Smart contracts have evolved as a game-changing option for safe and automated transactions in the dynamic world of blockchain technology. These self-executing contracts that are stored on the blockchain offer increased efficiency, transparency, and mutual trust. But even in the world of smart contracts, disagreements can occur as with any contract. This is when a novel approach comes into play: blockchain arbitration. This cutting-edge domain offers a decentralized and effective means for settling disputes within blockchain networks. It protects the reliability of smart contract interactions and offers an equitable path forward.
This article investigates the nexus of blockchain arbitration and smart contracts. It explains the principles that allow for secured transactions, looking at actual scenarios, and illuminating the transformational potential of this combined approach in forming the future.
What Are Smart Contracts?
According to Techopedia dictionary, smart contracts, self-executing agreements, use distributed ledgers like blockchain to document and validate contract transactions in a secure, transparent manner without the need for oversight by a central authority.. 1They enable efficient and secure transactions without the need for middlemen.
This is done by using if-then expressions and computer code. Smart contracts use cryptography to protect transactions and guarantee the confidentiality and integrity of data inside the contract. In order to validate and verify transactions, they also use consensus methods like proof-of-work or proof-of-stake. These methods help avoid double-spending and ensure network participant agreement.
Additionally, the distributed ledger requires network-wide consensus to amend or tamper with transactions or contracts. The decentralized structure of blockchain networks offers an additional degree of protection.
Automation and Execution of Smart Contracts
A network of computers will execute the activities if certain conditions have been met. These can entail examples such as paying out money to appropriate parties, registering a vehicle, sending out notices, or issuing penalties. 2 In essence, blockchain technology replaces the need for escrow accounts, notarizing, and/or certifying the documents. It also minimizes the involvement of third parties.
The Role of Oracles
Smart contracts utilize oracles as trusted intermediaries, connecting them to external data sources. This enables the acquisition of real-world information for decision-making. Oracles locate and validate off-chain data, like market prices, environmental conditions, or sporting event outcomes. They deliver relevant information before delivering it to the blockchain’s smart contracts. As a result, smart contracts may decide what to do and when to do it depending on current facts.
Real-World Applications: Trade and Supply Chains
International trade and supply chain management are two areas of major application for blockchain technology. Both smart contracts have a profoundly positive impact. Smart contracts simplify and secure global transactions by digitizing and automating procedures, including customs declarations, shipment documents, and payment settlements.
This lessens the administrative load and associated costs, as well as delays, increases transparency, and settles disagreements. It is becoming more and more clear that blockchain technology and smart contracts can change conventional cross-border trade.
They can also get rid of trade obstacles. Following the transaction’s completion, the blockchain is updated. Therefore, the transaction cannot be altered, and only the parties are permitted to see the results. 3
The Emergence of Blockchain Arbitration
When a dispute arises out of or in connection with smart contracts, traditional resolution methods may be used. However, these methods may lack efficiency and transparency.
In such cases, blockchain arbitration offers an appealing alternative.
This is due to its ability to provide verifiable and immutable records, impartiality, and faster dispute resolution.
As observed in the Journal of International Dispute Settlement, blockchain arbitration enshrines the representation of delocalized arbitration, but simultaneously leaves room for a new representation of arbitration: decentralized arbitration. 4
How Blockchain Arbitration Differs
Blockchain arbitration differs from conventional arbitration in a number of ways. First and foremost, blockchain arbitration relies on the immutability and transparency of the blockchain to operate in a decentralized setting. As a result, there is less reliance on centralized authorities, and participant trust is increased.
Second, the execution of arbitral awards can be automated thanks to the inclusion of smart contracts in the arbitration process. An award can be recorded on the blockchain once it has been rendered, creating a tamper-proof and legally binding record. The effective execution of arbitral decisions is guaranteed by this self-execution feature. It also eliminates the need for external enforcement measures such as national courts.
Unlike traditional arbitration, where parties may face challenges in enforcing an award due to potential jurisdictional barriers and the need for court intervention, blockchain arbitration offers a streamlined and automated process. 5 By leveraging smart contracts and blockchain technology, the execution of the award is inherently tied to the contract terms. This triggers automatic fulfillment of the agreed-upon outcome.
