COTI’s Arbitration System
The world is experiencing an accelerated pace of globalisation and digitalisation. An exponentially growing number of transactions are being conducted online between people across jurisdictional boundaries. If the blockchain promise comes to fruition in a not so distant future, most goods, labor and capital will be allocated through decentralised global platforms. Disputes will certainly arise, as users of a decentralised eBay will claim that sellers failed to send the goods, guests in a decentralised Airbnb will argue that the rented house was not as-advertised, and backers in crowdfunding campaigns will demand a refund as teams failed to deliver on their promises.
Existing dispute resolution technologies are too slow, too expensive and too unreliable for a decentralised global economy operating in real time. A fast, inexpensive, transparent, reliable and decentralised dispute resolution mechanism that renders ultimate judgments about the enforceability of disputes is a key institution for the blockchain era.
Arbitration and Game Theory
Arbitration is a process in which an impartial third party seeks to help two or more disputants or negotiating parties to reach an agreement. This is usually done by hosting a meeting with numerous discussions to explore the real underlying issues between them, to build proper understanding and to encourage the exchange of information between them. The parties can then identify and assess their options and alternative courses of action before reaching a mutually acceptable agreement, or ending negotiations. Experienced negotiators will help parties to measure options and consider proposals for reaching an agreement against objective standards, often called best or worst alternatives to negotiated agreement (BATNAs or WATNAs).
Arbitration tends to be a speedy and relatively cost effective process for those involved, particularly in commercial matters. The process is usually confidential and arbitrators may not, without permission, disclose to one party information given to them by another party. The entire process is usually designed to be private and without prejudice so that, in principle, no one may use information or waive any rights or remedies until the parties agree to do so, usually in writing.
Game theory is an area of study that deals with interactions where the choices of one agent influence the outcome of another, and vice versa, according to some fixed rules. Game theory attempts to predict, understand and explain activities as diverse as pricing strategies of firms, lobbying of political parties, and a couple’s choice of evening entertainment. Applied initially to economics, but now prevalent throughout the social sciences and in evolutionary biology, work in this field is characterised by its abstract and mathematical approaches and its emphasis on finding common structures among diverse social phenomena.
We believe that the focus of much analysis of the value of arbitration is on the ability of the arbitrator, and the arbitration process, to enable parties to come closer to what a calm, reflective and rational negotiator would achieve. In other words, the process helps parties to separate people from the problem and to overcome cognitive biases, such as reactive devaluation and attribution error, which so often plague traditional negotiations where parties are motivated to protect their positions and reduce the risk of making unnecessary concessions. Undoubtedly, arbitration adds a huge amount of value in this dimension by helping parties communicate more effectively, avoid protracted negotiations or costly court procedures, and maintain (or even enhance) personal and commercial relationships in the process.
However, game theory suggests that arbitration could add value compared to pure negotiation, even when the parties are supremely rational, wholly self-interested agents, subject to none of the cognitive biases and other such psychological (or apparently irrational) impediments to negotiation that permeate everyday life. We believe that this aspect of arbitration’s value is relatively underplayed and under-discussed, at least in some forums. We view it is as a fruitful area for arbitrators and those interested in arbitration to explore. The experiences of arbitrators could be brought together with more theoretical approaches to give richer understanding of this side of arbitration.
A range of literature in the rational-actor paradigm of traditional game theory has asked the question: ‘How is it that arbitration can add value?’ To many, this would appear to be an odd question to ask. But to the game theorist, it is natural. In this context of supreme rationality, why couldn’t any offer that an arbitrator communicates on behalf of a party be equally well communicated by the party directly? And, if there is no role for the arbitrator to help the super-rational parties explore all the options, weigh costs and benefits, and avoid cognitive traps, what then can the arbitrator add? Why not dispense with the arbitrator altogether?
The answer to this question has proved to be more complex than some game theorists first supposed. Actually, research predicts that an arbitrator can add value relative to a pure negotiation process between rational actors by helping parties to overcome one of the fundamental challenges in negotiation: generally, by applying the ‘BATNA’ yardstick, parties know what they would be willing to settle on, but they don’t know what the ‘BATNA’ is for their negotiating counterpart. This is the origin of the incentive to disguise one’s own true negotiating position and to resist making concessions as far as possible. This can lead to the parties failing to reach a settlement, even when there are potential agreements that would give both a better outcome than their ‘BATNA’.
