Introduction

With the advancement of technology, negotiations in the digital world have increased, so much so that there are many people who are engaged into independent work and development (freelance) in web environments or applications for existing systems and receive their payment in a digital way. However, at the time of presenting a problem between parties, both for contractors and for these independent entrepreneurs, it becomes difficult to resolve disputes and generally one party ends up incapacitated and losing their investment or their work. Most of the time litigating these problems is expensive or simply the laws do not cover legislations over other localities.

As the previous one, there are many types of contests or disputes that can be avoided with the use of the Kleros ecosystem, a decentralized system to resolve disputes of any kind. In the following report, it will be explained in detail how it works and what applications the Kleros system can have.

Project Overview

Kleros is an ecosystem based on blockchain technology, built on Ethereum, to resolve any type of dispute between two entities in a fast, safe, automatic and economic way. Kleros takes advantage of crowdsourcing technologies to implement game theories and economic incentives to develop a fairer and less expensive justice system.

Kleros encourages his system of justice using a mechanism very similar to Schelling Coin (created by the founder of Ethereum Vitalik Buterin), in which a question is asked to a series of agents, who have no communication between them, however, they all assume that they must respond with the truth and their economic incentive will depend on the final result of the answers, that is, all those whose votes coincide with the majority response will get a commission and those who voted otherwise will be reduced from their funds a similar amount to the commission

Arbitrated Contracts

To put the Kleros arbitration system into operation, a smart contract must be created indicating the Kleros court or sub-court system (for instance, for a freelancing contract, the freelancing sub-court must be selected) and the number of juries must also be indicated. Likewise, each party involved in the dispute must pay an arbitration fee.

Kleros' courts and subcourts Source: White paper

The contract must also specify the options among which the juries must decide, together with the description of the actions to be executed for each of the options defined by the contract.

All the information transmitted between the juries and the parties in dispute, will be encrypted, to ensure the privacy of the information.

These contracts, the options and actions to be decided will be handled through the contract development software of the Kleros application.

As an example, let's consider the following case: Jim needs a web page and decides to hire a web designer from another country, named Anne. Jim, knows Kleros and therefore decides to create a freelancing contract with 3 juries. In which define 3 options:

• Return the money. Action: transfer the money to Jim's wallet

• Give an extra week to Anne. Action: block new disputes for a week and remove this option for future disputes.

• Pay Anne. Action: Transfer the money to Anne's wallet.

In case there is a problem between Jim and Anne, the majority decision of the vote among the judges will decide the action that the smart contract will take.

Drawing Jurors

The selection of juries is determined at random, however, it will also depend on the number of pinakion tokens (PNK, native token of Kleros) that a jury deposites. The more PNK tokens they deposit, the more likely they are to be selected. Users will be incentivized to serve as jurors, due to the arbitration fee obtained in each dispute.

The pinakions will have double function within the ecosystem of Kleros:

1. Protect the system from Sybil attack (The Sybil attack occurs when a distributed system is corrupted by one entity that controls different identities of the network so the system does not know the difference between genuine nodes and the fake ones). In this way a single entity would have control of the jury system.

2. Provide the jurors with the incentive to vote honestly, in this way they will receive the deposit portion of those who voted incoherently (this will be explained further in the incentive system section).

It is necessary to indicate that the selection of the juries is done through a process that generates random numbers based on a computational scheme of proof of work (which also works with proof of stake) and verification of interactions. However, this process takes time, which could represent a problem to resolve disputes of certain sub-courts in particular, but it is considered for the future to use a faster and less secure method for this type of cases.

Votes

The jurors will cast their vote after examining the evidence. The vote will be sent encrypted together with the Ethereum address of the jury for reasons of fee allocation or fee penalty; once the vote has been cast, this can not be changed. The vote remains in secret, this prevents it from influencing other juries. Finally, when all the juries have voted, the option with the highest number of votes is the winner and immediately the action of the smart contract is executed. The juries in favor of the winning option will be rewarded and the others will be penalized (see incentive system).

