Kleros: Using Game Theory And Economic Incentives To Resolve Disputes In Smart Contracts - Ancient Greek Style
Peer to peer justice and leather skateboards: both brilliant inventions by the Ancient Athenians.
First things first: this piece does not constitute legal or investment advice.
In this research post, Curiositas present Kleros, a blockchain venture that uses game theory and economic incentives to resolve disputes in "smart contracts" . We are grateful to Federico Ast and Clément Lesaege (the masterminds behind Kleros) for their brilliant contribution.
By way of background: Nick Szabo (as early as 1996!) defined "smart contracts" as contracts that "are far more functional than their inanimate paper-based ancestors. No use of artificial intelligence is implied. A smart contract is a set of promises, specified in digital form, including protocols within which the parties perform on these promises."
In other words, these are coded, data-driven and self-executing contracts built on blockchain technology; take notice, they are no longer science fiction but already used in simpler "parametric" contracts where the satisfaction of a condition triggers an outcome. For example, an insurance payment in case of a flight delay as this has been communicated to the contract by the airport terminal acting as an "oracle", that is a verified third party.
By Federico Ast and Clément Lesaege
“Whoever controls the courts, controls the state”. Aristotle.
The world is experiencing an accelerated pace of globalization and digitalization. A growing number of transactions are conducted online between people from all over the world. It is estimated that disputes arise in 3 to 5% of online transactions, totaling over seven hundred million in 2015 alone (Katsh and Rabinovich-Einy 2017: p. 67).
As a larger part of commerce and social interactions move online, so do conflicts. Buyers in eBay claim that sellers failed to send the goods as specified in the agreement, guests in Airbnb claim that the rented house was not “as shown in the pictures” and backers in crowdfunding claim a refund as teams fail to deliver the promised results.
Existing dispute resolution technologies are too slow, too expensive and too unreliable for an online real-time world. This article presents Kleros, which leverages crowdsourcing and blockchain technology to build a fast, transparent and decentralized dispute resolution protocol.
What the Greek Knew About Justice
Ancient Athenians developed a remarkable judiciary. Trials were conducted by a large body of ordinary citizens. On trial days, those wishing to serve as jurors went to the courthouse where a sophisticated jury selection procedure took place.
Citizens inserted their pinakion (a bronze or wood ID token) into a slot of an allotment machine called kleroterion. After all citizens had inserted their pinakion, an official threw white and black icosahedron (20 faces) dice in a tube affixed vertically on a side of the kleroterion. The tube stopped at the bottom and held the dice in the random order in which they entered. Dice were then released one at a time. Candidates having a black dice on their row were dismissed for the day. Candidates with a white dice were drawn for paid jury duty (Boegehold 1995). Hence, the kleroterion was an ancient randomization device that guaranteed transparency in jury selection.
About 25 centuries ago, Athenians knew that courts could work as a peer-to-peer system without turning into mob justice, provided three conditions were met: jury duty was voluntary, jury duty was paid, jury selection was done by sortition (kleros). (1)
In the Internet age, as national legal infrastructures become unable to cope with an increasing complexity, ideas from Ancient Greek courts may help build a new, global and real time adjudication technology. (2)
This plaque made in bronce or wood was the citizen ID in Ancient Athens.
The allotment machine used in Ancient Athens to randomly select jurors for trials.
Made of 20 equilateral triangles, it was used for jury selection.
A Simple Software Dispute
Giselle is an entrepreneur based in France. She contracts Miguel, 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, Miguel gets to work. A couple of weeks later, he delivers the product. But Giselle is not satisfied. She claims that the quality of Miguel’s work is considerably lower than expected. Miguel replies that he just did what was agreed. Giselle is frustrated. She cannot hire a lawyer for a claim of just a couple hundred dollars with someone who is halfway around the world.
Imagine that, at the moment of their agreement, Giselle and Miguel had agreed that, should a dispute arise, it would be arbitrated in the Kleros network. After Miguel stops answering her email, Giselle taps a button that says SEND TO ARBITRATION and fills a simple form explaining her claim.
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 email are received by Benito, a programmer from Cusco and Alexandru, from Romania, who had also activated their pinakion 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 Giselle and Miguel. On the bus back home, Chief analyzes the evidence and votes who is right.
