Let's review and discuss PayrLink. It's a new DApp that allows decentralized escrow and arbitration. 

Legal Technology (Legaltech) used in arbitration enabled more rapid and supposedly reliable settlement approaches by providing case management solutions, decision-making support by identifying patterns and dishonesty in disputes, and analytic data. PayrLink proposes a secure, decentralized escrow service with an option to enter into arbitration. It will be powered by smart contracts on a blockchain, although the arbitration aspect will be handled by actual human arbitrators who will be systemically determined.

The Problem

A traditional way of entering into large transactions uses letters of credit (LOC). Here, a the seller requires payment of goods using a LOC from a bank instead of direct payment from the buyer. It does this because it has no way of  knowing if a buyer could actually make payment, and also because the buyer would not be willing to  pay money up front because it does not know if the seller could deliver. The buyer now applies for a LOC with the bank, and may be required to have funds there or get approval for financing. When the shipment arrives, the bank releases the funds to the seller upon presentment of the LOC and proof that the goods were shipped. And this is just the simplified version. 

Another way is to use an escrow service. An escrow company receives the money from the buyer, confirms receipt of the items or service, and releases the funds to the seller upon confirmation of receipt of the goods or service. 

Both processes will require some expense and involves a lot of time because of administrative work and approvals. They are also suitable only for transactions involving large amounts of money. Any problems can be the subject  of arbitration or litigation. If this were an international transaction, then the the expenses would be quite expensive.

But for smaller businesses, there’s a problem.

They do not have the scale to resort to such expense. Most of the time, they just have to trust that they would be paid by the buyer. Sometimes, they require advance payment. In that case, there is also no the assurance that the buyer would receive the goods or service.

There has been a huge number of online transaction between buyers and sellers over the past year alone, but there has also been a large increase in online transaction fraud. Pursuing legal remedies for fraud may even be more expensive than taking the loss from the fraud.

The Proposed Solution

A company proposed a solution in a Whitepaper published on May 2021. It created a decentralized application – a DApp – called PayrLink. It is a digital platform that allows secure escrow functions for transactions and can also use the DApp for decentralized arbitration. Many ideas seem to have been lifted from the September 2019 Whitepaper of Kleros - a DApp developed on top of Ethereum for decentralized arbitration system.   

Here, a smart contract would be created between the two transactors – the buyer and the seller, with PayrLink as their arbitrator and agree on how the fees would be paid in case of arbitration. The parties can agree on how many jurors and which arbitration court would rule on their contract in case a dispute occurs. They would choose a type of court that specializes in the expected topic or issues on the contract. For example, a software development contract would choose a software development court; an insurance contract would choose an insurance court; etc. PayrLink also created a cryptographic workaround to obscure such data for privacy concerns, not only for individuals, but also for corporate transactions.

Upon fulfillment of the terms or conditions of the sale or service, the money in escrow is released to the seller. If a dispute arises with regard to the goods or service, its quality, etc., the smart contract allows an “Appeal to PayrLink” option which activates the arbitration option. When this arises, the complainant will be sent a form to explain her claim and attach the relevant evidence. The jurors are then selected by PayrLink, and after being given a few days to assess the evidence, the jurors will vote, and the case will be closed.

What are the fees?

To compensate the jurors, creating disputes and appealing requires payment of a Dispute Arbitration Fee. This fee is for payment of the jurors. PayrLink also takes a portion of the total amount of the dispute as a Common Transaction Fee. Common Transaction Fees will be distributed to ALL persons who have PAYR tokens staked on the PayLink DApp – not just those who participated in the dispute.

How fair will the arbitration be?

To be a juror, one has to own PAYR tokens which can be purchased from PayrLink. The company had a public sale of tokens at the price of 1 ETH for 192000 PAYR. Later on, PayrLink intends to have its tokens listed on a cryptocurrency exchange.

Jurors have to “stake” a number of their PAYR tokens on the DApp at least one month before any dispute they take part in to make sure that they have no conflicts of interest. Even then, there is still a random selection from a pool of jurors. The frequency of selection of the juror which also depends on how much PAYR is staked on the DApp. The higher the stake, the greater a chance that the juror will be chosen for his subcourt, and the greater his share of the reward from common transaction fees paid to PayrLink.

After assessing the evidence, jurors commit their votes on one of the options given by the parties. The commitments are sent in a hash to prevent jurors from copying the commitment of another. The jurors later reveal their votes to the parties, while PayLink makes sure that the vote they express are the same as their commitment as found in the hash. Jurors who fail to reveal their vote or who voted contrary to what was written on their commitment are penalized with the slashing of a portion of their staked PAYR tokens.

After making a commitment and sending the hash to show that commitment, one’s vote cannot be subsequently changed and wouldn’t be shown to others for them to copy.

