Introduction
“Pravda Arbitrage” will be useful in the following cases:
- the deal is paid for in cryptocurrency;
- there is a time gap between payment and perfomance;
- the deal is complex or there is no full trust between the parties.
It is assumed that most of the deals are closed smoothly, by agreement of the parties and the Arbitrator is NOT usually involved at all (only at the stage of making the contract). The very possibility of the Arbitrator’s participation disciplines the parties and encourages them to fulfill the obligation in good faith.
The role of “Pravda Arbitrage” for a typical transaction:
- legal advice at the negotiation stage;
- drafting the contract (or reviewing the party’s draft of the contract);
- technical support for the DAO set-up and payment transfer to the DAO acc;
- (optional) dispute resolution during the contractual performance.
Please note, that such a transaction is “self-executing”. In case of breach, the bona fide Party together with the Arbitrator may independently enforce the contract without going to court. «Pravda» can work in isolation from the traditional legal and judicial system, and the Parties can draft a contract "for themselves", without taking the law into account. The main thing is the exact algorithm for contractual performance, which both Parties have understood and approved.
At the same time, «Pravda» will not participate in the transactions that clearly contradict public law, primarily in terms for prohibited materials and causing harm to third parties.
At the same time, «Pravda» will not participate in the transactions that clearly contradict public law, primarily in terms for prohibited materials and causing harm to third parties.
EXECUTION DETAILS
Drafting or reviewing the contract
Contract’s preparation
Arbiter and the prevailing party jointly authorize the payment transaction
Party 1 and Party 2 jointly authorize the payment transaction and withdraw the funds from the DAO
Arbiter adjudicates the dispute
Contact “Pravda Arbitrage”
Idea of the deal
Deposition of payment into the DAO
DAO creation for 2 parties and 1 arbiter
Execution of the deal
Any Dispute?
No Dispute
Dispute
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The Parties have envisioned the future transaction. They contact us.
Preparatory stage Payment (includes several hours of work).
We draft a contract for the future transaction, in accordance with the Parties’ requests. If the Parties already have a draft contract, we review it and adapt it for blockchain execution.
The task of preparation: to make sure that the contract is understood by both Parties, meets their intentions, is consistent, its execution is feasible and convenient.
All procedures are carried out remotely. The contract does not require traditional signing. Pravda makes sure that both Parties have approved the text and saves its latest version. Nonetheless, Docusign or EthSign service may also be used.
DAO creation: at this stage, a DAO will be set-up on the XDAO platform (the reliability of their smart contracts is described here).
The DAO has three Governance tokens in total, and the quorum for making any decision is set as 2/3. It means that any transaction to withdraw funds from the DAO requires at least 2 votes (i.e. «Party + Party» or «Party + Arbiter»).
The Arbiter helps the Parties create a crypto wallet and link it to the DAO. For security purposes, it is advisable to create a separate “Metamask” wallet (an extension for “Chrome” browser). Each Party independently saves the private key to their wallet.
Testing the DAO: The Arbiter checks that both Parties have connected the crypto wallet to the DAO, and distributes the Governance tokens (each Party receives 1 token, and the third token is received by “Pravda Arbitrage”).
DAO members run test transactions: "Party 1 + Party 2" and "Party + Arbiter".
Depositing the payment into the DAO. At this stage, the customer (or buyer) under the contract sends the agreed amount in cryptocurrency to the DAO account. From this point on, any withdrawal of funds requires confirmation from 2 DAO members: "Party 1 + Party 2" or "Party + Arbiter"
It is recommended to use payment in stable coins (USDT or USDC) on “Ethereum” or “BNB” blockchain. The amount of the deposited sum is determined by the Parties in the agreement.
Execution of the transaction: it is expected that the Parties will execute the transaction in good faith and transfer the payment on their own, without the Arbiter’s involvement.
The Parties can independently alter the Transaction, for example, to lower payment (due to poor quality work) and make a partial refund to the Customer. The opposite situation is also possible, when the Parties increase the volume of work and transfer additional funds into the DAO.
NOTE: any changes to the agreement must be documented (for example, by sending an e-mail, where the Arbiter receives a copy). That must be done to avoid problems in case of a dispute, when the Arbitrator would not have a record for the alteration of the contract, and the dispute might receive an unpredictable resolution.
Arbitration (optional stage): if a conflict happens between the Parties and they are unable to agree on the fate of the funds locked in the DAO, then the aggrieved Party contacts the Arbiter, submits a claim and pays a fee, which begins the Arbitration procedure.
After listening to the Parties and collecting all the necessary information, the Arbitrator makes a reasoned decision in writing.
Preparatory stage Payment (includes several hours of work).
We draft a contract for the future transaction, in accordance with the Parties’ requests. If the Parties already have a draft contract, we review it and adapt it for blockchain execution.
