Last updated on September 12th, 2018,

The arbitration process for our marketplace explained.

This blog post will provide an overview of the BitBoost arbitration process, both as it will be in the first release and how it will expand and improve in future releases. We will illustrate how the system works with example scenarios.

Arbitration is a method of resolving disputes between buyers and sellers when they arise. Ideally, there would never be any disputes but, in reality, there will be disputes and we need to have a way to resolve them. This is not a role that can be played by smart contracts alone – resolving disputes will require human judgment about matters that are open to interpretation, so arbitration will be done by people, not code. BitBoost has built the code to make arbitration possible, but in the end, that code is only in place to support, not conduct, arbitration.

The Arbitration System

Pricing model

Arbiters only charge for performing arbitration; the arbiter only gets paid if there is a dispute that s/he settles.

Arbiters will charge a percentage of the item’s final selling price for their service. The percentage will have an upper limit, to prevent an arbiter from taking advantage of inexperienced sellers: the upper limit is 20%, set in 0.5% increments, starting at 0.0%.

How will arbitration work?

At launch, there will only be one, default Arbiter. The default Arbiter at launch will mainly work in English, though other languages may be arranged. After launch, BitBoost will open up the Arbiter Verification process in order to add additional service providers.

Arbiters will be ‘insured’ against bad arbitration and thus add to the trust of the process.

On the initiation of a dispute, Arbiters will be able to chat directly with both the buyer and seller. The Arbiter will also receive access to the chat log between buyer and seller. Chats are encrypted in transit and at rest, and can only be decrypted by the Arbiter in the case of a dispute. If a transaction is completed without a dispute, then chat logs are permanently deleted.

Upon reaching a decision, the Arbiter has three options. S/he can send the disputer funds 1) only to the buyer, or 2) only to the seller, or 3) to both buyer and seller in some ratio that the Arbiter chooses. The Arbiter’s fee will be subtracted from the disputed funds before they are released to the buyer/seller.

We have included examples of Arbitration at the end of this post.

Arbiter control

Arbiters do have control over how they operate. They can set the following three things:

– what they charge, as explained above

– the languages in which they can work

– the amount they are “insured for,” which is the amount they currently have in their “insurance account” (more on this below)

Arbiter verification

BitBoost must verify Arbiters. This will be like the blue checkmark that Twitter offers to some of their users. BitBoost Marketplace is our product, so BitBoost must verify all Arbiters. Arbiters will have to pay a non-refundable fee up front to BitBoost to cover costs to review them. They will have to identify themselves with government documentation.

Arbiter ‘insurance’

Once BitBoost verifies an Arbiter, that Arbiter will contribute to an ‘insurance account’ representing the Arbiter’s value to the seller/buyer. This will act as an ‘insurance’ policy for buyers and sellers against bad arbitration and thus add to the trust of the transaction process. In the case of a bad arbitration decision, the buyer or seller can contest the Arbiter’s decision (see below), and this deposit can be used to reimburse the injured party if necessary.

An Arbiter may withdraw some or all of their insurance deposit at any time, even if they have just deposited it. Exceptions: If you have been selected as an Arbiter, some or all of your money may be locked into a smart contract. This money will be returned as soon as all active transactions are closed by the buyers.

For instance, a large ticket item costing $2000 with a potential arbitration settlement of $2000 could lock $2000 (or as close to $2000 as the Arbiter’s deposit allows) into a smart contract in the case of a contested arbitration decision, until the dispute is resolved.

Only when the transaction goes into dispute, and the Arbiter’s decision is contested, does the maximum possible award go into a smart contract while the governing body decides on a resolution. At that point, the money is either returned, in whole or in part, to the Arbiter and in whole or in part to the disputing party. For the time during the contested dispute, that money cannot be available to be locked for other transactions.

Only in the case of an arbitration being requested, completed, contested, and then found 100% in favor of the non-arbiter would this money be lost. This is unlikely but possible.

If payments are made from this fund, it will change that Arbiter’s value to buyers/sellers (in terms of the highest ‘insurance’ amount).

Arbiters can be listed as ‘insured’ up to the amount of their deposit. For instance, an Arbiter who has deposited more could be more valuable in the case of higher priced items/listings.

Arbitration ‘SUPREME COURT’

There will be a sort of ‘Supreme Court’ for contested arbitration decisions. This anonymous group or committee will gain control over the escrowed deposit in the case that buyer or seller disputes the Arbiter’s decision. The funds will be held in a smart contract that can be publicly inspected and audited. The group must be anonymous so that they cannot be contacted and bribed for positive results.

Examples or arbitration

*Example 1: The basics*

We have 4 parties: the seller, the buyer, the Arbiter, and the arbitration court. The seller chooses the Arbiter at the time of listing. Arbiters set their own fees for their service. In this example, assume that the Arbiter has set an arbitration fee of 5%.

The seller creates a listing and chooses the Arbiter. At this point, the Arbiter does not get paid.

The buyer buys an item. His money moves from his wallet to the escrow contract.

The seller ships the item. The buyer receives the item.

At this point, the buyer can finalize the sale, or open a dispute. If he finalizes the sale, the money moves from the escrow contract to the seller. The Arbiter does not get paid.

If the buyer opens a dispute, two things can happen.

1: the seller agrees with the dispute, and the money moves from the escrow contract back to the buyer’s wallet. The Arbiter does not get paid.

2: the seller also wants to open a dispute. In order to do so, the seller must pay 5% of the disputed amount to the Arbiter. This will be built into our smart contracts, so it happens automatically, from escrowed funds, if the seller also opens a dispute.

At this point, the Arbiter will gain control of the escrowed money, and can send the money only to the buyer, or only to the seller, or to both buyer and seller in some ratio that the Arbiter chooses, minus the arbitration fee.

Arbitration can be started by either the buyer or the seller; however, the seller will always pay for arbitration because the Arbiter’s percentage comes out of the cost of the item.

*Example 2: Seller pays for buyer’s mistake*

Because the arbitration fee comes out of the escrowed funds, it is the seller who always pays for arbitration, even if the dispute is the buyer’s fault. The seller needs to take this possibility into consideration when pricing his items.

In this example, the seller is selling a kitten for 1 ETH. He selects an Arbiter who charges a 5% fee for arbitration, so the fee is 0.05 ETH. A buyer places an order, and the seller approves it. The seller tries to mail the kitten to the buyer, but the shipment is returned because the buyer gave the wrong shipping address. The seller contacts the buyer and asks for extra money to pay for a second shipping fee. The buyer refuses to pay for the second shipping fee, even though the extra expense is his own fault. The seller does not ship the kitten a second time. At this point, the seller decides to open a dispute. The dispute is eventually decided in the seller’s favor, and the Arbiter awards the seller the shipping fee, minus his 0.05 ETH, from the escrowed funds, and returns the rest to the buyer.

*Arbitration Example 3: Arbiter selected but no dispute*

If there is no dispute at all the Arbiter never gets paid, so choosing an Arbiter is free for the seller as long as there is no dispute. There is never a cost to the buyer.