Arbitrator Selection in Blockchain Platforms
Blockchain technology’s automation, transparency, and reduced administrative overhead make blockchain arbitration more effective. It is also a more affordable method of dispute settlement. The selection of arbitrators in blockchain arbitration can differ depending on the chosen arbitration rules or the established procedure. The arbitrator(s) will typically be chosen and agreed upon by the parties to the dispute themselves. They have the option of selecting a single arbitrator or a panel of arbitrators with pertinent subject-matter knowledge.
As an alternative, certain blockchain arbitration platforms may use algorithmic or automated procedures to choose arbitrators based on specified criteria like reputation, credentials, or expertise. 6 To facilitate the resolution of conflicts within the blockchain ecosystem, objectivity and expertise are important. Justice in the appointment of arbitrators is also essential.
Procedure and Virtual Hearings
The parties may commence the arbitration procedure by presenting their claims when a disagreement occurs. They must also provide supporting documentation to the appointed arbitral institution. Depending on the arbitration platform or protocol used, the format of proceedings might vary. The conduct of proceedings may also differ accordingly. Though oral sessions can still be held virtually, blockchain arbitration primarily takes place in a digital setting. 7 Virtual hearings imitate the style of an oral hearing by allowing parties to present their arguments, show evidence, and have live conversations.
In order to streamline witness hearings, blockchain arbitration platforms might provide tools like video conferencing or recorded video testimony. Remote witnesses may present their evidence by virtually appearing before the arbitral panel. Blockchain arbitration platforms may include features like secure document sharing and digital signatures.
They may also use cryptographic methods to guarantee the accuracy and legitimacy of witness testimony. No matter where they are physically located, participants can communicate remotely, which increases accessibility and convenience.
The arbitrator(s) will then evaluate the situation and come to a fair and enforceable conclusion by taking into account the conditions of the smart contract, any pertinent evidence, and relevant legal precedents. The blockchain can be used to store the arbitral award once it has been rendered, creating a permanent and irreversible record of the judgment.
Blockchain Arbitration for Traditional Contracts
Similar to this, the parties may decide to submit their disagreement to blockchain arbitration if it results from a regular contract dispute. However, the arbitration procedure might not be directly incorporated because the contract is not carried out on the blockchain. Instead, the parties would have to concur to resolve their issue through blockchain arbitration.
They can choose to adopt blockchain arbitration by including an arbitration clause in their contract or by signing a separate agreement. The procedure would then proceed according to the standard processes of arbitration, in which the parties would submit their arguments and supporting evidence, and the arbitrator(s) would ultimately issue an award.
To ensure transparency, immutability, and potential enforcement of the arbitral award, the blockchain aspect may be relevant for documenting the arbitration procedure and the final judgment on the blockchain.
Final Considerations
It’s vital to remember that, depending on the arbitral institution selected and the relevant jurisdiction, the specific processes and standards for blockchain arbitration may change. To ensure compliance with and knowledge of the arbitration process, parties should review the rules and guidelines of the chosen institution and seek legal counsel.
In conclusion, the integration of blockchain arbitration, smart contracts, and oracles has the ability to completely change how business is done. Smart contracts speed and secure transactions with their ability to self-execute, and oracles give users access to real-world data so they may make informed decisions. Furthermore, blockchain arbitration offers a quick and decentralized way to settle disputes within blockchain networks. The future of domestic and international transactions has the potential to change as the usage of these technologies increases, promoting more efficiency, transparency, and trust in our global economy.
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References
- Margaret Rouse, Smart Contract Definition, Techopedia dictionary. ↩
- Alfred Daniel John William, Santhosh Rajendran, Pradish Pranam, et.al., Blockchain Technologies: Smart Contracts for Consumer Electronics Data Sharing and Secure Payment, Advances in Cryptography and Blockchain for Securing Modern Smart Communications, 2022. ↩
- Ibd. ↩
- Maxime Chevalier, ‘From Smart Contract Litigation to Blockchain Arbitration, a New Decentralized Approach Leading Towards the Blockchain Arbitral Order’, Journal of International Dispute Settlement, Oxford University Press, 2021. ↩
- Fox Mandal, Blockchain Arbitration: The Future of Dispute Resolution, Lexology, November 22, 2021. ↩
- Thalia Kruger, Can Blockchain Arbitration become a proper ‘International Arbitration’? Jurors vs. arbitrators, May 22, 2022. ↩
- Nevena Jevremović, 2018 In Review: Blockchain Technology and Arbitration, Kluwer Arbitration Blog, 2019. ↩