Smart Contract Arbitration: Anonymity or Transparency

In the rapidly evolving world of blockchain technology, smart contracts have emerged as a revolutionary tool for executing transactions. These self-executing contracts, with terms encoded directly into code, are designed to automate and enforce agreements without the need for intermediaries. Despite their ultimate goal of reducing disputes, the number of conflicts arises parallel to the increasing number of smart contracts. That necessitates a specialized form of dispute resolution tailored to the unique nature of blockchain technology. My recent paper explores the trade-off between transparency and anonymity in smart contract arbitration (SCA), with a particular focus on how this balance can impact the effectiveness of dispute resolution in blockchain by offering a new model.

SCA strives to resolve disputes efficiently and transparently while adhering to the decentralized ethos of blockchain. SCA platforms like Kleros and Jur have emerged within this context, offering innovative solutions for settling disputes arising from smart contracts and off-chain transactions. These platforms leverage blockchain’s inherent characteristics, such as anonymity, immutability and decentralization. However, a critical issue in SCA is balancing anonymity to achieve transparency and just proceeding. Traditional arbitration emphasizes transparency, with arbitrators’ identities and qualifications publicly known to ensure impartiality and trust throughout proceedings. On the contrary, blockchain’s decentralized nature values and promotes anonymity, which veils arbitrators’ identities and qualifications.

Proponents of anonymity argue that it preserves the decentralized and democratic nature of blockchain. SCA keeps arbitrators’ identities concealed and protects them from external pressures and manipulations. Anonymity can also prevent bias, ensuring decisions are based solely on the facts presented. On the other hand, transparency is crucial for building trust in the arbitration process. Knowing arbitrators' identities and qualifications helps parties feel confident and comfortable that competent and impartial experts are resolving their disputes. Transparency can deter unethical behavior while promoting accountability and ensuring a fair arbitration process.

In traditional arbitration, the selection of arbitrators is a critical process involving careful consideration of their expertise and impartiality. The identities and qualifications of arbitrators are disclosed to the parties involved, fostering trust, reputation, and confidence in the arbitration platform. Transparency is seen as essential for maintaining the integrity of the arbitration process. In contrast, SCA platforms often emphasize anonymity to align with the decentralized nature of blockchain. For instance, Kleros employs a jury-like system where arbitrators are randomly selected from a pool of anonymous individuals. While this approach aligns with blockchain principles and necessities, it raises concerns about the potential for unqualified or biased arbitrators to make decisions.

To address these concerns, a new model for SCA could be designed that balances transparency and anonymity. One potential solution is to reveal the qualifications and experience of arbitrators without disclosing their identities. This approach could provide the necessary transparency to build trust while preserving the anonymity valued in blockchain communities. Such a model would ensure that arbitrators are competent and experienced. At the same time, it would protect arbitrators from external malicious attempts while maintaining the decentralized nature of the SCA process by keeping their identities anonymous.

The rise of smart contracts has brought significant advancements in automating and enforcing agreements on the blockchain. However, the challenge of resolving disputes in a way that balances transparency and anonymity remains a critical issue. As the use of smart contracts continues to grow, developing effective arbitration mechanisms that incorporate the best aspects of both traditional and decentralized systems will be essential. By finding a middle ground that reveals arbitrators’ qualifications while maintaining anonymity, SCA can offer more transparent, efficient, and trustworthy dispute resolution services. This balance will be crucial in ensuring that smart contract arbitration can effectively address the unique challenges posed by blockchain technology and gain widespread acceptance as a reliable dispute resolution mechanism.

The future success of SCA depends on striking a delicate balance. As the blockchain ecosystem continues to evolve, the legal frameworks surrounding it must adapt to ensure fair and effective dispute resolution. By harmoniously embracing transparency and anonymity, a robust and thorough arbitration system that upholds the principles of blockchain while ensuring justice can be created.

The author’s paper can be found here.

Bahadır Köksal, LL.M. is a Doctoral Candidate at the Institute of Law and Economics, University of Hamburg.