Dispute resolution is critical for blockchain’s growth

All parties involved in a transaction need to know that they will be able to resolve disputes in an orderly way. This is true whether the contract was drawn up with a pen on the back of a napkin, or by mobilizing the benefits of distributed ledger technology (DLT), more familiarly known as blockchain.

For developers of blockchain solutions and networks, setting up an effective governance framework integrating processes for resolving disputes between counterparties is critical.

A new paper from the World Economic Forum in collaboration with Latham & Watkins explores forward-looking, practical options for resolving disputes. The proposed avenues ahead are drawn from a mixture of case studies, knowledge on ways that parties currently resolve disputes, and blockchain-based protocols recently designed to improve the process.

Five key insights from the paper could help market participants understand why orderly dispute resolution needs to be a priority for blockchain-based transactions to flourish:

While there are many networks testing protocols and resolution systems, there is no consensus on how to facilitate the resolution of disputes involving transactions that take place on a blockchain. Certain dispute resolution protocols may work well for some networks, but not for others.

There are also situations in which the existence of an available dispute resolution mechanism can actually provide parties with the incentive needed to create a negotiated settlement rather than incur the costs associated with the dispute process. But this is more likely to occur if the existing dispute process is known to produce reliable results.

The majority of business networks that use blockchain are unlikely to be anonymous, which allows participants in such networks to access different types of dispute resolution, from arbitration to the courts.

Most business disputes can be resolved through payment of money rather than a transfer of specific assets. If network operators want to ensure that network transactions are not tied up in disputes, it is important to choose a dispute resolution mechanism that will be respected by a court should a party need to access real-world assets to satisfy a judgment.

Dispute resolution is distinct from the governance processes that are required for most blockchain-based enterprise projects. Governing a blockchain network typically involves a larger set of stakeholders than the number of participants implicated in a single transaction. In addition, one of the tasks a governing body has is to decide how disputes arising from network transactions will be resolved.

The governing body of a network must decide: whether to provide dispute resolution in-network; whether to stipulate a choice of jurisdiction governing transactions; and whether users are able to opt out of either of these provisions, or not. Each of these decisions will have an impact on the outcomes that users can expect from conducting transactions using the network.

Participants in a blockchain network may determine that the best way to resolve disputes is by network participants themselves deciding. One idea is for them to be guided by the network operator, who acts as mediator.

Network operators will be incentivised to formulate a dispute resolution process if it is is seen as streamlined, unbiased and low-risk.

They should also want to resolve disputes fairly, based on a desire for the network to continue to function, and because they may be subject to judgment themselves.

However, while the participants in a network may determine that some disputes are best resolved internally, other disputes may have industry significance that is broader than one network.

Participants may also desire the legitimacy conferred by an industry standards body. In these situations, network operators may look to semi-private industry for a resolution. But in spite of the potential availability of other dispute resolution mechanisms, those parties involved in a blockchain transaction dispute may still decide to pursue arbitration or litigation.

Having a generally accepted method of dispute resolution is key to blockchain network adoption. When participants have not pre-selected a well-functioning way to resolve disputes, some portion of transactions on the network will have suboptimal outcomes compared to cases in which dispute resolution is available.

For example, parties may incur large litigation costs in the process of resolving their dispute or they may choose to forego the efficiencies provided by network adoption or investment in custom agreements because there is no way to recoup their costs should transactions break down. This reduces value for those potential participants, but also to the network as a whole.

A blockchain network with clear dispute resolution protocols will find it easier to onboard enterprise participants who seek certainty with respect to their operations. A network can grow more easily when that certainty is embedded into the platform’s governing and operational documents.