12 Apr, 23

Social Arbitrage Framework: A Good Practice Guide

social arbitrage framework
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Within the Decentralised Finance (DeFi) landscape, two distinct categories of products emerge: direct and indirect. Direct products cater to users by providing specific goods or services, while indirect products facilitate the creation of digital ecosystems wherein participants may assume both seller and user roles within a more comprehensive community context.

Interactions amongst community members may be classified as neutral, devoid of any potential for conflict, or non-neutral, where conflict may arise. Conflicts typically originate from discrepancies between one party’s expectations and the other party’s actions. Delving further, conflicts within community interactions can be categorised in two distinct manners. The first classification is objective (or binary) conflicts, which can be resolved by examining non-subjective, verifiable attributes associated with the interactions in question. An example includes failure to complete an in-system operation within the agreed-upon timeframe. The alternative classification encompasses subjective conflicts that pertain to more abstract attributes, such as the quality of goods or services received. These may be designated as ‘non-binary’ conflicts. 

Please refer to the chart below for a better overview of the above classification: 

social arbitrage defi product
Interactions & conflicts in DeFi communities

Objective conflicts pose little difficulty and can be managed effectively through simple escrow smart contracts. However, indirect DeFi products often grapple with subjective conflicts. Such conflicts are commonly associated with social platforms or similar products where users upload audio-visual content, necessitating content reporting and removal features.

Moreover, decision-making processes contingent on assessments, such as selecting superior content, approving development grants, or determining if received goods or services meet reasonable quality criteria, are also susceptible to the emergence of non-binary conflicts.

Solving Non-Binary Conflicts

In the realm of DeFi, two rational methodologies for resolving subjective conflicts prevail: through Decentralised Autonomous Organizations (DAOs), or closed arbitration, and open arbitration.

DAOs should be considered a measure of last resort, isolated from any form of spamming or burden associated with user-base expansion. While initially delegating arbitration responsibilities to a DAO may be feasible, as the average number of non-binary conflicts within a community escalates to over 10-50 per week, the DAO’s capacity to address these disputes in a timely fashion may be strained.

Open arbitration, on the other hand, enables any community member to participate in resolving users’ conflicts. Implementing such a solution necessitates the development of both the arbitration logic and an incentive layer for arbitrators.

An Introduction to Social Arbitrage 

The objective of social arbitration encompasses two primary facets: to engage ecosystem participants in resolving subjective, non-binary user conflicts, which necessitate human-based assessment, and to provide incentives for undertaking such activities.

Social arbitration constitutes a multifaceted process, replete with numerous ‘sub-features’ and organisational rules that demand comprehensive definition, coding, and elucidation before implementation. The features, along with their descriptions, are presented in the subsequent table for enhanced clarity and understanding.

Features of Social Arbitrage

Arbiters

Participation Requirements: Assuming the role of an arbiter should not be accessible to the general public, as the potential for exploitation through Sybil wallets exists. A malicious actor could intentionally generate hundreds of accounts to augment the likelihood of being chosen as an arbiter.

A more prudent approach involves reserving arbitration privileges exclusively for token stakers who hold a minimum of [n] tokens. The criteria for participation may also be predicated on alternative logic, such as staking score or experience points. Safeguarding against Sybil attacks is further reinforced by employing selection priority and random selection mechanisms, which are elucidated in greater detail in this section.

Opt-In vs Opt-Out: Two approaches to constructing an arbiters community exist:

  • Opt-in: Those who satisfy participation criteria can voluntarily become arbiters by selecting the appropriate button or tick mark.
  • Opt-out: Individuals who meet participation criteria are automatically included in the arbiters community unless they are actively opt out.

Selection Randomness: Arbiters ought to be chosen randomly, with randomness achieved through:

  • True, verifiable randomness (e.g., the seedrandom method utilising the most recent blockchain hash as input or Chainlink Verifiable Delay Function).
  • Simple randomness (randomness generated via an internal off-chain function).

Employing publicly verifiable, true-random methods in any randomness-based solution is typically the most effective. Cost reductions for third-party solutions can be attained through the seedrandom approach.

