UPDATE 13 Feb, 2020: Telos Arbitration is now referred to as “Telos Resolve”

Early blockchain systems like Bitcoin and Ethereum were completely peer-to-peer with no centralized payment processors between users to stop or redirect transactions. This was unique and exciting compared to all previous ways to transfer money. However, it did have some drawbacks. For example, people using a bank to process payments have the option of recovering their account if they lose their password, or reclaiming a payment that was sent incorrectly. With cryptocurrency this was not possible. Lost private keys or transfers to incorrect addresses were simply lost forever with no recourse. The theft of keys through phishing or other methods is also a problem because in most cases it is impossible to recover stolen funds. And when smart contracts came into the picture, the situation got worse because there was also no way to fix contracts that had errors and failed to work as planned.

A remarkable amount of money has been lost forever from these issues and they stand in the way of mass adoption. Most computer users are not prepared for a world where there is no form of account recovery whatsoever and will not dedicate their funds to a system with no protections. To reach mass adoption, blockchain needs to develop a way to help these users while still retaining the advantages of an immutable blockchain.

Why arbitration?

Arbitration is eos.io’s answer to this problem. As a governed blockchain, Telos has rules about what is and is not permitted. Arbitrators are people who interpret these rules and the evidence presented by the parties to make an impartial ruling that is then passed to the block producers for execution. Every Telos user agrees to be bound to this arbitration system as part of the Telos Blockchain Network Operating Agreement (TBNOA) that they accept upon use of the network.

Wherever value is stored, there will be disputes about who owns what or who owes another person money. Smart contracts compound the disputes whenever there is a different understanding between the parties about exactly what a contract is supposed to do. Eventually these misunderstandings or disagreements turn into disputes and sometimes even legal battles.

Telos is a global network with block producers, developers, and users around the world. If a dispute went to a court, it would be extremely complex to determine which country would have jurisdiction and what laws would be used to interpret transactions. Consider this: If the person invoking a smart contract is in one country, the open source developers are in three different countries, and the block producer that first processed the transaction is in yet another country, where should a court case about this be heard? Now imagine that millions of dollars are at stake: the dispute would be a giant, expensive mess with little hope for resolution.

To avoid this, Telos requires every participant agree to binding arbitration for all matters involving any value or information recorded on the Telos Blockchain Network. The TBNOA also specifies a country of jurisdiction for all cases (the British Virgin Islands) that has very strong support for legal agreements that specify binding arbitration and also allows the actual rules to be stipulated by the parties. (Telos does this in the Telos Blockchain Network Arbitration Rules and Procedures (TBNARP)). This means that whenever a dispute arises, the national courts of every jurisdiction should look at the clear terms of the TBNOA and see that the British Virgin Islands has jurisdiction over all disputes. The British Virgin Islands would then uphold the binding arbitration agreement between the parties. (BVI laws even say that the validity of binding arbitration can only be challenged within the arbitration itself.) But this is an extreme example; the laws are well understood and few challenge them because they are ironclad. The result is that most binding arbitration cases avoid national courts altogether and move straight to arbitration.

Telos Arbitrators

So, Telos members have a way to bypass a rats’ nest of national court systems and use Telos arbitrators to resolve any disputes between users. But where do these arbitrators come from? The Telos Launch Group (the TLG — the people who founded Telos) determined that there was no fair or decentralized way to appoint these people, even temporarily. For arbitrators to have authority over values recorded on the chain, they would have to be elected by the Telos tokenholders, as block producers are. This is the source of their legitimacy.

Any Telos user can nominate themselves as a candidate for an arbitrator position. The block producers vote on how many arbitrators may be elected at any time (currently 21) and whenever the number of elected arbitrators is lower than this number, there can be a new election. Elections last 5 million blocks, which is about 29 days. Arbitrators must meet minimum requirements (possessing a four-year college degree or equivalent and revealing their identities are two requirements) and agree to abide by the arbitrator registration agreement that they sign when nominating themselves as a candidate (called ‘regarb’ or ‘regcand’).

Once a member has nominated him- or herself as an arbitrator candidate and the election has begun, all voters may vote for the arbitrators of their choice. Voters may choose based on campaigning or simply from reading the candidate’s statement that each posts along with their nomination. Arbitrator elections are a “Leaderboard” type election where multiple people can run for multiple seats and those who receive the most votes win the seats (up to the number of available seats). At the end of the 29-day election period, the candidates who have received the most votes will automatically be added to the table of arbitrators, allowing them to hear and rule on arbitration cases. Each candidate must reach a minimum threshold of votes in order to serve, however, to prevent candidates without support from winning a seat simply because there were not enough people running.

Each Telos Elected Arbitrator serves for three years and may run for re-election during the last month of their term to provide continuous service. Elected arbitrators are protected by general liability insurance paid for by the Telos Foundation, so these terms are necessary both to allow the insurance to be written, and to reduce the amount of time arbitrators need to spend campaigning.

The first arbitrator election

The first arbitrator election is coming up very soon. It’s important to elect Telos’s first arbitrators because until that happens, no cases can be heard. Telos has been fortunate that no cases have yet arisen, but that will change in time. And besides large disputes, arbitrators also hear cases regarding lost keys and mistakenly sent transactions, and there are members waiting for these services already.

Prior to the Telos launch, the TLG Arbitration Working Group found eight exemplary candidates who nominated themselves as arbitrators. [https://telosfoundation.io/arbitrators]. Seven of these are practicing attorneys and one led the lost key recovery program for the TLG. No doubt, there are more excellent candidates available. The election was initially planned for immediately upon launch, but has been postponed to provide time for more users to join Telos so that there’s less chance that arbitrators will be elected by a small minority of very early adopters.

