The Next Frontier in Dispute Resolution for Cryptocurrency Transactions
In the current climate of digital currencies, buyers and sellers transacting with cryptocurrencies like Bitcoin and Ethereum will have to independently work out differences, if any, that arise between them. While credit card companies and Paypal use third party dispute resolution organizations (DROs) to handle complaints between transacting parties, the cryptocurrency space has yet to realize a workaround to this issue. In an ideal world if someone decides to sell a product or service and another person agrees to buy it for a specific price, then both parties would deliver on the agreement. Nevertheless, a deviation from the exchange can occur — people don’t always meet their obligations and fraud can occur. Some of the most common scenarios that necessitate mediation include billing errors, inadvertent transfers, unauthorized charges, undelivered goods or services or their unsatisfactory procurement. As it stands, if a seller decides to close doors and not negotiate, it would be quite difficult for the buyer to recover his or her funds.
One potential solution that has been adopted by a handful of cryptocurrencies on the market is an external escrow system that holds onto funds until the buyer is satisfied and decides to release funds to the seller. This multi-signature approach — also known as ‘multisig’ — relies on the collective agreement of multiple parties to authorize a transaction. It also helps to drive down fraudulent exchanges by verifying that a third party isn’t barred from receiving funds. CryptoCorp is one company that uses a multistage approach to carry over pre-clearance authorizations of credits card payments to bitcoin transactions. Credit card companies typically decline a transaction if a credit card has been reported stolen, or if a merchant’s account has been suspended due to multiple chargebacks, fraud or when the charge amount exceeds predefined limits. Bitsquare, a decentralized exchange, is yet another company that relies on trusted arbitrators to mediate transactions and resolve disputes.
Other payment transaction networks like COTI are building out complete mediation and trust scoring systems to manage counterparty risks and pave the way to friction-free commerce. COTI’s Mediation System serves to protect buyers and sellers in the event of disputes arising within the network, while the Trust Scoring Engine adds a layer of trust to all COTI transactions and disincentivizes behaviour that is dishonest or unfair. COTI’s approach to mediation harnesses the power of a decentralized and distributed group of independent mediators to handle disputes.
Mediators work independently to validate real world information pertaining to transaction disputes, and then cast votes on a mediated outcome.
They are not able to communicate with one another and are unaware of how many other mediators are involved in resolving a case. In other words, counterparty risk is eliminated by using profit-seeking individuals as trusted third parties to figure out which side failed to live up to the agreement.
Once a mediated decision has been reached, the system compensates the winning party, drawing capital from COTI’s reserve credit fund. Mediators are paid an amount of COTI’s native currency, C.O.T.I, for each instance in which they contribute successfully to reaching consensus, while the Trust Score Value for the losing party is driven down.
There are a number of similarities between Bitcoin miners and COTI’s mediator system: they both contribute to the healthy functioning of their networks. Miners and mediators both receive remuneration for their efforts; the greater their contribution to the network’s integrity, the greater the incentives.