Arbitration fees

Each party to the contest must pay a fee for the arbitration. In order to compensate the juries who are in favor with the ruling by the court. In addition, the winning party will be reimbursed the amount invested at the end of the dispute. In case a party is the only one that pays the arbitration fee, the smart contract will be in favor of the party that paid, without the need to create a dispute in the court.

Appeals will require a fee payment for arbitration by both parties as well. However, the appellant must deposit an extra fee per appeal; with the purpose of covering the time waste by the opposing party in case of losing the dispute. In case of winning the dispute, the appellant will be refunded their extra fee.

Appeals

In the event that a party is not satisfied with the court's decision, it may appeal and issue a new dispute. Each appeal will have twice as many juries and the appeal fee will be increased by the number of juries. Therefore, each arbitration fee will grow exponentially with each new appeal. This is to avoid bribery attacks on the judges.

Incentive system

After the Kleros system has reached a decision in the dispute, the tokens are distributed among the juries that voted in favor of the final decision. The juries who voted against will be subtracted from their balance; This mechanism is inspired by the Schelling Coin mechanism mentioned above, where the juries will win or lose tokens depending on their vote.

The tokens will be shared equally among the winning jurors, as shown in the following image (Bob has lost the dispute and must pay the arbitration fee).

Source: White paper

The amount that the juries could lose is calculated with the following formula:

Where the value of alpha determines the number of tokens to be distributed after the ruling; min_activate is the minimum number of tokens to activate the sub-court (arbitration fee), and weight is the weight of the jurors.

Attack resistance

Buying half of the tokens

This attack consists of the attacker acquiring half of all the tokens of the system, in such a way that attacker could decide the results of the disputes. However, this is not possible because the tokens are distributed fairly and it is not guaranteed that half of the tokens are available for sale. In addition, they will have a price dynamically in the exchanges, so it is increasingly expensive to acquire the tokens.

Bribe Resistance

It is probably easy to bribe a small number of jurors, on the part of the attacker. However, the victim can always appeal. So the amount of juries to be bribed will increase exponentially with each new appeal.

Therefore, for an attacker to succeed, it must bribe an amount of pinakions over 50% of the Kleros' tokens, which in most cases will exceed the value represented by the dispute itself.

But it is important to clarify that this attack does not work in a model of majority honesty like Kleros'.

Court Arborescence

The following figure shows the General Court and the sub-courts that are part of the legal system of Kleros. Each sub-court determines its policies, arbitration fees, session time, minimum number of tokens to be activated and number of juries. Each jury can register in any sub-court, but initially it must be in the General Court.

Source: White paper

Governance Mechanism

The governance mechanism is used to improve the functioning of the Kleros ecosystem. These are decided through the voting of the tokens holders or in their absence, by the delegation of their votes.

Governance can be used to:

1. Establish policies to arbitrate disputes of a particular sub-court. These will determine the conditions for a dispute to be won.

2. Modify subcourts: add, remove or modify the hierarchy of some subcourts.

3. Modify subcourts' parameters: arbitration fees, session time and minimum amount to activate a particular subcourt.

4. Change or improve Kleros smart contracts.

Applications

E-Commerce

In an environment of e-commerce, Kleros not only offers a great help to minimize expenses of both parties, but also gives more security in the negotiation for both parties. Before paying for a service or property, the funds will be placed in a smart contract. If the goods are in good condition or the service complies with the agreement, the buyer can unlock the funds. Otherwise, a dispute will start and Kleros will decide to reimburse the buyer or pay the seller.

Arbitration

As in the previous case, Kleros allows establishing trust between both parties when defining a contract. A smart contract is created in Kleros to establish a job between two parties living in different continents. If the work or service does not meet the quality required by the contractor, a dispute is issued and Kleros activates the jury to analyze the evidence and issue a verdict. In this way, a fast and safe arbitration is established between the two parties. So action can be taken in case of trouble.

