law

Human communities of every era have had to solve the problem of social order. For this, they developed governance and legal systems. They did it with the technologies and systems of belief of their time.

Athenians of the Classical period believed that all citizens had the right to participate in the lawmaking process and as jurors in popular trials. They used a sophisticated piece of civic technology called kleroterion for random selection of jurors and avoiding manipulation of the system. Modern justice systems were created in the 17th and 18th centuries, at a time of consolidation of nation states.

These systems worked fine for many years, providing rule of law for industrial development and economic prosperity. But in early 21st century, they started to reach their complexity limits. The advent of the Internet and the creation of a global, digital, real time economy started to show the cracks in legal systems built in an era of paper contracts, horse transportation and national jurisdictions.

In today’s global economy, a large and increasing number of transactions are conducted online across jurisdictional boundaries. Clients from different countries hire contractors from all over the world for building software and other services. Investors from different countries participate in crowdfunding campaigns from everywhere. In their book Digital Justice (2017), experts Ethan Katsh and Orna Rabinovich-Einy estimate that disputes arise in 3 to 5% of online transactions, totaling over seven hundred million in 2015 alone.

Existing dispute resolution technologies are too slow, too expensive and too unreliable for an online real-time world. Even alternative methods like online dispute resolution (ODR) have failed to address this problem. ODR promised to bring resolution to this new type of disputes, but in the end it just streamlined existing court procedures, without really bringing an innovation.

Cars, not faster horses

Henry Ford famously said (although some people doubt the veracity of this): “If I had asked people what they wanted, they would have said faster horses.” A better justice system may not come from further streamlining existing processes but from fundamentally rethinking them from a first principles perspective.

In the last decade, we have witnessed how collective intelligence could be leveraged to produce an encyclopedia like Wikipedia, a transport system like Uber, a restaurant rating system like Yelp!, and a hotel system like Airbnb.

These companies innovated by crowdsourcing value creation. Instead of having an in-house team of restaurant critics as the Michelin Guide, Yelp! crowdsourced ratings in users.

Satoshi Nakamoto’s invention of Bitcoin (and the underlying blockchain technology) may be seen as the next step in the rise of the collaborative economy. The Bitcoin Network proved that, given the right incentives, anonymous users could cooperate in creating and updating a distributed ledger which could act as a monetary system. A nationless system, inherently global, and native to the Internet Age.

Cryptoeconomics is a new field of study that leverages cryptography, computer science and game theory to build secure distributed systems. It is the science that underlies the incentive system of open distributed ledgers. But its potential goes well beyond cryptocurrencies.

Kleros is a dispute resolution system which relies on cryptoeconomics. It uses a system of incentives based on “focal points”, a concept developed by game theorist Thomas Schelling, winner of the Nobel Prize in Economics 2005. Using a clever mechanism design, it seeks to produce a set of incentives for randomly selected users to adjudicate different types of disputes in a fast, affordable and secure way. Users who adjudicate disputes honestly will make money. Users who try to abuse the system will lose money.

Kleros does not seek to compete with governments or traditional arbitration systems, but provide a new method that will leverage the wisdom of the crowd to resolve a large number of disputes of the global digital economy for which existing methods fall short: e-commerce, crowdfunding and many types of small claims are among the early adopters.

Political institutions are the result of trying to solve the practical problems of social coordination. Human communities of all times developed the institutions better suited to their problems, their technologies and beliefs. Athenians of the Classical period built their court system on their belief of citizen participation and the technology of kleroterion for random selection. The founding fathers of the United States built American courts based on the best knowledge of the political theory of their time.

In a time of globalization and digitalization, cryptoeconomics may become the pillar for building the institutions of the Internet Age.

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This article was written by Federico Ast, co-founder and CEO of Kleros. Kleros is a current member of the Thomson Reuters Incubator, part of Thomson Reuters Labs.