Economics Professors Hitoshi Matsushima from the University of Tokyo and Shunya Noda from the Vancouver School of Economics say their mechanism settle legal disputes on the blockchain without the need for an otherwise costly legal process.
“We designed a digital court which identifies and punishes parties who deviate from legal obligations such as commercial activities, but could potentially be any kind of agreement,” said Matsushima before further adding:
“On suspected violation of some agreement, those involved post their opinions to this digital court. The court algorithmically aggregates the parties’ opinions and judges who violated their agreement.
If the digital court judges that a party violated the agreement, the party is fined by withholding a deposit made during the initial agreement.”
The paper itself is highly technical, with the design using as little as possible of the blockchain.
“The advantage of a system like this is that most of the stages involved actually occur away from the blockchain, which is only invoked to maintain records of the parties’ involvement with the agreement in question,” they say.
How the design holistically works isn’t explained, with the paper more focusing on proving that the ‘court’ system can work.
“A digital court comprises n independent trials, indexed by i ∈ I. Each trial i regards agent i as a defendant and determines whether to convict agent i, and all agents (including the defendant herself) participate as jurors…
Sending a message closer to 0 means that the juror votes to acquit the defendant, and sending a message closer to 1 means that the juror votes to convict the defendant.”
From that the suggestion seems to be anyone who is using this court system can ‘vote’ on whether someone did or did not breach the contract on a scale of very sure they did to very sure they didn’t.
Instead of a yes or no, they can granulate their judgment, with the paper then going through quite a bit of maths to show the right decision is reached if only a few participants are more honest. They say:
“Although the mechanism design literature has typically assumed that agents are purely interested in material payoffs, experimental research has suggested that some people have intrinsic preferences for honest behaviors (Gneezy 2005; Abeler, Nosenzo, and Raymond 2019).
We assume that, with a small probability, there are honest agents who prefer to convey truthful information to the digital court. At the same time, we also assume that some agents might be adversarial and prefer to tell a lie.”
Established courts try to incentivize parties to reach an agreement between themselves as much as possible because naturally resources are limited.
Thus most cases are just settled, while a few go to arbitration, and even less end up in court usually due to new precedents or irreconcilable differences in accepted facts.
As such a system that facilitates adjudication outside courts can be very useful even on policy grounds, in addition to being much cheaper and much faster.
“This kind of system signals the dawn of a new economic paradigm that must be embraced and explored rather than feared and ignored,” Matsushima says, further addding:
“We have found a way to satisfy agreements without traditional legal enforcement or the long-term reciprocal relationships which might ordinarily keep the players honest. A digital court could be built on current blockchain platforms such as Ethereum, and it could happen right now.”
That means smart contracts can be smart and contracts afterall, with the blockchain here more used to coordinate the different parties who might not know each other as this works even if it is two strangers making a first transaction, they say.