Insurance

Kleros can also be applied in insurance cases, as long as the smart contract is established before creating an insurance policy. A smart contract is established between the insurance company and the insuree. In case of an accident and insuree does not agree with the quota received by the insurance company, insuree can initiate a dispute and have Kleros determine the final verdict. In the case of several insurees in dispute, the dispute shall decide the distribution of the funds among the insurees.

Oracle

An Oracle is a decentralized entity that establishes a bridge between the real world and the blockchain, therefore allowing smart contracts to use data from the outside world in their programming. This is done through the mechanism of Schelling Coin, however if all parties involved do not issue a single response to Oracle, the dispute can be arbitrated through Kleros to decide the correct answer and Oracle reward the parties who voted according to the final result and penalize the rest.

Curated lists

Kleros can be used to determine whether an elements belongs to a curated lists or not. The Kleros ecosystem can determine if an element can be admitted to a whitelist or a blacklist; using arbitration of disputes and allowing juries to decide through their votes the fate of the element, in cases where the parties do not agree with the fate of an element within a cured list.

Social networks

Kleros can be used to arbitrate a dispute for violation of the policies of a social network, whether by spam, scam or other abuse. Kleros can decide whether to remove the content published on the social network, or expel the perpetrator or lower its reputation.

Crowdfunding

Crowdfundings are networks of collective financing, generally established on the internet that through altruistic or other donations, manage to finance a specific project. Kleros can act as an entity to retain the funds directed to a specific project and return the funds to the crowdfunding participants in case the project does not comply with the stipulated in its milestone.

Use Cases

Case 1

Jannett visits Charlie's online store. Jannett likes a pair of sneakers that she saw on Charlie's website and decides to buy them. Finally the package arrives at Jannett's house, when she opens the package, Jannett realizes that the shoes are defective. Jannett claims Charlie. However, Charlie never responded and Jannett lost her money.

This would not have happened, if the purchase was created through a Kleros smart contract. Jannett could have started a dispute and the jurors of Kleros would verify the evidence and vote for Jannett; therefore Jannett would receive her money back.

Case 2

Jack is a composer and decides to enter a decentralized platform to share his music and have an income. Fortunately, this musical platform is backed by the Kleros system; revenues for the songs are blocked by Kleros smart contracts. That gives Jack the confidence to record his music and offer it to the public. Suddenly, another user tells Jack that his music is similar to Claire's. He enters Claire's blog and realizes that Claire's song is his song; so Jack decides to flag Claire for plagiarism. The jury team of Kleros gets into action and determines that the song is obviously Jack's. They vote in favor of Jack and revenue for the song are redirected to Jack's wallet.

Case 3

Jane is a very popular girl in a decentralized social network, due to the photos and videos she posts. However, Anne decides to comment dirty words in the last photo that Jane posted. Fortunately, the platform has the support of the Kleros ecosystem, therefore, the jury examines the evidence and decides that Anne has violated the terms and conditions by attacking Jane. So Anne loses reputation and her comment is removed from Jane's blog.

Conclusion

Kleros is an ecosystem that allows resolving disputes in a fast, safe and less expensive way. Especially in negotiations and digital contracts or contracts created online or P2P. Kleros can not only arbitrate in a dispute and offer a series of specialist juries that decide the best alternative in a fast way, but also represents a safe way to establish a smart contract that supports a negotiation between two parties. Especially for small and medium-sized enterprises that would spend their income in long, tedious and complicated litigation (usually expensive) when they face disputes.

However, it also would represent a saving for large companies such as Amazon, Ebay and others, by defining the sale of items such as Kleros smart contracts between them and their customers, in order to avoid losses in disputes with customers, especially those buyers who do not live in the same continent.

Kleros can be applied in many cases, as we already have seen.

Annexes

My Video presentation