Two days later, after all jurors have voted, Giselle receives an email:
Miguel receives an email saying he lost and that he has to pay. If he does not comply, he will lose reputation and this hurt his ability to find customers in the future. Jurors are rewarded for their work and the case is closed.
The Kleros Adjudication Process
The Kleros decision procedure is made of the following elements: 1) Contract, 2) Securing Evidence, 3) Jury Selection, 4) Analysis, 5) Voting, 6) Appeal, 7) Token Redistribution.
1) The Contract
Kleros is a voluntary opt-in system. In order to use it, the contract between the parties needs to have a clause stating that, should a dispute arise, it will be adjudicated in Kleros. The contract states in which subcourt the arbitration will occur. Some subcourts specialize in e-commerce disputes. Others in finance. Others in insurance.
Kleros subcourt system
The Kleros subcourt system ressembles a tree with a root and branches. The root is a General Court, from where a number of branches (subcourts) are born. Each subcourt adjudicates a specific kind of dispute.
Different subcourts will have different arbitration fees, depending on the complexity of the disputes and the scarcity of juror skills.
Proceedings start after a deposit is made to cover jurors fee. From the point of view of Kleros, it is irrelevant which party makes the deposit. It could be split equally between both parties, paid only by one party or by an insurance mechanism. What matters is that enough money is available to compensate jurors.
Model 1: Deposit and refund
The total cost of the dispute is $100. The contract stipulates that both parties will make a deposit when the case goes to arbitration and that the winner will get a refund. Jurors vote Giselle as winner. Money deposited by the loser is used to pay arbitration fees. Giselle is reimbursed.
Model 2: Both Parties Pay
The contract stipulates that both parties will share the cost of arbitration and that no party will get a refund, regardless of who wins.
2) Securing Evidence
Proceedings begin when at least one of the parties believes there was a breach of contract. When the party decides to send the case to arbitration, the contract in plain English (or the natural language chosen) and all relevant pieces of evidence are sent to Kleros secured by public key cryptography.
Relevant evidence will depend on the type of dispute at hand. In the Giselle vs. Miguel website suit, it may consist of the natural language agreement and the digital files delivered as a product. In an online gaming dispute where one party claims that the other has cheated, evidence could include a recording of the game. In a car crash insurance dispute, it could include the insurance contract and photos of the crashed car.
3) Jury Selection
Jury selection relies on two basic elements: candidate self-selection and sortition. In order to avoid retaliation and intimidation, jurors are not required to provide proof of identity to be drawn. (3)
The key challenge is: how to create the right incentives for anonymous jurors to adjudicate claims in an honest way?
As the Greek understood centuries ago, this problem can be solved by a combination of a token and a random selection mechanism. Anyone can self-select as candidate to be a juror in specific subcourt by using a reputation token called pinakion (PNK) which represents a right to be drawn as juror for a dispute. The higher the amount of tokens a user activates, the higher the probability he will be drawn as juror. Users have an economic incentive for serving as jurors: collecting arbitration fees.
Jury selection is done randomly among all the users that activated their pinakion in a subcourt. Activated pinakion will be frozen during the court session and will be unfrozen after the court has reached a verdict.
Clément, an insurance expert, can be drawn as juror in the General Court and in the Insurance Subcourt. Chief can be drawn as juror in the General Court, in the E-Commerce Subcourt and in the Freelancing Subcourt.
Users that are drawn as jurors will have access to the evidence for analysis and voting a decision. Subcourts will have different parameters regarding procedure and the time jurors will have to reach a decision, the complexity of the voting options and the possibility of communicating with the parties.
A simple dispute could involve only two parties and only two options. In the Giselle vs. Miguel dispute, the decision could be: “Who is right in the dispute? Giselle or Miguel?”. The winner would receive the full payment. A slightly more complex option would be: “From 0 to 100, how guilty is Miguel?”. This would allow to split the payment in different parts.
At is early stage of the project, Kleros will work mostly for simple disputes involving two parties and simple voting options. Over time, as technology improves, more complex disputes will be adjudicated.
After assessing the evidence, jurors vote one of the options. They are also required to provide a justification for their decision. The winning option is the median one, which gives a consensual result and is robust to strategic voting.
