Kleros is a decentralized jurys and arbitrated smart contracts system developed on the Ethereum blockchain. Since web 2.0 our economy has gotten global and our transactions are more and more often cross border whether it is regarding e-commerce, financial services or simply work. Therefore, the founders of Kleros are convinced disputes that will arise from this paradigm will be more and more global and will no longer concern local courts at all. Added to this the decentralized aspect of our daily cross border transactions brought by web3 and blockchain, one can securely expect a constant flow of decentralized disputes in the near future. The point of using Kleros is not only to resolve disputes, but to establish a decentralized justice process using the Pinakion (PNK) token based on ERC20 standard as well as the tokens integrated in the Token Curated Registry (now called Token² Curated Registry or T2CR). The T2CR has three main features in which you can participate in decentralized dispute resolution: by becoming a decentralized jury, by interacting with the token curated list Dapps or by funding appeals.

Even though decentralized arbitration courts may seem a simple concept, they actually involve a heavy load of blockchain technology, of which decentralized courts will rely mainly on three Ethereum token standards being ERC20, ERC792 and ERC1497. First, ERC20 standard is the fungible token standard used by most of the Ethereum-based cryptocurrencies on the market hence PNK integration of the ERC20. The other advantage of the ERC20 standard is its capacity to interact with smart contracts and this is where Kleros has an edge. The arbitration system is creating two contracts when a new arbitration fee is deposited on the system, the Arbitrable contract and the Arbitrator contract – the latter giving the decision to be enforced on the first. This is where the ERC792 standard comes into play by creating a dispute, an appeal in case of necessity and paying the fees. This standard is considered the arbitration standard since it not only creates the two smart contracts that will interact during the ruling but also makes interoperability possible with other decentralized applications (Dapps) requiring arbitration. Last, the ERC1497 standard has the burden of proof therefore it is considered the evidence standard. By following the previous standard references, this standard standardizes MetaEvidence and Evidence which are required variables to resolve the dispute. These must be created before the dispute is created on Kleros.

The ecosystem currently relying on Kleros tokens for dispute resolution is already broad and goes beyond transactions. It is now involving disputes in the whole decentralized finance (DeFi) ecosystem that Ethereum has made possible involving crowdfunding, financial markets, content moderation, insurance, freelancing, intellectual property, e-commerce, gaming, logistics, token listing etc. Even though those sectors may have at first glance few in common, they all potentially need Kleros for dispute resolution, escrow, interoperability between Dapps or off-chain/on-chain applications, and they can be broken down into three main use cases in which Kleros dispute resolution system built Trust As A Service in DeFi which are Classification As A Service, Justice As A Service and Turth As A Service.

In operational terms, Kleros recently concluded a partnership with the UNION Finance DeFi protection protocol to integrate both the arbitration and the evidence standards. That way they increase the level of protection while maintaining cost reduction to stay competitive on the insurance market. This type of integration is greatly beneficial for DeFi on both aspects of cost efficiency. Many protocols already would have benefitted from Kleros and several thefts would have been avoided. The most spectacular way Kleros can benefit DeFi is flash loans. Since this solution is based on automatic borrowing on a smart contract, it can lead to massive fraudulent orders as it has been seen on the Aave protocol in early 2021. A DAI lending pool on Yearn Finance was used to execute a malicious flash loan leading to the loss of $11 million worth of DAI and a bounty of $2.8m for the pirate. This attack is the first of 2021 and it should be the last one! Since Uniswap has already integrated Kleros, this use case proves the revolutionary aspect of the system. Therefore, it shows two things: DeFi platforms should integrate Kleros right now to prevent fraudulent moves and improve their safety. Another aspect of token listing is that a DEX does not have control on token listing so there can also be fraudulent listings. This situation is ambiguous because token listing cannot be in control of the platform founders otherwise it would be centralized. Therefore, Kleros decentralized listing would be a perfect way to ensure both decentralization and cost-efficient safety for DEXs.

As mentioned earlier, decentralized jurys interact via the PNK token or any token featured on the T2CR that earns a compliance badge. Quality control is ensured by a Decentralized Curated List on Ethfinex, now called DiversiFi. Currently, other DEXs are integrated in Kleros such as Uniswap that is using the service to create the very first decentralized token listing service. This sets a precedent because not only Kleros distributes a badge to compliant tokens, now it is even used by other platforms as a compliance process. And this transparent layer of compliance is a strong advantage versus the traditional insurance companies who are often accused of non-transparent claim management and doing everything they can to avoid compensating the plaintiff. This is especially interesting because the authentication reliability of Kleros can be applied both to a coverage product or compensation for a financial loss because of a decentralized dispute. Kleros can be used as a decentralized claim arbitration and will also add an additional layer of reliability for the insurer.

As a conclusion, Kleros is not only improving the efficiency of DeFi thanks to a safer and more transparent authentication and transaction pattern but also it leads the way in other functions to DeFi such as insurance where both parties are exposed to fraudulent claims. Kleros is on its way to become the highest common denominator of DeFi.