Arbitration on a Governed Blockchain: EOS’ Crisis of Dispute Resolution

Another week, another squabble involving the beleaguered EOS blockchain. The platform that has recently sustained a round of criticism for its lack of decentralization and its underwhelming technical robustness is now going through a governance crisis. The problem partly stems, quite ironically, from the lack of the system’s mediating capacity and centralized enforcement over the pool of Block Producers – twenty-one entities elected by token holders and responsible for validating transactions under the Delegated Proof of Stake consensus mechanism.

The latest controversy unfolded as the EOS Core Arbitration Forum (ECAF), effectively the ‘judicial branch’ of the EOS ecosystem, failed to handle a series of alleged security breaches, prompting Block Producers to take unilateral action and freeze the endangered accounts. The fallout highlighted immaturity of the system’s quasi-institutional structure, at the same time exacerbating the EOS’ skeptics’ over-centralization concerns. Despite the EOS token currently standing as the fifth cryptocurrency by market cap, and its $4 billion ICO remaining unmatched to date, the developers and core community behind the project seem to be fine with large-scale experimentation with a live blockchain.

The crisis

On June 17, shortly after the EOSIO mainnet launch, a Block Producer EOS42 drew the community’s attention to the fact that the accounts compromised during the registration process could now be unlocked, putting some $15 million worth of EOS tokens on the spot. Block Producers turned to the ECAF for guidance, but after the arbitration body fell short of immediately delivering an unambiguous decision, the network’s stakeholders have settled the issue via a conference call. By a unanimous vote, they decided to ‘freeze’ seven suspicious accounts, meaning that no transactions involving those addresses would be processed.

Unsurprisingly, all hell broke loose in the crypto segment of Twitter, as decentralization maximalists challenged the EOS’ big guns’ collective action as an instance of power abuse. Another twist of this story added some extra spice: the Block Producers’ consensus was meant to be a tentative solution, put in place pending the ECAF’s official ruling to legitimize it. As the arbitrators appeared hesitant to throw their weight behind the emergency measures already in place, a block producer EOS New York demanded that the document be issued before 13:00 UTC on June 19, failing which they threatened to ‘unfreeze’ the suspicious accounts.

To be clear (and not accused of “FUD”), what happened here is that they froze the accounts with agreement from the other block producers *before* the ECAF (EOS Core Arbitration Forum) had issued a decision.

Why have the ECAF or a “constitution” if that’s how things are done?

— Jackson Palmer (@ummjackson) June 19, 2018

As it often happens with EOS these days, events that already seem calamitous enough turn out to be just a prologue. On June 22, less than a week after the first wave of the ‘freezing’ controversy, a new ECAF order to stop processing transactions involving 27 more addresses surfaced on Twitter. The document featured a quaint subscript encouraging the recipients to ‘verify order with trusted BPs before execution,’ and lacked any solid rationale for blocking the addresses beyond the vague promise to clarify the logic of the order on a later date. Since it circulated as a screenshot of a signed PDF, part of the wider crypto world met the order with outright derision.  

As if the waters were not muddy enough, an apparent hoax ECAF order began to circulate on June 24, likely designed to sow even more confusion. It managed to elicit reactions from some BPs, notably EOS New York, which announced that it would suspend execution of any such orders due to inability to tell which ones are legitimate.

Meanwhile, even legitimate decrees proved challenging to execute. One of the Block Producers, EOSStore, had apparently missed an announcement of the second ECAF order and accompanying blacklist, which could be excused by the absence of a specific venue for such communications. The result was a failure to cut the addresses on the blacklist off the blockchain, since it is only possible when all BPs act in unison.

A widely circulated screenshot of an exchange between an EOSStore representative and someone in charge of communicating with BPs on the EOS side staggered the audience once again. It painted a picture of an unenthusiastic person who gets paid ten thousand dollars a day for validating transactions yet misses a crucial conference call for personal reasons on one side, and a sardonic bureaucrat threatening the other party with a lawsuit (sic!) on another. While many observers decried the fact that the whole block-producing business with an enormous yield is reliant on a single person, others spotted ‘emotional abuse’ of the BP. One way or another, the majority concurred that the way Block Producers currently communicate is a mess.

The problem

From all the above, one thing is clear: the EOS Core Arbitration Forum in its current format is a poor fit for the role it is supposed to play in the community. It exists in an ambiguous ‘legal’ space, it operates off-chain, and it doesn’t have a clear procedure to follow. And since a working mechanism of dispute resolution is one of the key elements of a governed blockchain which EOS aspires to be, its current impotence poses a major challenge to the whole governance structure.

Article IX of the EOS Constitution (still not ratified) states that ‘All disputes arising out of or in connection with this Constitution shall be finally settled under the Rules of Dispute Resolution of the EOS Core Arbitration Forum.’ During the time when the ‘freezing’ controversies were underway, the said rules only existed as a proposal discussed on a forum. By June 28, the set of rules became available at the ECAF website, marking a move toward some degree of disambiguation.

Another major criticism of the EOS’ current approach to dispute resolution (if one assumes there is any) is that it is based on off-chain interactions and therefore leaves too much room for human interpretation and error. Some of the notable suggestions to improve the dispute resolution system include moving all the pertinent communications, as well as contract enforcement, to the blockchain. It turned out that Dan Larimer, the mastermind behind EOS and a chief technology officer with its founding entity Block.one, has been having similar thoughts as he watched the recent wave of chaos sweeping through his brainchild.

The solution

In a June 27 Telegram exchange and shortly after in this Medium post, Larimer laid out his vision of a new governance paradigm for EOS. Fed up with watching people wield ‘arbitrary power to resolve arbitrary disputes,’ he put forward a fundamental solution that seemingly avoids both the chaos of off-chain governance (which he calls Free Form Contracts) and the gridlock of code-is-law approach that could yield catastrophic outcomes if the code proves imperfect.

According to Block.one’s CTO, the ultimate remedy lies in redefining community governance according to the logic of Ricardian Contracts. These rules specify both free-form terms (‘intent of code’) and the code itself, combining the seamless execution of terms inherent to pure code-based contracts with room for redress in the event of critical bugs causing serious damage. In other terms, this means taking into account both the letter and the spirit of the law, and referring to the spirit in the event of the letter going wrong. This design of the checks-and-balances system would reinvent the role of arbitrators, prescribing that they step in only in cases when there is a clear mismatch between the code and its intent.

Larimer proposes nothing less than a constitutional referendum to put the new system in place. As dramatic a change as this might seem, his weight in the EOS community could be enough to initiate a U-turn in the platform’s philosophy of governance. Should this happen, the revolution will transcend just the dispute resolution aspect, redefining the whole platform as it goes. The wheels have already started spinning, as on June 28 Larimer’s Medium post reappeared almost unabridged as ‘Block.one’s Proposal for EOS Constitution v2.0.’ The same day, the EOS’ founding entity announced its participation in voting process (from which it had previously abstained), pledging to act in compliance with Ricardian Contracts. The concept that has been absent from the community’s discourse just a few days ago seems to be gaining a tremendous momentum, showcasing Larimer’s and Block.one’s vast power to shape the rules of the EOS game.