Rubellin-Devichi, in 1965, and Lew, in 2005, considered arbitration, as a conflict resolution mechanism, to be autonomous and independent of other state or judicial powers, to the point of considering it a non-national system for resolving commercial disputes. For them, arbitration lives on the margins, free and emancipated from any other power or order and subsists without respecting national legal frameworks, as if it were delocalised arbitration. This idea underpins the notion of potential arbitration in the metaverse, combining blockchain, smart contracts, game theory and cryptocurrencies or tokens.
Arbitration in so-called cryptotribunals connects law, technology, dispute resolution, administration of justice, smart contracts, AI, cryptocurrencies and/or tokens and blockchain. Arbitration is a method of dispute resolution through which disputing parties agree, usually through an arbitration clause, to submit their dispute to a person (arbitrator) whose expertise they trust.
Currently, great advances are being made in the field, one example being the recently developed crypto arbitration courts to resolve disputes operating with blockchain technology. This is a disruptive solution that may completely change the paradigm of the administration of justice in the future. There are several platforms for this purpose, such as Aragon or Kleros, each with a unique way of operating.
Virtual arbitration courts are decentralised, open justice platforms that typically operate on a public blockchain. The service offering of each decentralised court varies, but two main innovations stand out. One, the random selection of arbitrators and two, on-chain enforcement, which involves the automatic transfer of cryptocurrencies, tokens or digital assets, executed by an underlying smart contract.
All this calls for drastic changes, because the traditional legislative and judicial framework as we know it cannot cope with realities that flow freely on the internet. Now, the notion of cryptotribunals builds on basic yet revolutionary technologies such as blockchain, smart contracts and cryptocurrencies.
The rise of decentralisation: Blockchain
Blockchain is defined as “a decentralised ledger for recording digital data in a verified and time-stamped manner without the need for a trusted third party“. It can be public or private, permissioned or permissionless, or driven by tokenised or tokenless crypto-economy.
The term blockchain was created by Satoshi Nakamoto in 2008, when the Bitcoin Whitepaper was published. This technology consists of a design of blocks that are mined by miners who combine data from previous blocks. These blocks are impossible to modify and, as a result, this technology offers high security for transactions. Blockchain technology is the protocol behind the operation of cryptocurrencies such as Ethereum and Bitcoin.
The blockchain concept refers to a decentralised application operating in a distributed network. The difference between centralised and decentralised is that while the former relies on a single entity or authority to control all aspects, the latter involves the consensus of all participants/validators (verifiers or nodes). On the other hand, in a decentralised network there is a diversity of computers that function as nodes, storing the information in all of them, and at the same time there is a diversity of miners to verify transactions, statuses and other details of the chain. All this makes it a platform where digital information is stored without the need for human intervention. This provides security, traceability and transparency, as well as reducing operating costs. The blockchain is similar to a registry instrument, indelible, public and shared, as opposed to other centralised registries. It prevents data loss and minimises data loss or obsolescence.
Smart contracts and the end of human intermediation
In 1995, Szabo defined the smart contract as a set of promises within which parties perform. The smart contract is an agreement between parties that is automatable and enforceable, and typically deploys its effects on the blockchain, as a means to gain immutability, traceability and security.
These contracts have the peculiarity of being able to be automatically executed when the conditions are met and, in addition, the fulfilment of the smart contract is guaranteed without recourse to the courts. This is enabled by the blockchain technology on which it is based and is an expression of the freedom of the parties to the contract. The parties can voluntarily agree on this automatic enforcement, and on any aspect they wish. Smart contracts are used to establish terms of agreement and specifically to include an arbitration clause that stipulates the use of the platform in case of dispute. The most important function of smart contracts, however, is that they are used to embody the arbitration award and the award is automatically enforced, without the need for recourse to the courts.