The task of preparation: to make sure that the contract is understood by both Parties, meets their intentions, is consistent, its execution is feasible and convenient.
All procedures are carried out remotely. The contract does not require traditional signing. Pravda makes sure that both Parties have approved the text and saves its latest version. Nonetheless, Docusign or EthSign service may also be used.
DAO creation: at this stage, a DAO will be set-up on the XDAO platform (the reliability of their smart contracts is described here).
The DAO has three Governance tokens in total, and the quorum for making any decision is set as 2/3. It means that any transaction to withdraw funds from the DAO requires at least 2 votes (i.e. «Party + Party» or «Party + Arbiter»).
The Arbiter helps the Parties create a crypto wallet and link it to the DAO. For security purposes, it is advisable to create a separate “Metamask” wallet (an extension for “Chrome” browser). Each Party independently saves the private key to their wallet.
Testing the DAO: The Arbiter checks that both Parties have connected the crypto wallet to the DAO, and distributes the Governance tokens (each Party receives 1 token, and the third token is received by “Pravda Arbitrage”).
DAO members run test transactions: "Party 1 + Party 2" and "Party + Arbiter".
Depositing the payment into the DAO. At this stage, the customer (or buyer) under the contract sends the agreed amount in cryptocurrency to the DAO account. From this point on, any withdrawal of funds requires confirmation from 2 DAO members: "Party 1 + Party 2" or "Party + Arbiter"
It is recommended to use payment in stable coins (USDT or USDC) on “Ethereum” or “BNB” blockchain. The amount of the deposited sum is determined by the Parties in the agreement.
Execution of the transaction: it is expected that the Parties will execute the transaction in good faith and transfer the payment on their own, without the Arbiter’s involvement.
The Parties can independently alter the Transaction, for example, to lower payment (due to poor quality work) and make a partial refund to the Customer. The opposite situation is also possible, when the Parties increase the volume of work and transfer additional funds into the DAO.
NOTE: any changes to the agreement must be documented (for example, by sending an e-mail, where the Arbiter receives a copy). That must be done to avoid problems in case of a dispute, when the Arbitrator would not have a record for the alteration of the contract, and the dispute might receive an unpredictable resolution.
Arbitration (optional stage): if a conflict happens between the Parties and they are unable to agree on the fate of the funds locked in the DAO, then the aggrieved Party contacts the Arbiter, submits a claim and pays a fee, which begins the Arbitration procedure.
After listening to the Parties and collecting all the necessary information, the Arbitrator makes a reasoned decision in writing.
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Stages of Work
Arbitration Process
The adjudication of disputes in “Pravda Arbitrage” is subject to the following principles:
- The task of the trial is to give effect to the intention of the parties.
- Reasonable expectations of honest man must be protected.
- The arbiter's decision shall not at all times be approved by both parties. But both parties shall believe that they have been heard out and understood, that no essential aspect of the case escaped the arbiter's attention.
The proceeding is conducted in accordance with the Arbitration Rules (see here together with the fees). Below is a brief description of the process.
Arbitration includes the preparation stage and the proceeding itself. At the beginning, the Arbitrator contacts both Parties, receives their statement of claim and objection to the claim, and collects evidence from both Parties.
The process, in general, resembles a traditional litigation, but is carried out with greater flexibility and convenience for the Parties. The process is conducted via electronic messages and video communication.
In simple cases, the Parties may represent their interests pro se (on their own), without involving a lawyer. The Arbitrator may help each Party formulate its claim and objections to the claim, but does so only within certain limits. In order to avoid bias, the Arbitrator may refuse this function (independently or at the request of the other Party), and then it is advisable for the Party to seek legal assistance from another arbiter or an outside lawyer to prepare the claim or defense.
Arbitration includes the preparation stage and the proceeding itself. At the beginning, the Arbitrator contacts both Parties, receives their statement of claim and objection to the claim, and collects evidence from both Parties.
The process, in general, resembles a traditional litigation, but is carried out with greater flexibility and convenience for the Parties. The process is conducted via electronic messages and video communication.
In simple cases, the Parties may represent their interests pro se (on their own), without involving a lawyer. The Arbitrator may help each Party formulate its claim and objections to the claim, but does so only within certain limits. In order to avoid bias, the Arbitrator may refuse this function (independently or at the request of the other Party), and then it is advisable for the Party to seek legal assistance from another arbiter or an outside lawyer to prepare the claim or defense.
The Arbitrator is not limited to examining the documents provided by the Parties, and may independently request documents "from the outside world". For example, the Parties entered into a real estate sale agreement, and a dispute arose over whether the ownership title has been transferred to the buyer (for example, the defendant states that the plaintiff's extract from the state register was fakes with “Photoshop”).
