When to arbitrate and when not with EOS

EOS is a governed blockchain. Which ruleset will govern EOS will be decided by the voters shortly. The current proposals have in common that they are agreements between all users of EOS (end users and dApps and block producers).

Rules need to be enforced in order to be effective. Agreements can be enforced easily. Each of the parties to the EOS charter/constitution/agreement is entitled to demand fulfilment of another party’s obligations. Each party is entitled to claim damages with a defaulting party.

There are many factions within EOS that strongly dislike any form of mandatory dispute resolution. Their views are that voting will, at the end of the day, rid the chain of bad players. This might be so, but that will not stop disputes from arising. This memo focuses on those disputes.

The discussions have been very confusing. This memo provides an analysis of the various elements of dispute resolution. It is meant to align the discussions. To prevent further confusion and distinguish the different elements of the discussion in order to allow for a granular approach.

Arbitration & Dispute Resolution (ADR) is not ECAF. If ADR is needed, any ADR provider that meets the standards and is willing to invest to get the necessary technical insights will do.

The question addressed here is not whether EOS should have ECAF or not but where and when ADR could be a viable solution whomever shall be the provider of such ADR.

Dispute resolution and execution

First we need to be aware of the distinction between dispute resolution and the execution of the verdict/award. This seems self-evident but a lot of heated debates are in fact more about the execution (no arbitration on the base layer! as an example) and not about dispute resolution itself.

Dispute resolution means that a third party decides a dispute between party a and b (or between party a on the one hand and parties b,c,d, etc on the other). This third party can be a judge or an arbitrator. Or a clan elder or a decision by 15 block producers. This is dispute resolution: not more (nor less) than having someone else decide who is wrong and who is right.

Such decision has to be executed. In the old world court decisions are being executed by bailiffs and ultimately the police. Arbitrators’ awards are executed quite similarly: one has to get a court order (easily obtained in principle) and then such court order can be executed as any other court order. Execution happens inter alia by attaching and the forced selling of assets of the losing party. Within EOS only the block producers have the power to actually do something. We shall investigate if it is a good idea to use such powers within an ADR context.

Dispute resolution

In the event of a dispute there will always be a competent court. The question is therefore simple: when would arbitration (ADR) be better than courts?

Obviously EOS dispute resolution should be limited to disputes connected with EOS. EOS is not there to provide ADR to all disputes of the world. Such EOS ADR solution will require arbitrators that know the law and know EOS.

Further: this memo is not about voluntary arbitration. The parties concerned could always choose to go that route. If and when ADR is the best choice, the community should make it mandatory unless the parties concerned agree to opt out.

We distinguish the various types of conflicts and will advice whether or not mandatory ADR is good, not necessary or bad.

Block producer vs block producer

Of course block producers work together diligently to make EOS a safe and efficient system.

However, disputes may arise. E.g. if a block producer does not comply with the BP agreement, under all proposals that would mean other bps can claim their damages with such BP or claim fulfilment of such BP’s obligations. Another example is if a block producer provides false information about its competing block producers.

Also, under the current Constitution, bps could sue in the event of vote buying. Block producers that did not buy votes, get a smaller amount of EOS. They are entitled to claim that damage with the vote buying parties.

It makes sense to settle all of this through ADR. This is in the self interest of all block producers except for the ones, if any, that are planning not to comply. Lack of ADR will mean that block producers could get sued in their own country but, possibly, in many others too. A competent court can be found in a number of ways and the claimant will see to it that the defendant is being subpoenaed before the claimant’s home court.

Not suitable for ADR are non-EOS disputes. E.g. a block producer could steal vital personnel from another one. This should not be dealt with through EOS ADR.

Block producer vs account holders

Disputes here may arise when EOS is down due to a mistake made by one or more block producers. This seems unlikely but it is not impossible. Another example is when a block producer fails to timely blacklist an account (provided that obligation will still be there in the charter/agreement that gets voted in by the community.

Damages could be very high. Also block producers may be forced to block certain content (by blacklisting accounts) that is in the account holder’s jurisdiction perfectly legal.

One could argue that the block producers provide just a technical infrastructure and cannot be liable, but that is legally not so. Block producers certainly can be liable. And if the damages and frustration of the other party are high enough, they will get sued.

Again it makes sense to offer ADR here. Not only to protect the block producers against having to show up in a court that is alien to them, but also to offer a system to hold them accountable. Accountability of the block producers will raise trust in EOS.

Also here disputes that have no relation to EOS should not be subject to ADR. So if a block producer’s CEO hit someone on the nose, it should not get through the ADR.

Account holder vs account holder

The number of conflicts is limitless. From theft through offering of securities without a license, from fraud to delivering goods and services that allegedly do not comply with the agreement etc. etc.

It is not possible to address all of these highly diverging disputes in some catch all phrases. We have therefore broken down the various types and address them below:

Defaults regarding the agreement between user and dApp

E.g. the delivered goods or services are delivered late, they are not compliant, against the local law etc.

There is hardly any added value here to provide ADR. The dispute has nothing to do with EOS. EOS is just the technical infrastructure. The claimant shall have to go to the court or to the ADR agreed upon with the dApp provider.Another point is that within such a broad array of disputes a specialized ADR body doesn’t have much added value.