Smart contracts offer a series of advantages related to the material efficiency implied by the replacement of the parties’ trust by an external computerised control of the vicissitudes in the formation and execution of the contract. This virtual trust is based on three elements: the immutability of events, as they are recorded without the possibility of alteration in the blockchain; the performance of services, which is not subject to human interpretation and remedies for non-performance are automated; and the self-execution of the contract as agreed and programmed.
A futuristic reality: Cryptocurrencies and tokens
Within the concept of virtual currency are cryptocurrencies, which refer to “distributed, open-source, mathematically based, decentralised, convertible virtual currency that is cryptographically protected and has no central authority to administer it, and no central control or oversight“. Bitcoin would be an example of a virtual currency, and more specifically, a cryptocurrency.
Virtual currencies can be classified as convertible (or open), as in the case of Bitcoin, and non-convertible (or closed). Open virtual currencies have “an equivalent value in real currency and can be exchanged for real currency“, while closed virtual currencies are intended to be specific to a particular virtual world.
In the case of virtual courts on the blockchain, each court normally uses a virtual currency or token, as a token that guarantees its participation and contribution to the arbitration. Without tokens it will not be possible to take part in this arbitration. In the case of Kleros, it will be pinakions (PNK), and in the instance of Aragon it is ANT, which act as validation tokens for the functions to be performed by each of the parties (arbitrator, plaintiff, defendant…). For example, if you want to be an arbitrator in Kleros, you must acquire a minimum number of pinakions. If a party wants to submit to arbitration on Kleros, it must contribute pinakions to the procedure for the smart contract to be effective, which will be uploaded to the blockchain so that it will be self-executing once the arbitration award is known. And it will be self-executing because precisely that number of tokens has been deposited on the blockchain.
The Kleros cryptotribunal: the theory of games
Kleros was created in Paris in 2017. It is a decentralised dispute resolution protocol that works on the blockchain. It is a multi-purpose peer-to-peer dispute resolution system that uses crypto-economy-based incentives to offer decentralised arbitration services where members are automatically selected as jurors. Kleros acts as an ad hoc, purpose-built, decentralised arbitration system where two parties can bring a claim before a tribunal, where impartiality is guaranteed by economic incentives. An arbitration clause is required, which will be digitised and incorporated into a smart contract.
The decision taken by the arbitrator will be individual and will be based on a binary voting system. In other words, the arbitrator must indicate which of the two parties is right and justify his/her vote, which once cast cannot be changed because it will be recorded in the chain itself, it will be immutable. Kleros referees are governed by game theory.
The Game theory, formulated by Neumann and Morgenstern in 1944, focuses “on the analysis of conflicts and cooperative situations between purely rational individuals, based on which strategies would be most beneficial or least harmful“. It is built around Schelling’s concept of focal points, which rethought game theory and explained how people can reach a solution even when they cannot communicate or when the parties do not trust each other. For game theory, an arbitrator will be considered to act correctly if he/she resolves/votes in accordance with the majority and the arbitrator who votes in the minority loses his/her reward (tokens) and his/her prestige and reputation. The arbitrator who voted in the minority is considered the loser and loses all his tokens. Therefore, based on game theory, the central point for the referee is to try to predict what the others will vote in order to maximise his/her economic benefit.
It is observed that cryptotribunals have and will continue to cause a radical transformation of alternative dispute resolution, particularly arbitration. Nonetheless, it is yet to be assessed how effectively will the law adapt to such challenging new realities.
Suggested citation:
Cayetana Santaolalla, ‘Cryptotribunals: The Unavoidable Change of Arbitration?’ (Comparative Digital Law Blog, 11 March 2025) <https://lawandtech.ie/cryptotribunals-the-unavoidable-change-of-arbitration/>.
About the author:
Cayetana Santaolalla is Associate Professor of Private International Law at Public University of Navarra (UPNA), Spain. She is a member of the Digital Assets working group of the European Law Institute (ELI), the European Association of Private International Law (EAPIL), the Institute for Advance Research in Business and Economics (INARBE), the Academic Network of Antitrust Law (RADC) and Network of Professors and Experts in Private International law (APEDIP).
