How to Build Trust and Solve Disputes with Smart Contracts based Dispute Resolution

Ishan Pandey: Hi Sakhib, welcome to our series ‘behind the start-up’. Please tell us about yourself and the story behind Astra Protocol?

Sakhib Waseem: Hi Ishan. It is a pleasure to be with you today at Hackernoon.

I am Sakhib Waseem, Chief Innovation & Technology Officer at the Astra Protocol. For the past 10 years of my career, I have been working in the finance and technology sector. I began my journey in data and analytics but evolved into leading the design and development of different platforms for large financial service organizations. In the main, dealing with operational efficiency disputes - specifically on high-volume and high-profile regulatory issues and the resolution of the dispute cases. Around 2013, during my journey of designing large-scale financial technology for some of the world’s leading banks, I started looking at and forming an interest in blockchain.

Initially, it was from a passive perspective around Bitcoin as a speculative asset class, but later on, in my career, it would be more so to harness the power of blockchain to track the movement of cases of work within financial programs to prove that items/cases and products can only exist in one singular state or location and how we can derive efficiency, reliable information and strong trustworthy reporting.

The story behind the Protocol: In 2017 I was approached by the now founders of Astra. They are highly regarded entrepreneurs who saw the prominence of smart contracts due to holding an extensive portfolio of patents, have an understanding of contracts, the legal sector and have worked across many business arenas for several years. The founders understood that they could potentially play an important role in the future operation of worldwide industries. They started by applying for patents, covering the assurance and validation of smart contracts, irrespective of the blockchain and the programming language of the smart contract itself, it was really forward-thinking! I was on board from the start, to lead the design and build-out of the product, ensuring that the patents fulfilled the vision we shared of a safe environment between both the traditional and crypto worlds, enabling them to converge and harness the power of DeFi in a meaningful and secure way.

The world of DeFi has grown and we have watched it as it has begun to mature, the new financial market is becoming quite prominent, and it is a privilege to be a part of the growth. We have, since the initial conception, developed the ability to validate previously executed smart contracts or those in progress. Our unique technology utilizes legal professionals to provide a security layer that does not compromise decentralization.

Ishan Pandey: DeFi protocols are stifled with hacks, frauds, and code execution errors. How does adding a legal technology stack in the framework help to solve this problem? Furthermore, how does the legal stack work with DeFi protocols?

Sakhib Waseem: If there is a rug pull (scam) a founder/owner decides to dump and leave a project or another malicious action, the token holders are left with the mess. Currently, they can either; take the loss and move on with their day; hire a PI and find out where the founder/owner is and settle out of court (we have all heard the tales of that option!), or reach deep into their pockets, lawyer up and spend the next three years waiting for a day in court and a fair outcome.

We know there is a middle ground. Our plan is to firstly equip smart contracts with the ability to initiate disputes. If something goes awry in a transaction, be it technology-based or even in the off-chain “real world”, we should be able to pause things and bring in a decentralized panel of verified legal experts from the major credible law firms. They should then be able to review the information and associated evidence to settle things and push our findings back into a smart contract.

Firstly, this mechanism of digital dispute resolution removes the ability for scams to occur, acting as a deterrent to either party. Secondly, it’s adding an additional compliance layer to projects, giving further confidence to both the community and traditional institutions sitting on the edge of DeFi, looking closely, and flirting with the idea of investing and participating.

We know that this will be the next step into a healthier ecosystem, driving massive growth, by adding more trust and more safeguards to DeFi. We will broaden the customer base beyond the existing crypto community and into more large-scale institutions and retail consumers who were previously anxious about participating.

Ishan Pandey: How does the Proof of Trust consensus mechanism work?

Sakhib Waseem: After a dispute or data validation case has been registered between two parties, The Proof of Trust algorithm selects a panel of experts from a pool of known and trusted individuals to independently review all available evidence and arrive at a binary decision. Each individual expert, known as a Delegate, submits their vote without knowing the other parties’ actions. The votes are collated, and the voting majority determines the outcome.

With up to 49% incorrect determinations, the Proof of Trust voting mechanism is more robust than many other consensus algorithms that involve entirely unknown participants, such as practical Byzantine Fault Tolerance (pBFT).

Our unique algorithm uses elements of game theory to arrive at a fair decision. Trusted network participants ensure that the Delegates are accountable for their actions. The Proof of Trust maintains a Delegate pool consisting of individuals that are more than 50% likely to vote in the majority, meaning we can exploit the Condorcet Jury Theory (CJT). We can therefore apply the CJT to a smart contract data validation case, assuming independent Delegates and, for example, a mean probability of correct determination of 95%. With two rounds of voting using 5 and 9 Delegates, incorrect smart contract execution probability falls from 1 in 20 to 1 in half a billion. I think you’ll agree that this is a huge leap!

To track and monitor the behaviour and voting actions of each Delegate, we assign all individuals a Trust Rating (a value between 0 to100). A Delegate’s Trust Rating will affect the chances of them being chosen to adjudicate a particular case, as well as the amount of work they receive. Also, Trust Rating determines the weight of a Delegate’s vote.

The Trust Rating algorithm has four primary functions:

1. Ensure a Delegate is at least 50% accurate, meaning they vote in the majority more than half of the time.

2. Increase a Delegate’s Trust Rating for voting in the majority.

3. Decrease a Delegate’s Trust Rating if they vote in the minority or fail to vote.

4. Identify the most diligent individuals who achieve a score above a particular value known as Super Delegates and therefore earn extra privileges.

