Blockchain governance is a critical issue as the technology gains wider use across industries. It attracted close attention after the Ethereum DAO incident, where a token holder exploited a bug to funnel about one third of the total value in the network into their own account. (The bug was later fixed via a “forking” algorithm, but the issue remains an open question.) More recently, the heist of more than half a billion dollars’ worth of digital currency from the Coincheck exchange in Japan was largely due to a weak governance structure, which in turn was because of lack of standardization to enable timely action.
Governance is about who makes the rules and who enforces them. It is not only about the control of the blockchain; it identifies resolution mechanisms to deal with technological issues, user disputes, and other violations.
Because blockchain technology has naturally evolved from traditional industries and existing projects, we look to real-life governance solutions used by traditional projects to guide our development of analogous solutions for the blockchain ecosystem.
In this article, we review several real-life governance use cases in both traditional industries and blockchain projects. For more blockchain governance use cases, we invite you to review our earlier article.
Traditional Governance Solutions
Case 1: XianYu Small Claims Court
XianYu (means “Idle Fish” ), Alibaba’s customer-to-customer platform similar to eBay, was established in 2013. Today, it has over 200 million registered users and more than 16 million active users, surpassing Taobao, the biggest e-commerce platform in China.
As the biggest and most popular second-hand e-commerce platform in China, XianYu handles almost two thousand user disputes daily. Most cases involve no more than 10,000 RMB (~USD $1,400), but due to the high volume of those cases, the aggregate amounts in dispute handled on XianYu daily are considerably higher than most public chain projects are likely to face. So far, XianYu has handled user disputes well, continuously attracting new users and retaining existing ones.
XianYu Small Claims Court provides governance and dispute resolution for XianYu platform, and it is is modeled on the Anglo-American jury system. Similar to how the jury system operates, XianYu Small Claims Court randomly invites 17 users with at least 700 Sesame Credits (Sesame Credits is a private credit scoring system introduced by Alibaba, similar to the credit scores in the US) to resolve user disputes. The party that receives 9 out of 17 user votes wins the case. If disputing users are not satisfied with the result, they may appeal.
User Flow of XianYu Small Claims Court:
- Users with high Sesame Credits are notified of a new arbitration task.
- Jurors accept the case and enter the arbitration process.
- Jurors vote, and XianYu Small Claims Court announces the winner.
- Jurors provide reasons for their votes.
Design Characteristics of XianYu Small Claims Court:
- Community jury system eliminates costs associated with maintaining customer service.
- Community jury system delegates governance to the community (and takes it away from the platform owner) to increase fairness.
- The system would still run even if the jury is not filled. The platform automatically requests 17 jurors, but the arbitration could be initialed with any number of jurors.
- Jurors volunteer to vote and are automatically assigned cases by the platform. No incentive system is in place to motivate the jurors to diligently approach their task.
- Jurors may vote as soon as the case is initiated, even before the parties upload their evidence.
- No KYC process for jurors. Sesame Points are the only standard for picking qualified jurors.
Case 2: Xiang Hu Bao Insurance by Ant Financial Services Group
Ant Financial Services Group is a financial powerhouse in China, with over 400 million customers. It operates Alipay, the country’s dominant online payment platform, and China’s largest money market fund, Yu’e Bao, which manages more than $150 billion in assets.
Xiang Hu Bao Insurance is a brand new community-based health protection service, allowing Ant members with at least 650 Sesame Points and meeting certain health conditions may join without having to undergo a health assessment. To ensure openness and transparency, the company introduced two measures: first, claims monitoring by members to ensure that only those who should be compensated are compensated. Second, the company uses blockchain technology for claims-related evidence, including payments.
In October 2018, there were over 9 million users on the Xiang Hu Bao platform. Let’s assume 10% (or 900,000) of them submit insurance claims this month, with an average claim value of RMB 5,000 (~ USD $700), bringing the total claims amount to RMB 4.5 billion. Xiang Hu Bao charges 10% service fee, bringing the total platform liabilities to RMB 4.95 billion. Dividing that among all users, or RMB 4.95 billion by 9 million, brings us to RMB 550 (~USD $80) monthly contribution per person. Users may terminate their membership at any time, once they have no outstanding monthly dues.