What provides incentive to the arbitrators to come up with the best decision possible is the use of the Game Theory concept of Focal Points. The jurors don’t simply vote. They have to make sure that their vote is the most correct or best possible outcome in reference to the case. They will be rewarded or penalized based on their decision. Those jurors who voted with the majority decision will be compensated with their share of the Dispute Arbitration Fee determined by the subcourt where the dispute is resolved. If the juror did not vote with the majority, he would be penalized by removal of some of his staked PAYR tokens.

Use case cited in the Whitepaper:

Alice is an entrepreneur based in United States who hires Bob, a programmer from Mexico, on a P2P freelancing platform to build a new website for her company. After they agree on a price, terms and conditions, Bob gets to work. A couple of weeks later, he delivers the product.

But Alice is not satisfied. She argues that the quality of Bob’s work is considerably lower than expected. Bob replies that he did exactly what was in the agreement. Alice is frustrated. She cannot hire a lawyer for a claim of just a couple hundred dollars with someone who is halfway around the world.

If she had included in her smart contract the option to use PayLink for arbitration, Alice taps a button that says “Appeal to PayrLink” and fills a simple form explaining her claim.

Thousands of miles away, in China, Chief is a software developer. In his “dead time” on the bus commuting to his job, he is checking PayrLink court platform to find some arbitration work. He makes a couple thousands of dollars a year on the side of his primary job by serving as a juror in software develo.pment disputes between freelancers and their clients. He usually rules cases in the Website Quality Subcourt. This court requires skills in HTML, JavaScript, and web design to solve disputes between freelancers and their customers.

Chief staked 20000 PAYR from 1 month ago and is chosen. Similarly, James, a programmer from England, and Momir, from Serbia, also staked their PAYR on PayrLink and decided to take part in Website Quality Subcourt. They will never know each other, but they will collaborate to settle the dispute between Alice and Bob.

Chief analyzes the evidence and votes who is right. Two days later, after the three juries have voted, Alice and Bob receive an email: “The jury has ruled for Alice. The website was not delivered in accordance to the terms and conditions agreed by the parties. A smart contract has transferred the money to Alice”.

Jurors are rewarded for their work and the case is closed.

PERSONAL COMMENTS

The Game Theory aspect on Focal Points is very interesting. It builds on the trustless system by ensuring that those involved will do their best to obtain the best possible outcome. It may even ensure that the jurors themselves might self-police their abilities and make sure that they have sufficient qualifications to adjudicate the issues or controversies involved in the case, or they may be penalized. It is actually a beautiful system.

But I have some issues with regard to it.

First of all, the two most important things a judge or arbiter must have are impartiality and expertise. In a country’s judicial or arbitration system, these are key components that are always the focus of appointment to such positions, and for disciplinary action.

But here, the main qualification to qualify as an arbiter or juror is based on ownership of PAYR tokens. In a system where the main qualification is ownership of property or assets, what is the guaranty that the person is impartial and has the expertise to arbitrate a case, particularly a difficult one that puts a lot of issues in a gray area?

Game Theory will only take one so far. While Game Theory concepts can work in a trustless environment, the fact is that a trustless environment also interacts with the real world. And in the real world, very few people understand or appreciate cryptocurrency and would have bothered to purchase PAYR tokens. Most would be software developers who work with, or interact with cryptocurrency. That means that the pool of expertise available to PAYR would be quite limited. Therefore, there may be times that the issues brought before PayrLink for arbitration may be issues that the jurors may not have sufficient background in.

I would also think that PayrLink envisions itself to to be a go-to platform in the future for large transactions involving millions of dollars. But then we go back to one of the basic requirements to qualify as a juror – ownership of PAYR tokens.

What is to keep a large company or business conglomerate from purchasing as much PAYR tokens as possible for its employees, contractors, or other closely-related personnel so that it could have people friendly to it when it has an issue on controversy pending in PayrLink? One might point out the one-month required staking period. But forward-thinking companies may purchase tokens when they see promise in the company several months or even years before actually using its service.

The system uses ownership of the coins to incentivize people to participate as jurors for a justice system. How these coins get to the right people is something the people in PayrLink have to think about. They also have to figure out how to ensure that there will be no conflicts of interest between all the participants in the arbitration while taking into account privacy laws.

I understand that PayrLink is looking to list its tokens on an exchange where it may be traded. This can be problematic then if the PAYR tokens become expensive enough that competent jurors would find it impractical and prohibitive to purchase it for themselves. Is the objective of the DApp to provide its users with justice, or to pump its token’s value? These are not mutually exclusive, but one can’t help thinking.

Finally, there are also issues in evidence and discovery. In everything said above, we're assuming that all the facts are present and that there are no other environmental or factual issues that need to be presented. What if the evidence can be faked? What if there are factual information that only one party has access to? There are many things that can be brought out in a court or discovery proceeding that cannot be brought out in a Q&A form. Will PayrLink limit itself only for certain contracts? Or will it have some kind of oracle API that secures the required evidence?

The PayrLink DApp is a step in the right direction. But it should ask itself the questions above this early. And it has to provide those answers in the soonest time possible because it will have to answer questions like these in further investment rounds.

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A version of this was originally posted on my blog.