Trakti Smart "Legal" Contracts Blog

Blockchain mediation and arbitration with smart contracts

on July 6, 2023

Companies can achieve better Blockchain mediation and arbitration with smart contracts. Blockchain’s capacity to expedite and simplify the entire commercial process will have a flow-on benefit to both the enforcement and procedural components of arbitration.

The business world is increasingly reliant on technology. At the same time, the legal field is not at the same level when it comes to staying relevant, and competent, in the wake of the digital revolution.  Companies of all sizes no longer rely on paper documents.  Even the Regulatory frameworks are changing.

Technology is revolutionising the art of deal-making.  

But disagreements and deviation from original terms are part of contract management. And one way that these could be streamlined is by taking advantage of blockchain mediation and arbitration with smart contracts

Despite our current comfort with contracts, “smart contracts” on the blockchain push the envelope even further into the digital age. Smart contracts are different from common e-contracts in that they are essentially computer code enforcing obligations of a contract and automating processing.  Notably, smart contracts are not necessarily contracts and not necessarily “smart” since they need to be programmed to get the context where they have to operate. 

These smart contracts are made up of “nodes” which consist of computer-coded algorithms that live in a decentralized ledger.  This decentralised ledger is the blockchain. Think of it as a network spread throughout computers instead of being centralised in one computer or database. This decentralisation helps make smart contracts nearly unhackable.  Furthermore, these decentralised ledgers are immutable, meaning that the code generally cannot be altered.  In other words, most distributed ledgers are “append-only,” meaning that parties may add to, but not alter, information placed in the ledger. 

This immutability and decentralisation foster data safety. For this reason, companies have started to place data in the blockchain to manage risk.  Furthermore, blockchain-based smart contracts create efficiencies and resolve transactional trust issues. The idea is that blockchain mitigation and arbitration with smart contracts may largely eliminate conflicts.

Arbitration is the process that aims at resolving disputes between parties privately (not in court) through the decision of one or more individuals. These individuals are chosen by the disputing parties. Blockchain can automate a great part of the process by creating, for example, “Smart Awards”.

But what is Blockchain arbitration?

Imagine a judge renders a reward on the blockchain and encodes in the reward the rules of its transfer in case a party breaks a clause; this reward could be a certain amount of cryptocurrency or a real-world asset like IP ownership. This way there would be no need for further enforcement processes or a national institution to assist in the enforcement.

In fact, it can even be argued that commercial arbitration necessarily operates within its most effective form when it can be said to be ‘universal’ and ‘decentralised’. As commerce becomes increasingly globalised, attempts have been made to decentralise the field of international commercial arbitration through the use of uniform and model laws, conventions, regulations and treaties.

Blockchain’s capacity to expedite and simplify the entire commercial process will have a flow-on benefit to both the enforcement and procedural components of arbitration. It has the potential to mitigate a number of inefficiencies and, as we understand the technology more, the practical uses of blockchain can only increase.

In light of the above, the legal industry should certainly look to the emergence of distributed ledger technology as an opportunity. It will streamline transactions, business processes and will make the management of rights and obligations substantially less convoluted.

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