If a party is not satisfied with a decision, it can appeal and have the case ruled again. Decisions can be appealed several times. In each round, a new jury will be formed with twice as many jurors than the previous instance plus one. The appealing party will be required to make a new deposit in order to pay for arbitration fees. Losers can choose to keep on appealing and keep paying arbitration fees at a steeply rising cost in each round.
7) Token Redistribution
After a decision has been made, comes an instance of token redistribution. Tokens are unfrozen and redistributed among jurors. Jurors will gain or lose pinakion depending on whether their vote was coherent with the rest.
Redistribution if based on the concept of Schelling point. Game theorist Thomas Schelling called focal point a solution that people tend to use to coordinate their behavior in the absence of communication. Schelling points also arise when communication is possible but parties do not trust each other. Based on the concept of Schelling Points, Vitalik Buterin has proposed the creation of the Schelling Coin, a token that aligns telling the truth with economic incentives.
Assuming that jurors were properly selected, that they were correctly incentivized and that they had access to the same evidence, we would expect them to reach a similar verdict. Kleros assumes that jurors who voted incoherently with the rest were not properly qualified (they self-selected into a wrong subcourt), that they did not conduct a proper analysis (they voted quickly just to collect the arbitration fee) or that their goal was not discovering the truth (they were bribed).
Economic incentives for jurors come from two different sources.: 1) Arbitration fees are payments from parties to jurors as a compensation for the time and expertise invested in analyzing evidence and voting. All jurors adjudicating a claim will earn the same amount; 2) Token redistributionfrom jurors who voted incoherently to jurors who voted coherently.
Imagine that the dispute between Giselle and Miguel was solved with 7 jurors. Jurors Ignasi and Julio, who voted incoherently with the majority, have their tokens redistributed proportionally to the jurors who voted coherently. The net effect (arbitration fees minus tokens) will depend on the difference between the value of the earned arbitration fee and the value of lost tokens.
Miguel, the loser in the dispute against Giselle loses his 100$ deposit, which is used to pay arbitration fees to all jurors. Ignasi and Julio, the two jurors that voted incoherently with the rest, lose their pinakion, which are transferred to the jurors who voted coherently. Daniel, Ezequiel, Frédéric, Gabriela and Hadass, the jurors who voted coherently, experience an economic gain in fees and tokens. Ignasi and Julio, the jurors who voted incoherently, earn arbitration fees but lose pinakion.
As usual, some users will try to abuse the system. But Kleros is hard to game. Manny learnt this the hard way. He had always thought of himself as the smartest guy in the room. When he found out about Kleros, he saw it as an opportunity to make some easy money. He bought some pinakion and started to activate them in subcourts with high arbitration fees. Of course that, when he was drawn as a juror, he would not even read the evidence. Manny just voted randomly, collected the arbitration fee and moved on to another dispute.
A couple of weeks into his “brilliant scheme”, he realized that he was suffering a net loss. Manny earned some money in arbitration fees. But, since his vote was often incoherent with the rest, he systematically lost pinakion. After a couple of weeks, he realized the net effect was negative and he abandoned his intention of trying to game the system.
The pinakion is a critical part of the mechanism because it prevents sybil attacks and provides incentives for Kleros to produce true verdicts. The expectation of winning or losing tokens gives jurors the incentive to self-select into the subcourts where they truly have expertise, to analyze the evidence carefully and to vote honestly. A juror who chooses the wrong cases, who does not analyze the evidence carefully or who does not vote honestly is more likely to vote incoherently with others and, as a result, will suffer an economic loss.
Kleros: a Multi-Purpose Adjudication Protocol
In this paper, we have focused on a software development dispute as an example of the Kleros adjucation proceeding. However, Kleros is a multi-purpose protocol which may be used to adjudicate a wide variety of claims. Some of them may be workable in the near future, while others will probably work in the longer term.
Small Claim Arbitration
In the early 1960s, 11.5% of cases in American federal courts went to trial. In 2002, the number had fallen to just 1.8%. The decline is not the result of fewer disputes, but the consequence of the growing use of alternative processes to deal with problems (Katsh and Rabinovich-Einy 2017, p. 14). In order to cut costs, governments have promoted the use of alternative dispute resolution (ADR) in areas such as commercial disputes, consumer protection and employment. Early applications of Kleros will probably include small claim arbitration such as credit card fraud, house rental and car repairs done wrong. Cases would be decided online, and would be binding and enforceable in the same way that traditional court decisions are.
