispute resolution.

Earlier, we discussed the difficulties that prevent the application of traditional law enforcement environments in decentralized autonomous organizations (DAOs), and the dispute resolution mechanisms that must be established. Below you will find some ways that this situation may be improved, but to answer this question, you need to think outside the box of commercial transaction disputes and rules.

Possible but fundamentally flawed approach

One method of dispute resolution that a DAO could choose is to appoint a legal representative who will be the company’s only real-world link. The reason a DAO would establish a legal representative first is very simple: other DAOs and large corporations don’t trade with suspicious DAOs because they can’t be held accountable for their actions, so from a business perspective this makes sense, so we want to protect the identities of investors and establish a structure that promises to trade and be accountable for its actions.

The key element of this approach is that if the legal representative is the only physical person connected to the DAO, then that legal person must hold the DAO's funds. Why? Because he may be required to comply with a judgment. If a DAO is found guilty of breach of contract, and the DAO's only connection to the real world does not have the ability to enforce the court judgment, we are back to square one.

This approach, although simple at first glance, has some obvious obstacles.

First, although the solution for the legal representative holding the organization’s funds was relatively simple and straightforward on the first day of the dispute, we also had to ensure that the decentralized organization (DAO) did not revoke the legal representative’s authority to hold funds, which would be a big problem.

Second, the legal representative approach may be effective for commercial and civil disputes, but if a decentralized autonomous organization is accused of a crime, you can imagine that the legal representative of the organization cannot be held responsible for the crime unless he personally participated in the criminal activity.

Other possible solutions would be to establish a DAO address that would act as a multi-factor mechanism with a trusted third-party guardian organization that would follow up with payments in the event of a legal dispute. This mechanism is less than satisfactory because the funding of the DAO would depend on the third-party arbitrator behaving properly, who could take bribes or run away with the funds.

Prevention rather than correction

So far, the logic is clear. If we don’t trust the DAO to voluntarily enforce the judgment, then we can’t trust the third party holding the funds, so the only possible solution is to avoid disputes.

This may surprise you, but it is the most reasonable answer available. Business relationships do not actually need litigation to exist. Litigation is a recent phenomenon because there is no realistic way to avoid disputes. Before smart contracts, parties needed to trust each other to perform their parts. Party A paid Party B and then expected Party B to do what they agreed to. If Party B did not fulfill its obligations, then the judiciary would step in to find a fair and reasonable solution.

Bitcoin and Ethereum Logic

The current situation has fundamentally changed. Technology has provided many solutions that can greatly reduce, and sometimes even eliminate, the risk of fraud.

If Party A wants to buy something from Party B, based on their assessment of goodwill, they can set up a procedural payment mechanism that will strongly incentivize compliance if both parties follow the agreement.

Remember that similar logic is the basis of Bitcoin, Ethereum, and other cryptocurrencies. Miners or stackers can choose to ignore the protocol rules and try to cheat the network, but they know that if they do so, they will lose money because their blocks will never be recognized by other nodes, and all the electricity consumed in the process is lost, which means that they will be much better off if they follow the rules.

Smart contracts help you get out of disputes

Suppose Party A and Party B agree to buy a machine for a fixed amount. Party A is smart and knows that if he pays in advance, there is a big risk that Party B may not deliver the machine, or the machine delivered may be of poor quality. To avoid the above risks, the two parties agree to a functional contract, which stipulates that Party A pays the full amount in advance, and Party B knows that Party A has enough funds to buy the machine, and if Party B delivers the machine as required, he can be sure to get the payment. First, 15% of the machine price is paid in advance, and another 15% is paid when the machine arrives at its destination, and the rest is paid two months later, if the machine works as expected at that time (the expected machine characteristics are agreed upon by both parties in advance and stipulated in the contract).

This method is suitable for payment activities related to the delivery of certain goods. With a little improvement, it can prevent any violation of the terms of the contract. Here is a simple example. 0.3% of the payment will be allocated to the address of a treaty arbitrator, who will play the role of "let us abide by the treaty". If any party violates the contract, he will lose the accumulated funds at this address, and the contract will transfer the funds to the other party to compensate for its losses in the process.

Similar procedures are possible and already used in traditional contracts and fiat banking systems, but the current approach is inefficient, expensive, and its impact on risk is not very obvious. Why? Because of the lack of blockchain technology, it is still based on trust, which means that the risk still exists, but this risk is transferred to a third party (banking industry, the third party will check whether the machine works as required, etc.).

While all of the above is true, we can conclude that this approach is not a silver bullet. There will be more advanced transactions that may require additional or different types of security. Finding innovative solutions to these problems will provide many opportunities for skilled programmers and entrepreneurs. In the meantime, the article “Zero-Knowledge Incidental Payments” covers this in more detail and is beyond the scope of this article.