Let’s start from the beginning: why do we need a dispute resolution algorithm? Disputes will always arise in P2P exchanges, either due to mistakes or malicious actions from one of the parties involved. Therefore, we require a mechanism to resolve these disputes. In traditional P2P exchanges, disputes are typically resolved by a central authority, but we aim to take a different approach for our web3-native platform.
So, what are the desired attributes of our dispute resolution mechanism?
1. Decentralization: The mechanism should be decentralized, eliminating the reliance on a central authority. Relying on a central authority creates a single point of failure and the potential for biased decisions.
2. Incentivization: Users should be incentivized to support the most likely correct side of the argument. Fair dispute resolution builds trust in the system and encourages continued platform usage.
3. Confidence in Results: There should be a high degree of confidence in the dispute results. The majority should be confident that the winner is on the right side of the argument.
4. User Participation: Users should be incentivized to actively participate in the dispute resolution process. Without user participation, disputes cannot be effectively resolved.
5. Discouraging Unnecessary Disputes: Buyers and sellers should be discouraged from applying for dispute resolution. They should first attempt to resolve disagreements among themselves to avoid potential abuse of the system.
The solution that encompasses all these attributes already exists in the blockchain space: the Proof of Stake (PoS) mechanism. In our implementation, we utilize Finja Tokens, the platform’s native tokens, to enable PoS dispute resolution.
Here’s how it works:
- When a dispute is created, holders of Finja Tokens can vote to support either the buyer or the seller.
- The side that reaches a certain threshold of votes at the end of the voting period emerges as the winner.
- Voters who supported the losing side will lose a certain percentage of their staked tokens, which will be distributed among the voters who supported the winning side.
Initially, we set the threshold at 75% and the percentage of tokens taken from the losing side supporters at 10%. However, these numbers can be adjusted through the governance process.
While this solution addresses the first three attributes, additional mechanisms need to be introduced to incentivize voters to participate and discourage unnecessary disputes.
To incentivize participation, we have already implemented one incentive: supporters of the winning side receive a penalty distribution from the losing side supporters. Additionally, we plan to introduce minting of the tokens that will be distributed to voters, regardless of whether they supported the winning or losing side. The amount of tokens distributed will likely be proportional to the disputed crypto amount, similar to how Finja Tokens are minted for dispute-free transactions.
To discourage the creation of disputes, we currently reward buyers and sellers with Finja Tokens for completing transactions without dispute resolution. However, we are considering the introduction of a “fee” for initiating a dispute. This fee can be returned if the side that initiated the dispute wins, but it will not be returned and instead be paid to token holders, voters, or the opposing side if the initiator loses. This mechanism introduces the risk (potential downside) of creating a dispute and balancing the system.
Why would voters care about holding Finja Tokens? Finja Token holders will participate in earning commissions from completed transactions and have a say in the governance of the platform. This adds financial value to the tokens and aligns the incentives of voters with the long-term health of the system.
We will discuss the token distribution logic and the progressive decentralization of our platform resulting from this distribution separately.
Date: July, 16th 2023