Design Characteristics of Xiang Hu Bao Insurance:
- Low cost: all members split the cost keeping the fees as low as 0.1RMB per case, per person.
- Easy to use, no tedious paperwork: patients only need to upload evidence online, and if no one raise objections, patients get paid immediately.
- Highly transparent process: all patient cases are public and verified by the community (with certain protection of patients’ privacy). Questionable cases are re-reviewed by Xiang Hu Bao.
- Based on blockchain technology: information is stored on the blockchain and cannot be changed.
- Not suitable for everyone: older people are more likely to apply for insurance compensation than younger ones. If young members choose to leave the community, it may be difficult for Xiang Hu Bao Insurance to keep the cost low.
Case 3: Alipay’s Child Protection
Today, more than 12 million children are covered by Alipay’s Child Protection Plan. Alipay has paid RMB 7.1 million for 70 cases and refused to pay for 11 cases. Out of the 11 initially rejected cases that were then reviewed by community juries, four were approved by the juries and fully paid by the company.
Child Protection Plan covers children from 1 month to 17 years old. The insurance covers 12 critical illnesses with RMB 100,000 insurance compensation limit, and there is no wait period for compensation once the case is verified by the insurance company and the community.
Child Protection Plan has no investor stakeholders. It is owned and governed by the community. As their governance solution, Alipay uses the Anglo-American common law jury system, with community members serving as jurors. Applicants need to pass a basic insurance knowledge test to become qualified jurors. When there is a coverage dispute, the case is decided by the community jury through voting.
A family learned that their child’s blood platelet count decreased and bought Child Protection Plan insurance. One month later, the doctors diagnosed the child with HIV. After the insurance company refused request for coverage, parents applied for arbitration, saying that they did not intentionally conceal the child’s pre-existing health condition. After 24 hours, 59% of the jurors voted for the family, and the insurance company covered the claim. Such an outcome would not have been possible with a traditional insurance company.
Design Characteristics of Child Protection Plan Insurance:
- Uses decentralized jury system for governance and dispute resolution and gives decision rights to the community, relinquishing centralized superpower of any insurance company to accept or refuse patient cases.
- Because all patients are children, some jurors may vote in favor of the patient regardless of claim merit, which is not fair to everyone.
- Only offers services to users with high Sesame Points.
Comparison of Traditional Jury-Based Governance Solutions and Oath Protocol:
Similar to XianYu Small Claims Court, Xiang Hu Bao Insurance, and Child Protection Plan, Oath Protocol is also modeled on the jury system, but it has developed a more complex design system.
- Jurors are KYC-verified and provide basic personal information that allows algorithms to select appropriate jurors for various cases.
- Incentive system for jurors to participate and vote: jurors are rewarded for making the right decision, building up their reputation level in the community. You can learn more about Oath Protocol’s juror credit and reputation system here.
- Specific and efficient user flow for evidence submission and voting that resolves any case, start to finish, in 8 days.
- Maintains individual juror voting records through Oath’s credit level system and its partner DREP’s decentralized reputation system.
- Using the network system, supported by random algorithms and blockchain infrastructure, ensures that the jurors are selected randomly from a diverse jury pool (within certain parameters that can be set by the parties) and do not serve on more than one jury together.
The jury system originates from Anglo-American common law, and most common Chinese users are not immediately familiar with it. But as AliBaba Group’s examples (in which common Chinese people participate in governance and dispute resolution cases as jurors) show, such a familiarity is not necessary to the system’s success. Instead, the community’s enthusiasm for effective and low-cost governance participation drives the high-rate participation.
Blockchain Governance Solutions
Case 1: ECAF
On the ECAF platform, each case is reviewed and decided by one or three arbitrators. Presently, ECAF has six professional arbitrators who have passed internal tests and reviews. ECAF decisions, including governance or suspicious account freezes, are enforced by super-block producers.