The global workplace is switching from traditional employer-employee relationships to arrangements involving distant, cross-border and flexible work by freelancers (Friedman 2005). Disputes in such agreements require fast and simple responses. The Giselle vs. Miguel case explained earlier is a typical freelancer dispute. Another conflict may involve a freelance writer who gets his project rejected by a client, leaving him without pay, only to find out that the client ended up using the product anyway. Uber offers drivers very little assistance to address problems such as disputed rankings by customers. A large number of horror stories in apartment rental on Airbnb platform can be seen in the website AirbnbHell. The Kleros arbitration system could be an important solution for disputes arising in these global platforms.
Crowdfunding, a rising source of funding for entrepreneurs, raises a number of concerns regarding scams and false promises on a team ability to deliver on the results promised to backers. A software startup may create a crowdfunding agreement stating that funds will be transferred after certain development milestones are reached. Next payment will be made after V.2.0 is launched. However, some backers may claim: “This is just V.1.0 with some trivial extra features and some make-up”. Kleros proceeding could analyze the evidence and make the decision (11). Future crowdfunding contracts could have a clause having Kleros as default arbitration procedure.
As an increasing number of social interactions start to take place online, harassment, invasion of privacy, false information and bad reviews become important problems. Such interactions may result in reputational and monetary loss as well as psychological damage.
Imagine Soushiant and Uri are having a discussion on a decentralized social media platform. As they heat up, Uri flags Soushiant for a comment that violates the terms and conditions of the platform. Soushiant replies: “My comment did not violate the terms and conditions. It’s not my fault if Uri is too sensitive”. The evidence is analyzed by a jury in Kleros, which decides that Soushiant’s comment indeed violated the terms and conditions and takes 20 reputation points away from him.
Decentralized music platforms such as Ujo Music will enable musicians to upload music and receive payments using smart contracts. This will generate a number of claims regarding copyright infringement.
Imagine the rock band The Misfits uploads its new song on to Ujo Music. Another band, The Holograms, claims that the song infringes their copyright. In a centralized platform such as YouTube, this claim is solved with the proprietary algorithm Content ID, which blocks any content identified as copyright infringing by matching between materials submitted by a user and copyrighted files. Concern has been raised about the lack of transparency of Content ID and the lack of accountability mechanisms (13).
In decentralized music platforms, the dispute is sent to Kleros and jurors produce a decision: “The Holograms are the rightful owners of the song. All revenue generated by the song is automatically redirected to The Holograms account”.
League of Legends is a very popular online battle video game with over 100 million players every month. The 2016 World Championship had a total prize pool of over 6 million dollars. To make sure that the game happens in a safe environment, the creators introduced a system for using the community for disciplining bad players. The tribunal is composed of voluntary players, who are empowered to vote on punishment for abuse. Penalties go from a mere warning to a ban. A similar system was implemented by Valve. Kleros could work as a similar, yet decentralized, system for solving disputes in online gaming.
A Justice System for the Decentralized Internet
A large part of our lives happen online. Our social and economic connections are increasingly intermediated by global Internet platforms connecting content producers, consumers and advertisers (Facebook and YouTube), buyers and sellers (Amazon and eBay), drivers and riders (Uber) and travelers and hosts (Airbnb).
If the blockchain promise holds true, the coming years will bring the disintermediation of centralized global platforms and their replacement by distributed models. People will transact goods in decentralized versions of eBay (e.g., Open Bazaar), will contract rides in a decentralized Uber (e.g., Arcade City), will stream music in a decentralized Spotify (e.g., Ujo Music), will contract labor in a decentralized Upwork (e.g., Ethlance) and will connect in decentralized Reddit platforms (e.g., Steemit).
Kleros will become the unified, decentralized, network of jurors for adjudicating claims in different industries. It will become a fundamental part of the infrastructure for the decentralized Internet.
Kleros will become the standard adjudication network for the decentralized Internet. Different subcourts will handle disputes coming from these different DAOs.
Kleros will enable the widespread use of smart contracts in a growing number of economic activities. Smart contracts self-execute when the predefined conditions are met. However, automatic enforcement by code is at odds with a key principle of the philosophy of right: all contracts are incomplete. At the moment it is signed, no contract could ever foresee every possible situation that could arise until the time it is to be enforced. Sometimes, strict enforcement may result in an unfair situation. And this cannot be solved exclusively by computer code.
