Kleros-MARKET Protocol Partnership Announcement
Building the Legal Infrastructure for Decentralized Finance…
Derivatives are almost as old as mankind itself. The first-ever options trade in recorded history can be traced back to the 6th century B.C.
In his book Politics, Aristotle relates how Greek philosopher and mathematician Thales made an option type-agreement with olive producers when he deposited a small sum to have the right (but not the obligation) of buying olives at a low price.
Two and a half millennia have gone by from that simple contract to today’s derivatives markets worth over 500 trillion. Derivatives are a key component of modern economy allowing for companies to manage different types of risk: airlines use them to hedge jet fuel, farmers use them to hedge crop prices and banks to hedge interest rates.
MARKET Protocol is a leading project aiming at the decentralization of derivatives markets.
A key condition for the adequate functioning of derivatives contracts is access to reliable sources of information. Upon expiration, contracts are settled using price data (e.g., the market price of a crop or a cryptocurrency). With millions of dollars at stake, it’s critical to make sure that this data is accurate.
Traditionally, parties have trusted centralized service providers for supplying such information.
However, a fully decentralized derivatives market requires a decentralized oracle and a decentralized dispute resolution process. In case one party notices a price it believes to be incorrect, a dispute can then arise. For example, one party claims that the price for settlement should be $95 and the other claims that it should be $105.
A disagreement in this matter can have an impact of millions of dollars going the wrong way or staying locked into the contract forever.
How Can Kleros Help?
Kleros’ decentralized dispute resolution process can provide a fast, affordable and secure solution to settlement disputes regarding price oracles in MARKET Protocol.
This is how it works:
1) When a new contract is created, parties agree to use Kleros for dispute resolution regarding oracle data. This will be carried out in the form of an arbitrable price oracle in which jurors solve disputes regarding prices at the time of the settlement (to understand how this works, read this article).
The arbitrable contract would have to implement the ERC792 arbitration standard. This will allow MARKET Protocol users to choose their dispute resolution system between centralized arbitrators, Kleros, or other arbitrators following the standard.
2) Should a dispute arise, it would be solved using Kleros dispute resolution system. Crowdsourced jurors would define what price should be used to settle the contract.
3) After jurors have voted the right price, they all receive a compensation for their work, and the contract is settled.
We’re excited about this new partnership with MARKET Protocol. As with our other agreements in e-commerce, payments and floating cities, we believe this is another important step for Kleros to provide the basic arbitration infrastructure for powering the emerging decentralized ecosystem.
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