Kleros: Building Dispute Resolution for the Internet Economy

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With the advent of technology and the rise of private sector enterprises across the globe, along with a trend of diluting state-owned enterprises to improve efficiency, reduce fiscal burdens, and raise revenue, an interesting question arises. Is it possible to establish dispute resolution firms that can speed up the justice process while still delivering fair and unbiased decisions?

This idea may not be far-fetched. In recent years, companies have begun experimenting with technology-driven dispute resolution systems. One such example is Kleros. Kleros represents an attempt to build dispute resolution as a digital infrastructure service for online transactions.

Kleros is a crypto-based application that acts as an online arbitrator. It was founded in 2017 by Federico Ast and Clément Lesaege, and its development efforts are coordinated by a cooperative society registered in France. The platform leverages Web3 technology to create a new model of online dispute resolution that aims to be faster and more efficient.

Disputes are decided by jurors randomly selected from a larger juror pool. Anyone can become a juror without formal screening or permission, although participation requires staking capital. A majority vote among the selected jurors determines the outcome of a dispute. Litigants can also challenge the decision by triggering a predefined appeal process. In such cases, the dispute is brought before a larger jury that is more than twice the size of the original jury, and this new jury is also drawn from the juror pool.

Business Incubation

The growth of the internet enabled individuals across the world to learn skills such as coding, design, or digital marketing and offer services in the global marketplace. However, participating in this market was not always straightforward. In many countries with strong capital controls, receiving international payments could lead to significant losses through taxes and banking fees. Cryptocurrencies helped address this problem by enabling direct cross-border payments, allowing individuals across the world to participate more easily in the global economy.

Yet an important challenge remained unresolved. When disputes arise between clients and service providers located in different countries, pursuing legal action for small contracts is impractical, as traditional courts and international arbitration systems are too slow and costly to handle low-value cross-border disputes. This gap creates an opportunity for new dispute resolution models designed specifically for digital marketplaces.

Managing the Economics

Kleros addresses this opportunity by designing a decentralized arbitration system with built-in economic incentives. Participation in the Kleros system requires holding the platform’s native cryptocurrency token called Pinakion (PNK). PNK is a fungible token on the Ethereum blockchain, meaning it cannot be manufactured or duplicated fraudulently. Its value is derived from its integration within the broader Ethereum ecosystem.

To become eligible as a juror, individuals must stake a minimum quantity of PNK tokens in a specific Kleros court. By staking these tokens, participants enter the juror pool for that court and become eligible to be randomly selected when disputes arise.

Once selected, jurors review the claims made by both parties and assess the evidence presented. After evaluating the case, jurors cast their vote in favor of one of the parties involved in the dispute.

When all votes are submitted, the final decision is determined based on the majority outcome. The staked tokens are then redistributed according to the voting result. Jurors who vote with the majority are considered to have voted coherently and receive additional PNK tokens along with a share of the arbitration fees paid by the disputing parties. Jurors who vote against the majority are considered to have voted incoherently and lose a portion of the tokens they initially staked.

Serving Justice

This system of dispute resolution creates economic incentives that encourage jurors to act responsibly. The possibility of earning rewards on their staked tokens motivates jurors to participate in the system and attempt to vote coherently. At the same time, the risk of losing staked PNK tokens discourages malicious or careless voting.

The underlying proposition is that jurors will try to vote coherently in order to protect their staked tokens and earn additional rewards. As long as disputes have relatively clear outcomes, such a system can provide a structured mechanism for resolving disputes.

A dispute resolution system built as a cryptoeconomic protocol can also provide certainty in execution. Because the system operates on blockchain infrastructure, evidence submission, jury selection, and vote tallying are difficult to manipulate. The use of cryptocurrency allows quick and direct enforcement of outcomes, while crowdsourced participation introduces efficiency and decentralization into the process. In this way, Kleros attempts to turn dispute resolution into a scalable digital service rather than a traditional institutional process.

Conclusion

As of November 2020, nearly 500 disputes had been resolved on the platform, with around 400 users participating as jurors. These cases generated approximately $123,000 in arbitration fees distributed among jurors.

Although the technology is still developing, these early outcomes highlight the potential of decentralized dispute resolution systems and suggest how dispute resolution itself may evolve into a digital infrastructure layer supporting global online commerce.