So no ADR in these cases.

Defaults regarding the offering of specific EOS services

These could be mistakes made with the buying and selling of EOS. The service provider, e.g. an exchange, could be liable in numerous ways. Here the choice whether or not there should be ADR is more difficult. Specialized ADR will have added value here. Also the possibility to hold parties that work with EOS accountable, will raise trust in the system. It will further provide a global recourse for victims of mistakes made by exchanges and other EOS service providers.

For the EOS service providers ADR means they cannot be subpoenaed before the court of the claimant. In that sense ADR provides clarity and security for them as well.

We believe therefore ADR here, might be preferable.

Theft and fraud

A lot has been said about theft and fraud. Of course having no theft or fraud is preferable, The EOS community works on ways to decrease that chance. However, we have to deal with the obvious: theft and fraud are here and probably will remain here.

Legally a claim based on theft and fraud is mostly a claim by a known claimant against an unknown criminal. That doesn’t change the nature of the ADR: it is still dispute resolution between two parties: the thief and the rightful owner. ADR is not replacing the police in any way. ADR remains a ‘peer to peer’ dispute resolution.

It is further obvious that local law enforcement cannot help the victim. They will not be able to find the thief. Also given the international character of EOS.

Execution here is vital. In many of the other cases, onchain execution is not always necessary: one should easily be able to get a local court order and execute that. The defendants will often be tangible companies and if they are not, with ADR the claimant runs into the same executional issues as with a court case. The exception is probably only that onchain the block producers may blacklist a dApp: that is a effective way of executing an award that is just not there offchain..

In theft and fraud cases it is self evident that without ADR and onchain execution, a victim doesn’t have the means to get justice done. He doesn’t even know the thief’s identity. With ADR the victim will at least have an arbitrator’s award and just maybe, if he is lucky and execution of such awards has been a block producers’ task, he might get his EOS back. Of course in many cases the EOS will be gone given the current way EOS works.But also now accounts are effectively frozen and some people do get their EOS back.

ADR should therefore be mandatory in these cases, provided there is some sort of execution of the awards. Efficient ADR will allow for more trust in the EOS system and will effectively allow justice to be done. Something that won’t happen without ADR.

Execution

ADR decides on cases between a claimant and a defendant (or more claimants and more defendants). The decision in a case does not lead to any obligations for anyone else than the parties unless generally applicable rules stipulate otherwise.

A court order can be executed by the police and bailiffs since this is detailed in specific legislation. In such rules it is further detailed if and to which extend third parties will have obligations. E.g. a bank ( a third party) can be forced to pay sums that belong to the defendant to the claimant following a court order issued between those two parties. The same goes for an central exchange.

Within EOS itself only one type of actors can actually do something: block producers.

15 out of 21 active block producers can do all they wish with accounts. It is therefore technically possible for them to jointly execute awards in the event that can be done by blacklisting or seizing the EOS on an account.

If it is possible, should they be obliged to do so? Surely the block producers would prefer not to. Executing awards and other verdicts is not automated yet. It is hardly scalable and therefore a costly and risky operation. Risky since mistakes will be made (and are made) and such mistakes might cost the respective block producer dearly.

But without execution, the ADR system fails in a number of cases. And without ADR the legal insecurity and risks for all would grow considerably. Therefore within the limited scope an ADR result should be executable by the block producers.

The execution block producers do should be carefully detailed and also be limited to the minimum that is necessary to make ADR functioning. We believe that will include blacklisting accounts. And restoring the original owner to an account in case of theft. Please note that such restoring can only be done following an ADR award. The arbitrators shall have to carefully establish whether the original owner can proof ownership. If not, they should refuse to grant the award.

As for executing ADR awards that grant damages to a party, block producers could also seize EOS on an account and pay those to the claimant. They could, but we are not sure if they should. The powers to attach EOS on accounts are scary. It could be tempting for block producers to seize EOS without the proper proceedings. On the other hand, providing the possibility to seize online assets, such as EOS, will help to make EOS mainstream. And will help to establish effective ADR.

We take due notice of the fact that ADR may be flawed and in some countries offline courts not being as impartial as in others. We therefore support the idea of an extra protection of the defendant. An ADR that results in the seizure of EOS should therefore only be executed with a court order from the country in which the defendant lives. This rule protects the defendant and respects the various cultural differences of this planet.

Please note that given the current rules on liability of providers of digital services in the EU, the block producers may already be liable in the event they are aware of something illegal (theft, illegal dApp) and don’t take action to stop that illegal situation. In other words: it is very well possible that block producers don’t have a choice but to execute since not executing would mean to become liable for letting an illegal situation continue..

Conclusion

We believe there should be limited ADR. And a limited package of executive actions with the block producers in order to make EOS a functioning governed blockchain. Block producers should blacklist accounts upon an ADR decision. Block produces should further execute ADR awards by transferring EOS but such transferring only following an ADR decision and a confirmation by a competent court in the defendant’s home country.

Amsterdam, 29 November 2018