If It Pleases the Court: What Is Kleros? Decentralized Justice in the Crypto World

Blockchain technology gave rise to a decentralized economy where goods, services, and capital are effortlessly traded across borders at the speed of light. But similar to real-world products, decentralized protocols inevitably raise disputes among their users. 

For instance, users of an insurance protocol will claim that they haven’t received a payout, or members of a decentralized autonomous organization (DAO) will claim that votes are not fairly tallied.

Kleros is an open-source, decentralized court system that works with organizations to arbitrate disputes. By leveraging blockchain, crowdsourcing, and game theory, Kleros offers an alternative to centralized dispute resolution platforms like Modria and democratizes access to justice in the decentralized economy. 

Kleros, an Ethereum autonomous organization based in France, was founded by Dr. Federico Ast (Ph.D., Singularity University) and Clément Lesaege (M.A. Georgia Tech) in 2017. The organization employs over 11 people and has raised a total of $5.7 million in funding to date.

While Kleros Court is the core product in the Kleros ecosystem, they also offer a suite of specialized products and services like Kleros Oracle, Escrow, Governor, and Curate, which can be used by organizations to resolve disputes relating to:

• E-commerce 
• Insurance 
• Content moderation
• Intellectual property
• Token listings
• DAO governance

One of their most interesting products is Proof of Humanity, a system where users submit a selfie, and a panel of jurors verify whether they're real humans. Kleros’s official Twitter account even suggested that Elon Musk use Proof of Humanity to solve Twitter’s current bot problem.

• Blockchain: Ethereum
• Supply: 764,626,704 PNK
• Price: $0.04146
• PNK staked on courts: 146,615,680 
• Market cap: $25,849,849
• Markets: Bitfinex, Gate.io, Uniswap, Sushiswap and more

$PNK serves 3 main functions within the Kleros ecosystem. First and foremost, $PNK is used to protect against Sybil attacks. In other words, an attacker would need 51% of the total supply of staked tokens, currently valued at over $3 million, to manipulate court rulings. But attempting to buy this many tokens will only drive up the price per token. And as the token gains value, this attack becomes less feasible since it would require ever more economic resources to pull off. At least in theory.

Secondly, users need to stake a minimum of 1000-1600 $PNK ($41-$67) to be drawn as jurors. The higher a user’s stake, the higher their chance of being selected. Jurors also earn arbitration fees in the form of $PNK tokens, which amounts to a 7.37% staking APY.

Finally, $PNK is used to govern the Kleros protocol and help make decisions concerning everything from arbitration policies and sub-court additions to court session durations and arbitration fees.

Kleros Court is an opt-in system, meaning that organizations like decentralized protocols need to integrate Kleros into their smart contracts as an arbitrator. When creating this arbitration contract, parties have to choose the specific court related to their subject matter (e.g. Token Listing) and the number of jurors that will resolve future disputes. 

When a dispute arises, the Kleros Court will carry out the following steps:

1. Jurors: Randomly pick a selection of jurors for the case in question.
2. Evidence: Allow all interested parties to submit their evidence for a period.
3. Voting: Allow jurors to vote on the case after all the evidence has been submitted and tally the votes. Before the tally, all votes are kept private.
4. Appeal: In the case of an appeal, the voting phase is re-done with a larger selection of jurors. 
5. Ruling: Issue a final ruling and reward/penalize jurors as needed. 

Jurors

Anyone can become a Kleros juror, no sign-up or personal identification is needed. This anonymity has the dual benefits of protecting jurors from being bribed and also lowering the operational costs associated with court systems. 

But why would anyone want to be a juror? Well as mentioned above, jurors are rewarded with arbitration fees after every case. In the Humanity Court example below, you can see that each juror who voted correctly will be rewarded with 0.03 ETH ($60).

Security

Okay, but how can you trust a bunch of anonymous jurors to agree on what’s true and vote honestly? That’s where Kleros’ game-theoretic incentives come in. 

Take Wikipedia for instance, where anyone can edit a page but could also get their account banned if they were to vandalize a wiki. In that same spirit, Kleros jurors who vote randomly or don’t side with the majority will have their stake slashed, thus losing money. 

Kleros also has systems in place that prevent whales from manipulating the court, like allowing for appeals with an increasing number of anonymous jurors.

Key details:

• Disputes: 1200
• Cases closed: 1194
• Total fees paid to jurors: $1.07 million
• Active jurors: 774

While Kleros can technically be used by any online organization (e.g. Ebay, Airbnb) to resolve disputes, the protocol has thus far mostly been adopted by decentralized applications (dApps) across categories like Prediction Markets, Decentralized Exchanges and DeFi Insurance. Some notable projects that rely on Kleros either directly or through other third-party integrations include Uniswap, Unslashed, Polkamarkets, API3, and Gnosis.

Unslashed Finance, in particular, has Kleros directly built into its DeFi insurance platform to manage the claims process in an unbiased and decentralized manner.

 In the wake of Terra (LUNA)’s collapse, Kleros saw one of its biggest practical applications yet. Within a week, there were over 35 Unslashed claims relating to the algorithmic stablecoin TerraUSD (UST)’s de-pegging, with claim amounts up to 169.91 ETH ($346,124).

While Kleros is providing a valuable use case for the decentralized economy, this project is definitely on the riskier side for a few reasons. For one, the project has a mere $25 million market cap as of May 2022. This low liquidity makes it very easy for large token holders to influence price, both to the upside and (more likely) to the downside. 

Another issue with Kleros is that $PNK isn’t listed on any top-tier exchanges like Coinbase, FTX or Crypto.com, which prevents new users from discovering the token and growing the project—making it more valuable and potentially more secure.

This leads to another issue. While Kleros theoretically has some whale controls in place, a small-cap project like this is still vulnerable to Sybil attacks. Finally, don’t forget that a juror’s stake is at risk of being slashed if they vote against the majority or even miss a voting deadline. 

All that said, Kleros is one of the more innovative projects in the blockchain space. And as Kleros continues to build its track record, it might one day move beyond crypto and become recognized as an international arbitration service for mainstream use cases. We all know damn well that Web2 companies that take weeks or months to resolve customer disputes need a solution like Kleros.