- Researchers have developed a “digital court” mechanism using blockchain-powered smart contracts.
- The digital court could be used to settle disputes and enforce contracts in areas such as auctions, business contracts and sales.
- The researchers use a combination of smart contracts and incentivized behaviour to create a “self-enforcing mechanism” that could be used in place of a traditional legal court.
Researchers from the University of Tokyo and the University of British Columbia have created a “digital court” using blockchain technology, which could be used to settle disputes and enforce contracts in place of a traditional legal court.
The digital court, designed by Professors Hitoshi Matsushima from the University of Tokyo’s department of economics, and Shunya Noda from the University of British Columbia’s Vancouver School of Economics, builds on the idea of smart contracts. These are pieces of code that run on a blockchain and are executed purely by code. The digital court could be used to settle disputes around auctions, business contracts and sales, without resorting to the expense of a traditional legal court.
How does the digital court work?
The digital court “identifies and punishes parties who deviate from legal obligations such as commercial activities, but could potentially be any kind of agreement,” said Matsushima.
It uses smart contracts to create a “self-enforcing mechanism that relies on neither legal enforcement nor a long-term relationship,” according to the working paper published by the Center for Advanced Research in Finance.
When a violation of an agreement is suspected, the parties involved post their opinions to the digital court, Matsushima explained. The court then algorithmically aggregates the parties’ opinions before reaching a conclusion on who violated the agreement. “If the digital court judges that a party violated the agreement, the party is fined by withholding a deposit made during the initial agreement,” he added.
Most of the process happens off-chain, partly in order to minimize the cost of interacting with the blockchain, and partly for the sake of privacy, since smart contracts deployed on blockchains are open to public view. “If parties write a smart contract intended for a specific purpose, the public can infer the detail of the agreement the parties reached,” the paper notes.
The truth, the whole truth and nothing but the truth
Of course, for the digital court to work, participants need to tell the truth. To resolve the “oracle problem,” in which participants could enter incorrect information into the smart contract, the digital court incentivizes them to make truthful inputs. It does so by punishing jurors for mutually inconsistent reports with fines, and by enabling agents to vote not just for acquittal or conviction, but for fractional values between the two—encouraging rational agents to report a “slightly more honest” message than other rational agents.
“Providing there are more honest users than dishonest ones, which fortunately in the real world does seem to be the case, then only those who violate agreements or provide false information are punished,” said Matsushima. “Honest users incur only minute costs for use of this system.”
The paper also notes that any party, including criminals, could use blockchain to run self-enforcing mechanisms, and that even if regulators monitor the blockchain, they can’t tell whether a digital court is being used for a legitimate or unlawful purpose. The paper’s authors advise that regulators should “carefully consider a way to prevent parties from abusing smart contracts.”
“Blockchains in some ways are a double-edged sword,” said Matsushima, adding that the “new economic paradigm” should be embraced and explored rather than feared and ignored. “We have found a way to satisfy agreements without traditional legal enforcement or the long-term reciprocal relationships which might ordinarily keep the players honest. A digital court could be built on current blockchain platforms such as Ethereum, and it could happen right now.”