One way arbitrators can, in theory, help disputants overcome this possible barrier is by taking some information from parties, but transmitting only a portion of it to the ‘other side’. For example, if an arbitrator commits to using his or her first exchanges with parties to establish whether the agreement might be possible (i.e. the fact that a ‘zone of agreement’ exists between the parties) and to break off negotiation if it is not, but not to tell the parties the specifics of what has been disclosed to the arbitrator. The incentive for parties to be strategic and bid up or down their offers is much reduced as they risk losing a deal by overplaying their respective hands.
An arbitrator can also help by administering a pre-approved process to which parties could not rationally adhere to if negotiating on their own. For example, an arrangement could be made to place a time limit on the arbitration process. An arbitrator who stands to neither gain nor lose by implementing this arrangement would be committed to doing so (and the parties would know this), even when one or both negotiating parties might be prepared to modify the time limit in order to drive a harder bargain.
Professional arbitrators see dynamics of this sort playing out regularly in reality. In a sense, the parties perform for the arbitrator and act more reasonably by virtue of his/her presence.
We think that game theory can help us better analyse aspects of the arbitrator’s role, hitherto perhaps understood tacitly and pursued on instinct and experience. As theory and practical experience accumulate, there is surely much to gain from bringing together the findings of the game theoretic literature and the insights of arbitration practitioners.
COTI’s Arbitration Layer
The COTI Arbitration Layer is a decision protocol for a multipurpose court system able to solve every dispute type. It is COTI’s autonomous system that works as a decentralised third party to arbitrate disputes, from very simple to highly complex disagreements. Every step of the arbitration process (securing evidence, selecting jurors, etc.) is fully automated, with the exception of juror decisions, once a dispute reaches disagreement between the parties.
COTI does not rely on the honesty of a few individuals, but on game-theoretical economic incentives. It is based on a fundamental insight from legal epistemology: a court is an epistemic engine, a tool for ferreting out the truth about events from a confusing array of clues. An agent (jury) follows a procedure where an input (evidence) is used to produce an output (decision). COTI leverages the technologies of crowdsourcing, blockchain and game theory to develop an arbitration system that produces true decisions in a secure, efficient and inexpensive way.
The COTI payment system is designed to provide users with a new level of quality for this service. COTI is a complex and comprehensive solution, incorporating many important features on the protocol level. One of the most important services provided by COTI is arbitration.
The COTI Arbitration System provides users with a quick, reliable and inexpensive way to resolve disputes. This highly required feature is not possible with other cryptocurrencies, as COTI provides a ready-to-use service any customer can appeal to.
COTI’s Arbitration System is a decentralised application built on top of the COTI Trustchain that works as a decentralised third party to arbitrate disputes between buyers and sellers. It relies on game theoretic incentives in order for jurors to correctly rule cases. The result is a dispute resolution system that renders ultimate judgments in a fast, inexpensive, reliable and decentralised way.
In the COTI Arbitration System disputes are resolved by an arbitrator jury randomly picked from a large pool of highly trusted network participants. The process of forming the arbitrator jury, decision and settlement is decentralised and cannot be biased by any party.
This document describes the complete set of rules, principles and architecture of the COTI Arbitration System.
Incentive system
Jurors rule disputes in order to collect arbitration fees. They are incentivised to rule honestly because after a dispute is over, jurors whose vote is not coherent with the group will lose arbitration fees that will be given to coherent jurors. After the COTI Arbitration System has reached a decision on the dispute, tokens are unfrozen and redistributed among jurors. The redistribution mechanism is inspired by the Schelling Coin, where jurors gain or lose arbitration fees depending on whether their vote was consistent with the other jurors.
Small disputes are defined as training disputes for new arbitrators for which the network will favor assignment, while still making sure that at least one veteran arbitrator is added to the poll.