The Greek called epikeia a moral principle that exempted a citizen of strict compliance with a positive law or contract in order to be faithful to its spirit. Modern legal systems also recognize that parties may be relieved of the obligation of compliance if such obligation has become unreasonable after a change in context. Massive adoption of smart contracts require an “escape hatch” mechanism for when strict compliance would produce undesirable or unfair consequences. But how to create a procedure for an escape hatch without using a centralized decision maker that introduces a new single point of failure into the system?
Kleros can become this method for “error correction”, a decentralized escape hatch to revoke smart contracts when compliance has become unreasonable. It can comply with this, without reintroducing arbitrariness and corruption into the system.
In the past years, e-commerce has been growing at double digits and is expected to total a 2 trillion dollar market in 2020. Key components of the sharing economy (travel, car sharing, finance, staffing and streaming) are expected to reach $335 billion in spending by 2025. Around 2,000 platforms of equity crowdfunding exist in 2016 and the World Bank predicts that crowdfunding investments will be a $96 billion a year market in developing countries alone by 2025.
The legal systems of the nation state era were successful in creating an institutional framework for economic growth and social prosperity. In the wake of the digital revolution, however, they are reaching their complexity limits. While the new economy requires a deep institutional rethinking, few people are conducting research on legal infrastructure from a system level perspective. Lawyers research what the law is. Economists study what the law should be in order to promote trade or improve incentives for workplace safety. But hardly anyone studies how law works as a system, what determines the system’s costs and efficacy (Hadfield 2015: p. 215).
Inability of legal systems to solve the disputes of the Internet Age led platforms such as eBay or Alibaba to develop their own arbitration mechanisms. However, no horizontal system emerged to be used across the board and that could gain from increased specialization over time. Kleros seeks to become this system.
While Kleros relies on cutting edge technologies in blockchain, cryptography, game theory and collective intelligence, its fundamental logic is still based on a principle the Greek knew 25 centuries ago: justice can be served on a peer-to-peer basis. Bitcoin is helping advance the cause of financial inclusion. Justice inclusion is an equally important goal. Just as Bitcoin is bringing banking for the unbanked, the Kleros promise is to bring justice for the unjusticed.
Want to learn about the cryptography, math, economics and computer science behind Kleros? Check out a technical version of the paper here.
Want to know more about the historical, philosophical and business side? For a long conceptual version go here.
Want to know more about the project and joining our team? Visit our website.
Federico Ast graduated in economics and philosophy from the University of Buenos Aires. He holds a PhD in management from IAE Business School. He was a participant at Singularity University Global Solutions Program in 2016. He hosts a Coursera program on blockchain to be launched in January 2018. He is founder of Crowdjury and Kleros, projects that leverage the use of blockchain and collective intelligence to democratize access to justice.
Clément Lesaege graduated in computer science at the Université de Technologie de Compiègne. He holds a masters degree in computer science from the Georgia Institute of Technology. He is an expert in decision systems and machine learning.
(1) In the 420s BC, jurors were paid three obols for a day’s work. While it was not a grand sum, it was enough to make a difference in the way a man lived and more than enough to sustain mere existence.
(2) Notably, the United States judiciary kept some of the spirit of Athenian courts in using citizen juries. This participatory feature of the American political system was greatly admired by Tocqueville: “The jury, and more especially the civil jury, serves to communicate the spirit of the judges to the minds of all the citizens; and this spirit, with the habits which attend it, is the soundest preparation for free institutions (…) It invests each citizen with a kind of magistracy; it makes them all feel the duties which they are bound to discharge toward society; and the part which they take in the Government” (Tocqueville 1961: 336–37).
(3) Pseudonimity, a critical feature of the Kleros adjudication process, may be seen both as an advantage as well as a disadvantage. It is an advantage from the point of view of protecting jurors from possible retaliation or intimidation from the parties. It is a disadvantage when individual accountability of jurors is required or when jury must be drawn from a pre-defined pool of candidates.
(4) The name is a reference to the pinakion, the bronze plaque that each Athenian citizen used to be drawn in popular trials. In the Kleros network, the pinakion represents a right to work and therefore to earn arbitration fees. Pinakion will initially be given to people in a token distribution event. A lesser part of them will be given to project contributors.
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