Once an election is opened (date to be determined by block producer vote, but soon after the publication of this article) these members — and any other candidates — will officially nominate themselves on-chain using an interface that supports arbitrator nomination and voting, such as Sqrl wallet, the command-line wallet, or an online portal. The nomination period will close after a period determined by the BPs, but probably 1 million blocks or 5.8 days after it opens. Users will be able to vote once the election begins. Twenty-nine days later the election will conclude. Elected arbitrators will receive training materials provided by the Telos Foundation in the TBNARP, blockchain, DPOS and Telos fundamental principles, and the arbitration process. From that point they will be able to mark themselves available to receive cases.

Filing an arbitration case

When users have a dispute, they file an arbitration request using the built-in tool in a wallet like Sqrl or an online portal. (These tools are still being developed and tested as of this writing but will be available around the time that arbitrators have been elected.) To file an arbitration case, a member will input certain information like their account name, the account name they are in dispute with, and the type of claims they are making.

Claims fall into several categories and a case may have more than one. For example, if an account’s keys have been phished by a misleading website, the owner may file a case with claims for an emergency freeze of the funds before they can be transferred, a claim for recovery of the stolen account, and a claim of a tort, or compensation for harm caused by the account for phishing their keys in the first place. The account filing a claim is called the “claimant” and the account responding is called the “respondent.”

Cases can also be a single claim, as when a person claims to have lost the keys to their account and seek to have new keys applied to it so that they can recover the account. In a case like this, a claimant would have to create a new Telos account in order to file, and their old account would be the respondent, even though it is essentially a case against oneself. However, lost key claims like this could potentially become a way to steal accounts from others, so there needs to be strong proof of ownership in order to recover keys from one’s own account. Arbitration can’t ever be allowed to become a vector for stealing from the accounts of others. Therefore, most cases will require some form of cryptographic proof such as a signed message or transaction from an account used to purchase the tokens in the first place. There will soon be a number of documented processes for users to show evidence for ownership of lost accounts or mistakenly sent transactions that should be persuasive in most cases.

Arbitration proceedings

Arbitration proceedings are a process that hopefully most Telos users will not ever need to encounter. They will be the subject of another chapter.

Arbitration fees and expectations

Telos members should not look at arbitration as a panacea for all the ills Telos may face. Arbitration has both costs and limitations, and should be used with care and thoughtful consideration.

Arbitration is supported by fees paid by the claimant and respondent (along with some initial bootstrapping funds from the Telos Foundation). These fees are still to be determined, but they are intended to be as affordable as possible for the parties, while still attracting high caliber arbitrators to apply their time and experience towards bringing a just practice to Telos users. The fee schedule will aim to set lower fees for simpler cases like lost key recovery, but there will always be cases that aren’t worth submitting because the amount that can be recovered is less than the cost of arbitration. Every judicial system in the world has this limitation at times and Telos is no different.

Another limitation is the ability to act as quickly as thieves can move funds. Even though a temporary freezing of accounts to protect disputed funds is provided for under Telos Resolve rules, it is not always possible for accounts to be frozen in time to secure them. An arbitrator must receive and review the order, then direct the block producers to freeze the account, which requires a vote of at least 15 BPs, while a thief could send funds to an exchange in moments. It’s also possible that a claimant could win a case but the respondent would not have enough funds to pay the judgement. Every legal system has these shortcomings. It’s important to have realistic expectations about what arbitration can accomplish. It is likely to be most effective in honest disputes between parties needing an impartial referee, and in the recovery of lost and stolen accounts or mistaken transactions.

One advantage Telos does have over traditional courts and arbitration is that in most cases, Telos Resolve arbitration proceedings will have the benefit of a perfect record of blockchain actions, and cryptographically signed transactions to prove ownership. It is exceedingly rare for any type of trial or arbitration to have evidence this strong, yet Telos arbitrations are likely to have them in nearly every case. For this reason, the Telos Resolve process seeks to move forward at a much faster pace than other court cases or arbitrations.

As a result of this exceedingly strong evidence in many cases of disputed account ownership, it is expected that the respondent may never actually respond in the majority of phishing cases, for example. The TBNARP takes this into account and aims to reduce unnecessary waiting to a minimum. (Other forms of arbitration generally must wait at least 30 days for a response before a hearing can begin, even in cases like this.) However, Telos arbitrators must guard against this speed ever becoming an exploit that thieves could use to steal accounts from people who are just not paying close attention to their accounts on a daily basis. Therefore, cryptographic evidence of account ownership is generally going to be required for all account recovery.

Taking action

Arbitration is an important part of Telos that helps it evolve beyond early forms of blockchain into something much more suitable for broad adoption. But democratic systems are only as good as the people working and voting in them. Telos needs quality arbitrators to hear cases. This is an important responsibility, but also an opportunity to engage in the Telos economy and earn money. Anyone with a knowledge of the Telos system and governance and a strong interest in being a part of it should consider becoming a candidate for a Telos arbitrator. Telos members should familiarize themselves with arbitrator candidates and vote. Voting has no cost and does not tie up your tokens in staking. (Voting for arbitrators currently uses a token-holder’s measure of both staked and liquid TLOS for its vote weight.)

A How-To guide for becoming a Telos arbitrator candidate and for voting for arbitrators is found here: https://medium.com/@goodblock_info/telos-users-guide-tutorial-telos-arbitration-ecd803c0d50

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