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What is and how is Smart Contract Dispute Resolution?

What Is Smart Contract Dispute Resolution?

Smart contract dispute resolution is the term used to describe alternative dispute resolution (ADR) measures for transactions that use smart contracts. Smart contracts are self-executing programs contained in a blockchain, such as Ethereum. The program ensures the actions agreed on in the contract happen, which removes the trust generally required when exchanges occur.

This has created concern and a perceived need for ADR solutions that significantly decrease the time and expense needed to resolve issues between parties in separate countries.

Learn what smart contract dispute resolution is, why it is needed, and what some decentralized finance companies are doing to assist cryptocurrency users who have transaction disputes due to the smart contracts contained within a blockchain.

Key Takeaways

  • Smart contracts remove the need for trust in a transaction, but there is still the issue of resolving contract disputes.
  • Contract laws vary significantly by country, so resolving contract disputes across borders is the main issue.
  • Blockchain startups have created dispute resolution solutions using blockchain technology, smart contracts, and online applications.

Understanding Smart Contract Dispute Resolution 

Smart contracts are programs or scripts written into a blockchain. Many low-level agreed-upon transactions can be executed autonomously by these programs without issue.

Existing contract laws and dispute resolution measures—at least in the U.S. and most developed countries—adequately cover the underlying contracts that include the use of smart contracts within their borders.

Large businesses that expand globally typically develop expansion plans that include dispute resolution in the countries they have expanded to; typically, they already have policies and programs in place to deal with customer and client dissatisfaction. The concern then is how to resolve disputes between smaller businesses and consumers in different countries.

One of the common misconceptions regarding smart contracts is that they are contracts. Smart contracts are programs written into a blockchain that execute an agreement when specified conditions are met. They are not contracts but rather the means by which a contract is executed.

Applications built on blockchain, which facilitate contract dispute resolution of smart contract implemented transactions through arbitration or mediation, are referred to as decentralized justice platforms.

Thus, resolving a contract dispute falls under your country's contract laws. However, the global marketplace is more accessible than ever before. Technology has made it possible for cross-border transactions to occur, which raises the possibility of disputes across borders where laws might be quite different.

Smart Contract Dispute Resolution Goals

Smart contract dispute resolution seeks to resolve disputes involving blockchain activities across borders using blockchain technology and smart contracts. The technology is still evolving, but it shows promise in that the need to involve other parties in a dispute is removed. The technology also bypasses any obstacles that exist for resolving cross-border disputes.

Here's how the concept works—you purchase goods or services using a decentralized application (dApp). A smart contract executes the transaction when both parties agree the terms have been met. An ADR platform is tied to the trade that allows either party to dispute the transaction if one is not satisfied.

You'd find the dispute transaction button on the dApp, and a smart contract would execute dispute resolution actions. The blockchain network would select a group of mediators, arbiters, or judges based on their expertise. They would pass their votes for judgment, and a smart contract would execute whatever action the group voted for.

One startup, Kleros, has created a dApp built on the Ethereum platform. Their platform is an ADR application that randomly chooses vetted jurors. They are selected based on the cryptocurrency they have staked and their qualifications in the dispute field. In this case, staking is the act of offering cryptocurrency as collateral for the opportunity to be chosen as a juror.

Jurors are provided compensation for their services. The process determines how much they are paid, and the smart contract determines which party in the dispute pays the fees.

The judges have a specific number of days to review the dispute, and they cast their votes anonymously. If their vote agrees with the ruling determined by the majority, they receive a payment. If they vote in opposition to the rest of the group, they pay a portion of their staked cryptocurrency. According to Kleros, this encourages honest voting.

Kleros allows for a decision appeal process, but this might not be true for all emerging ADR platforms. Platforms will likely have different rules and fees—and these platforms will probably change and evolve as time passes.

How Are Disputes In Smart Contracts Resolved?

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Generally, smart contract disputes are governed by contract laws in the jurisdiction they fall under. Cross-border dispute resolution solutions for smart contract-enabled transactions are still being developed.

Can Smart Contracts Be Reversed?

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Smart contracts, as programs, are irreversible once executed unless they have been programmed otherwise.

Are Smart Contracts Legally Binding?

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A smart contract is an instrument that executes underlying contractual terms. Smart contracts themselves are not the legal agreement—the agreement between the two parties is the contract, and the smart contract program simply executes the agreed-upon actions.

The Bottom Line

Smart contracts are not actual contracts between two parties—they are programs that run on a blockchain and execute the agreed-upon actions between the parties. Once they are programmed into a blockchain, they are generally unchangeable unless there are permissions that allow developers to change them.

The contracts between people remain under the jurisdiction of the countries or areas the parties fall subject to, so disputes must be handled according to local, national, or international laws. Decentralized dispute resolution technology and techniques are still being created but are not necessarily legal globally.


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