Arbitration DAO
An Arbitration DAO (arbDAO) is a group of judges who resolve disputes that arise in the course of immediate business. In any DAO which employs a work smart contract (WSC), when one or more of the parties is dissatisfied with the execution of the contract, they may trigger an arbitration clause, which transfers the assets encumbered in the WSC to a judge in the arbDAO. The judge then resolves the dispute according to the standards of the arbDAO.
Arbitration is the immediate type of judicial governance. Importantly, the arbitration clause must be triggered before the WSC is concluded. Otherwise the dispute must be resolved by the lengthier review of Forum revaluation.
Overview
The basic type of judicial governance is arbitration. Arbitration allows a DAO to review the automated outcome of a work smart contract (WSC). The "code is law" assumption of Web3 makes such review difficult in a primary DAO. Nevertheless, the code is law standard is necessary when a DAO allows open access to pseudonymous members.
However, rigid contracts following code is law are not good for business. Business contracts demand all parties perform in a predictable manner under assumptions about the future business environment. But no one can predict the future. Business must be able to continue when an eventuality occurs that was not anticipated in the smart contract. Parties to the smart contract must be able to come to some consensus on what is fair in those circumstances. The existence of a meaningful reputation system motivates the parties to behave as well as possible. Nevertheless, sometimes, even if both parties are behaving with the best intentions of honoring the spirit of good business, irreconcilable differences in perspective about what is fair are inevitable. In such cases a third party is necessary to adjudicate and resolve the dispute.
System design
To achieve this type of judicial governance in a primary DAO while respecting the standard of code is law, the WSC must therefore include a clause that allows any party in the smart contract to trigger a sub-contract, called an arbitration smart contract (arbSC). If arbSC is triggered before the conclusion of the WSC, then the WSC sends all its encumbered REP tokens, fees, and other property to the arbSC, which then follows the basic work flow of DGF. Specifically, the arbSC then calls arbitrator(s) from the arbDAO to do the work of the arbSC. This means the arbitrators follow the established arbDAO protocols for resolving a dispute between parties to the WSC. The arbitrators were first selected (usually randomly) by the arbSC from the currently functioning availability smart contracts (ASCs) from the arbDAO bench. Once the work of arbitration is finished off chain, the arbSC concludes by submitting evidence of its work to the Forum for recording and initiates a Validation Pool to disburse the fees and mint new arbREP.
The arbSC will typically itself include a clause which allows unsatisfied parties to trigger another arbSC, iteratively. Assuming the issue is not resolved to the satisfaction of the parties, these subsequent arbSCs can escalate in intensity, such as expanding the number of judges to give greater attention to the matter, perhaps escalating to the larger attention of the DAO. The incentive to corruptly exploit the arbitration clause is everpresent and will need to be policed by sophisticated legal thinking when designing the protocols in the arbSC.
Domain specific arbREP
The fact that arbitration is a separate skill from the primary work a typical DAO performs, means an arbDAO will typically have a separate REP token, called arbREP. Therefore an arbDAO can be seen as a technically separate DAO with which the primary DAO negotiates in order to secure their work.
Arbitration tax
Typically, a DAO will pay for arbitration by including a tax in each WSC, which acts like insurance, giving everyone who uses the WSC the right to trigger the arbitration clause.
Initiation
The way judges are initiated in a primary DAO is to recruit them from the group using their work REP. A potential judge signals their availability to serve, by encumbering their REP in an arbitration ASC. If they demonstrate their mastery of the protocols, by successfully serving as a judge, they receive arbREP to encumber in future arbitration ASCs.
Failure of arbitration
Arbitration may fail to produce justice for many reasons. First, the WSC can conclude before a party notices an injustice. Then the WSC has no power to trigger the arbitration in the first place. Second, the WSC is not perfect. There will inevitably arise business situations that the WSC did not anticipate. The executive governance encoded in the WSC can be injustly written for certain eventualities. Third, the larger functioning of the DAO can be flawed. The legislative governance the DAO operates under requires eternal improvement. For all of these reasons, arbitration will sometimes fail to establish justice. Therefore, the final backstop is to rely on the transcendental values of the DAO--the motivations for why the group exists, which ultimately govern how the group behaves toward one another. These values can be served by one final type of judicial governance, when the other approaches fail: Forum revaluation.