A lower threshold is set such that if a Delegate falls below the 50% accuracy mark, they will be immediately removed from the Delegate pool and investigated further.

The choice of Delegates is central to The Proof of Trust’s adjudication service. Crucially, we need to select the most appropriate Delegates while avoiding choosing those who can communicate and compromise the outcome. We take several steps to prevent this situation.

1. Essential criteria include relevant skill set, availability, a connection to the case, a link to the client, and our Trust Rating. These are used to give Delegates a weighted score that determines how appropriate they are for a particular case.

2. Delegates remain anonymous to each other and the client.

3. Information extracted during KYC ensures that no individuals are simultaneously chosen who are likely to communicate.

4. Bayesian Statistics are used to identify suspicious or unusual voting patterns, which will be further reviewed. Dishonest actors will be immediately removed from The Proof of Trust ecosystem and liable for their actions.

Ishan Pandey: According to you, what are the best practices that should be kept in mind while writing code for smart contracts to ensure cybersecurity?

Sakhib Waseem: Firstly, build internal circuit breakers! From my experience, most failures are when we allow mechanisms to run unchecked or without boundaries. This is key for any measurable reading in a contract, be it a time or monetary value. Build pre-defined ranges for these values to limit the exposure for them to run wild.

Ishan Pandey: Most of the PoS blockchains have a high barrier to entry, due to which running a full node is not possible for everyone. What are your views on this level of centralization in the current state of PoS?

Sakhib Waseem: Personally, I don't believe that this is centralization from the PoS Blockchains themselves. There is always give and take. It takes time to implement more efficient ways to manage node ownership and, for the majority, it has always started with good intentions. The real barriers to entry are coming from the cost of energy consumption for long-term positions. We definitely need to look at more efficient ways to manage this going forward. Once we can do this, it'll open the opportunity to those who are currently inhibited by costs. We should all be looking at more cost-efficient green pathways.

Ishan Pandey: What are your views on incoming regulations around VASP’s framework released by FATF that bring DeFi protocol under AML and CFT regulations?

Sakhib Waseem: The rise of decentralized finance and the accompanying new service offerings and products within DeFi over the last few years has been explosive, showing the potential to disrupt the traditional financial system. Financial innovation, inclusion and efficiency can be enriched by new DeFi operations. Still, malicious actors have many opportunities to utilise the new avenues to launder finances or mobilise capital for criminal activities.

The revisions to the standards set out by FAFT aim to increase the AML/CFT regulatory implementation, not through a change in the approach to virtual assets but to increase the scope of their operations. If we look back to 2019, when FAFT initially revised their standards, there has been rapid and robust growth in the sector.

The inclusion of DeFi into their new standards is not a precursor to a padlocked, suffocated market but the updated draft guidance massively expands the types of entities that might fall under FATF’s umbrella. It currently remains uncertain whether the regulations would agree or disagree with decentralized markets.

In their 2021 report, FATF finds no evidence that the previous revisions have stifled innovation in the virtual assets sector, instead indicating that increased regulatory certainty and robust AML/CFT standards are acting as facilitators to the international level commercial expansion and public adoption.

At our organization, we believe in the same vision about the long-term institutional adoption of DeFi. Although we believe that any regulation should be made to fulfil the potential of the DeFi market, without any regulation, be that at the international level, or through private sector innovations, Decentralised Finance does not have sufficient longevity to match such potential. If the AML and CFT activities are allowed to grow at the same rate as the market, we would see large-scale, severe intervention in the market by authorities rather than what we see with regulatory bodies such as FAFT.

Ishan Pandey: Recently, Ethereum surpassed $4,000 for the first time, setting a new peak in a spectacular rally that has outperformed bitcoin. According to you, between Ethereum and Bitcoin, which cryptocurrency will hold the #1st position in the future?

Sakhib Waseem: Seeing Ethereum hit $4,000 was encouraging, but we’ve also seen Bitcoin surpass $50,000. I don’t personally hold a position on which will be the front runner, but I would say it may be more in Ethereum’s favour at this point in time, given the sheer number of dApps running and the utility it’s providing. In the long term, it may not be either of these digital currencies, there could very well be another mechanism in the next few years, but undoubtedly they are both monumentally important to the industry.

Ishan Pandey: According to you, what is the future of DeFi? Furthermore, what are the certain limitations regarding Dapps and Defi applications running on the ethereum blockchain?

Sakhib Waseem: I truly believe that the future of DeFi lies in the balance of harmony between regulators, traditional institutions and the crypto community.

We know the transformative power of DeFi; this has been recognized by traditional institutions and governments. However, the lack of safeguards, the rampant scams, rug pulls and dumps have created an atmosphere of fear. Fear leads to over-regulation or indeed, a clampdown. We've seen this with a few of BINANCE's product offerings and the EU, which is looking at financial reporting of high-value transactions, could again lead to further restrictions.

We’re at a crossroads where the world of DeFi can continue as is, stubbornly moving forward whilst facing oppressive movements. Alternatively, we implement more secure compliance layers, so we can move forward and prove that it’s a secure environment, limiting exposure to risk and playing more actively in creating healthy ecosystems.

Disclaimer: The purpose of this article is to remove informational asymmetry existing today in our digital markets by performing due diligence by asking the right questions and equipping readers with better opinions to make informed decisions. The material does not constitute any investment, financial, or legal advice. Please do your research before investing in any digital assets or tokens, etc. The writer does not have any vested interest in the company. Ishan Pandey.