We will assume a jury member voted coherently if he/she voted for the option chosen by the majority. The amount of tokens lost from the arbitration fee per incoherent juror is : α ⋅ min activate ⋅ weight. The α parameter determines the number of tokens to be redistributed after a ruling. It is an endogenous variable that will be defined by the governance mechanism as a consequence of the internal dynamics of the voting environment. The min activate parameter is the minimum amount of tokens that can be activated in the dispute. The arbitration fees are divided between the coherent and incoherent parties proportionally to their weight. Parties are considered coherent if they voted as the majority.
You can see an example of token redistribution in the figure below:
An example of the distribution of $100 dispute fees:
How to calculate the fee percentage for each arbitrator:
Jurors could fail to reveal their vote. To disincentivise this behaviour, the penalty for not revealing one’s vote is twice as large as the penalty for voting incoherently (2⋅α⋅min activate⋅weight). This incentivises jurors to always reveal their vote. In case of appeals, the tokens are redistributed at each level according to the result of the final appeal. When there is no attack, parties are incentivised to vote what they think other parties think is honest and fair. In COTI, the Schelling Point equates to honesty and fairness. One could argue that these decisions being subjective would not enable a Schelling Point to arise.
The informal experiments run by Thomas Schelling showed that in most situations a Schelling Point plebiscite by all parties does not exist. But Schelling found that some options were more likely to be chosen than others. Therefore, even if a particularly obvious option does not exist, some options will be perceived as more likely to be chosen by others parties and will effectively be chosen. We cannot expect jurors to be right 100% of the time — no arbitration procedure could ever achieve that. Sometimes, honest jurors will lose arbitration fees, but as long as they lose less value than what they win as arbitration fees for other incoherent parties, the system will work.
Arbitrators are incentivised to participate in the dispute resolution by the arbitration fee. This fee depends on the stake in COTI coins by the arbitrator on the particular case.
The most effective incentive for arbitrators to be fair is the pursuit of justice, which is instinctive human nature.
The main motivation problems to be dealt with are: 1) the “lazy” strategy , that is to not read case data, provide a random vote and earn a fee 2) the possibility of a biased opinion based on affiliation, nationality, religion, culture, gender, etc.
To mitigate these problems, COTI will implement the following measures:
- Arbitrators are highly trusted network participants according to the Trust Score metrics. High Trust Score value means that if the arbitrator is successful in a societal activity, so we may suppose that he/she is a responsible person.
- Arbitrators are randomly chosen.
- There will be a control set of questions automatically generated from the case data to check that the arbitrator completed them.
- There will be an AI-based system to analyze arbitrator votes to detect possible biased or ‘lazy’ arbitrators.
- Depersonalisation of case data to the maximum extent possible.
Arbitrators
The COTI Arbitration System maintains a pool of reputable network participants from which the arbitrators are randomly chosen for the arbitrators jury. Users are invited to the arbitrators pool if they have maintained high Trust Scores. The Arbitration System is a decentralised human-input service, even when a particular arbitrator is a legal entity.
It is not required for network participants to deposit any amount of COTI, or maintain any amount of COTI to be invited to the arbitrators pool. However, to participate in the arbitration process it is required that arbitrators have a sufficient amount of COTI locked per their stake and released once the dispute decision has been made.
Arbitrator jury
The arbitrator jury is selected randomly after the Arbitration System has received the claim and accepted it.
Arbitrators work independently to validate real world information pertaining to transaction disputes and then cast votes on a mediated outcome.
Arbitrators receive case data and cast their votes using the arbitrator client. They are not able to communicate with one another and are unaware of how many other arbitrators are involved in resolving a dispute.
The number of arbitrators is dependent on the case and the dispute stage.
Closing Remarks
COTI is uniquely positioned to provide the infrastructure needed for industries requiring immense scalability, in addition to an arbitration mechanism to resolve disputes, fraud (e.g. double spending) and errors.
The COTI arbitration system provides buyers and sellers with protection against errors, fraud and counter-party abuse. One of the greatest barriers in e-commerce is the lack of trust between parties that do not know each other and may never transact again. What’s more, buyer-seller protections are absent in the cryptocurrency sphere, which has prevented the mass adoption of digital currencies.
To read more about COTI’s arbitration service please refer to our latest whitepaper.