In this case, the Arbitrator can independently request an extract from the register of the relevant jurisdiction by applying to local lawyers, and resolve the dispute according to the information received from third parties upon the initiative of the Arbitrator. Similarly, the Arbitrator may order expert opinions on the object (for example, in construction contracts) or code audits for software development, or order observants to make a video record of the object.
NOTE: if the defendant ignores the adjudication and Arbitrator’s notices, the Arbitrator makes an award in the absence of the defendant, based only on the evidence provided by the plaintiff. That is, ignoring the process worsens the defendant's position. The Arbitrator's task is to ensure that notices are properly sent to the defendant via the means of communication specified in the contract.
Fees: all costs (arbitration fee, postage, lawyers' fees, etc.) are paid by the losing Party. If the plaintiff's claims were partially satisfied, the Arbitrator distributes the costs between the Parties at his discretion. Unpaid expenses are deducted from the payment locked in the DAO before its transfer to the prevailing Party. These expenses might be later recovered from the losing Party by going to a traditional court, for which “Pravda” issues the necessary documents.
Enforcement of the Arbitrator's decision: The parties have the opportunity to obtain a writ of execution in a state court and force the defendant to comply with the Arbitrator's decision.
In this case, the Arbitrator can independently request an extract from the register of the relevant jurisdiction by applying to local lawyers, and resolve the dispute according to the information received from third parties upon the initiative of the Arbitrator. Similarly, the Arbitrator may order expert opinions on the object (for example, in construction contracts) or code audits for software development, or order observants to make a video record of the object.
NOTE: if the defendant ignores the adjudication and Arbitrator’s notices, the Arbitrator makes an award in the absence of the defendant, based only on the evidence provided by the plaintiff. That is, ignoring the process worsens the defendant's position. The Arbitrator's task is to ensure that notices are properly sent to the defendant via the means of communication specified in the contract.
Fees: all costs (arbitration fee, postage, lawyers' fees, etc.) are paid by the losing Party. If the plaintiff's claims were partially satisfied, the Arbitrator distributes the costs between the Parties at his discretion. Unpaid expenses are deducted from the payment locked in the DAO before its transfer to the prevailing Party. These expenses might be later recovered from the losing Party by going to a traditional court, for which “Pravda” issues the necessary documents.
Enforcement of the Arbitrator's decision: The parties have the opportunity to obtain a writ of execution in a state court and force the defendant to comply with the Arbitrator's decision.
This is possible, but the enforcement option must be kept in mind from the start of the deal. In particular, it is necessary:
- signing the contract "in paper" with wet-ink signatures of both Parties;
- the contract must contain an arbitration clause (the Arbitrator provides the text);
- the law of the relevant country must allow the remuneration payment in cryptocurrency (for example, in Russia and China, the cryptocurrency can only be purchased or sold, but cannot be used for payment).
In general, «Pravda Arbitrage» is designed for independent execution of the contract by the Parties and the Arbitrator, without appealing to any government agencies. But this requires 100% coverage in the form of an advance payment put into the DAO. Any coercion beyond the blockchain capabilities the will require the above preparation.
How is this different from a guarantor/escrow?
When using a traditional guarantor/escrow scheme, the Parties are more dependent on the third party, since they transfer the payment to their custody and lose control over the funds. The basic scheme of such a transaction looks like this: "The Party transfers an asset to the Guarantor, and in exchange receives a legal obligation to fulfill the guarantee agreement." Basically, it is an exchange of an asset for a promise, with the resulting risks.
Another disadvantage of the guarantee agreement is that any payment transaction requires the Guarantor. This means the increased costs, even if both Parties agree and confirm the transaction.
Conflicts with the Guarantor may arise due to defects in the documents for the payment release, fluctuations of the government policy, or the dishonesty of the Guarantor itself. Conflicts with the Guarantor require the court resolution, which is difficult and expensive.
To the contrary, if the payment goes through the DAO, the Parties retain significant control over the money. If there is no dispute, the Parties can close the deal on their own, without the Arbitrator’s involvement. That reduces the third-party risks and simultaneously reduces the transactional costs.
Another disadvantage of the guarantee agreement is that any payment transaction requires the Guarantor. This means the increased costs, even if both Parties agree and confirm the transaction.
Conflicts with the Guarantor may arise due to defects in the documents for the payment release, fluctuations of the government policy, or the dishonesty of the Guarantor itself. Conflicts with the Guarantor require the court resolution, which is difficult and expensive.
To the contrary, if the payment goes through the DAO, the Parties retain significant control over the money. If there is no dispute, the Parties can close the deal on their own, without the Arbitrator’s involvement. That reduces the third-party risks and simultaneously reduces the transactional costs.