Arbitration application form from the ECAF website:
Design Characteristics of ECAF:
- ECAF uses professional arbitrators for governance and dispute resolution. All six arbitrators have completed professional training and are knowledgeable about on-chain transactions, blockchain related notions, and EOS constitution and governance.
- As a third-party governance organization, in most instances, ECAF is not implicated in conflicts of interest.
- Six arbitrators are responsible for all user disputes. Given high costs of arbitrator training and hiring, arbitration fees are relatively high, although they vary by amount in dispute.
- Semi-centralization, meaning that each case is decided by one arbitrator according to his/her professional and personal judgment. Arbitrator identities are known to public.
- Lack of tech support. There are no team members with tech expertise, which hinders ECAF from creating a technologically advanced system that would allow efficient and transparent governance process.
Case 2: Oath Protocol
Oath Protocol, modeled on the common law jury system, combines one of the most reliable legal systems from the real world with blockchain technologies, cryptography, computing algorithms, game theory reputation system, and other concepts to provide a layer 2 cross-chain infrastructure for a decentralized, standard, and extensible public chain-agnostic protocol that protects dApp users’ rights and assets.
Oath is a versatile protocol that can be used in a variety of scenarios, including, but not limited to, e-commerce, p2p marketplaces, short-term home rentals, travel bookings, content publishing platforms, blockchain insurance, prediction markets, and news verification.
- After either party initiates a dispute, both parties can set criteria for the dispute resolution process.
- Jurors are selected through the categorizing random algorithm.
- Counter-parties have 5 days to upload their evidence.
- Jurors have 3 days to vote and provide rationale for their votes.
- After the votes are collected, the case resolution result becomes public. Parties will have five days to either confirm or appeal the verdict.
Design Characteristics of Oath Protocol:
- Decentralized community decisionmaking: Oath Protocol relies on regular blockchain users to form its juror community and decide cases, initially with juries ranging from 11–101 jurors. Jurors do not need to hold OATH tokens to qualify for juries.
- Semi-decentralized voting process: only two transactions take place on-chain (and require gas fees to record): initiation of the case and recording of the case result.
- Layer 2 protocol: When chains or dApps use a smart contract that incorporates Oath as the standard dispute resolution mechanism, once the case is decided, the outcome is returned to the smart contract, which self-executes.
- Algorithms and safeguards to ensure fairness: Oath Protocol’s dynamic allocation algorithm reduces the odds of the same jury members resolving multiple disputes to avoid collusion. Oath’s categorized random algorithm, designed for reducing bias, selects jurors with diverse backgrounds to ensure fairness. The jury members’ identities are kept confidential through cryptographic techniques to ensure objectivity and immunity from external influence.
- Compatibility with any public chains or dApps: via APIs, Oath Protocol is compatible with any chains or dApps.
- Serving a wide range of use cases could be a double-edged sword. It may be hard for Oath to provide a product that can serve all these use cases very well.
The jury system, as a way to safeguard against bias and corruption and guarantee a fair outcome, has successfully stood the test of time. While it has been used in the UK and USA for centuries, its core concepts now underpin real-life community-based governance in China — a society traditionally reliant on central authority-based governance — where Alibaba has successfully gotten its regular users involved in governance and dispute resolution. There, community governance has already proven itself as a cheaper, fairer, and more transparent alternative to its traditional, centralized customer service-based counterparts.
In the blockchain context, the jury system model naturally extends to governance and dispute resolution because it is true to the blockchain’s promise of decentralization; it relies on the community — rather than individual third party — to provide input for key governance decisions, execute smart contracts, or resolve user disputes. Presently, Oath Protocol stands out among its competitors, delivering the most promising approach to the future of decentralized governance and dispute resolution. By design, it facilitates decentralized, community-based decisionmaking secured by blockchain and other technologies and featuring compelling incentive and reputation systems.
Given Alibaba’s recent success at incorporating community governance into traditional web platforms in China, it is only a matter of time until we see widespread adoption of community-based governance solutions in both traditional and blockchain businesses.
Onward and upward, Oath Protocol!
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