Arbiters Score: Arbiters accumulate reliability points, which enhance their overall score and standing in the arbiters ranking. The reliability score is augmented by:

  • The quantity of staked tokens (or another staking-related scoring system).
  • The number of cases resolved.

Selection Priority: The arbiter’s score serves as their ‘weight’ within the context of the random selection procedure. For instance, an arbiter with a score of 1 will appear once in the pool of selected arbiters, while an arbiter with a score of 20 will appear 20 times in the same pool. Consequently, the second arbiter possesses 20 times greater odds of being chosen for conflict resolution.

Losing Points: Arbiters lose points for each missed arbitration duty. We recommend implementing an [n]-based penalization increment for every skipped arbitration responsibility.

For example, the first skipped arbitration results in a loss of 1 point, the second skipped duty incurs a deduction of 2 points, the third costs 3 points, and so forth.

Arbitrage Process

Triggering Arbitrage: Initiating arbitration must be designed in a non-exploitable manner, as follows:

  • Arbitration can only be triggered if there is an active, non-binary conflict between two parties.
  • It should be linked to a minimal staking-related requirement.
  • Arbitration should necessitate covering associated costs.
  • Arbitration must be accessible only within a specific timeframe (that is, it becomes unavailable after a set period once a deal between parties is closed).
  • If applicable, arbitration should be based on the mutual consent of parties engaging in a transaction that could potentially generate future non-binary conflicts, with the consent expressed before entering the deal.

Main Process: The arbitration process revolves around the random selection of [n] arbiters, who are then tasked with casting their vote for one of the two binary solutions.

[n] represents the minimum starting a number of arbiters, with a default value (e.g., 3) that can be either fixed or adjustable based on the user’s preference. By incorporating more depth and explanations, the arbitration process ensures that technical details are clearly understood, enabling a fair and transparent resolution of conflicts within the decentralised ecosystem.

Securing Arbitrage Cost: The cost of arbitration must be secured early in the process. In two-party transactions, the involved parties should have the ability to agree on the following variables: the possibility of subjecting the transaction to future potential arbitration (yes/no), the number of instances they agree upon, and whether they want to keep the DAO as a last resort.

Based on the parties’ selections, they are asked to secure an additional deposit for future potential arbitration, with a 50:50 split. The deposit will be returned if arbitration is not triggered. As the number of instances increases, so does the required deposit. The deposit can be partially consumed if not all instances are utilised.

Limiting the option to choose the DAO as a last resort should only be available for cases where parties want to have at least three instances of appeal and are willing to subject themselves to an additional deposit increase.

Last Resort: The DAO may be optionally selected by the parties as a so-called “last resort.” Opting for this choice is only available when employing at least a three-level social arbitration and increases the overall arbitration cost by [n]%.

Furthermore, the DAO can serve as a “safety valve,” mitigating the risk of inconclusive or excessively lengthy arbitration procedures.

Arbiter Supplementation: In the event that an arbiter neglects their duty, they are replaced by a new, randomly selected individual from the community. This arbiter supplementation can either be governed by a fixed logic within the smart contract or made adjustable by the parties involved, such as triggering supplementation after a predetermined period (e.g., 24, 16, or 12 hours) without receiving feedback from the arbiter.

Inconclusive Arbitrage: While it is improbable, it is prudent to impose limitations on the arbiter supplementation function, such as setting a maximum number of consecutive supplementations or a maximum total waiting time for an arbiter’s decision. If these thresholds are exceeded, the arbitrage decision would be escalated to the DAO.

Majorities: With respect to decentralised arbitrage, multiple systems can be utilised to establish arbitrage majorities. These majorities are crucial for determining the outcome of arbitration by ensuring that a consensus is reached among the chosen arbiters. By employing an odd number of arbiters, it guarantees that there will always be a majority decision, preventing deadlock situations. Examples of various arbitration majority systems include:

  • 2 out of 3: In this system, three arbiters are selected, and the majority decision is reached when at least two of them agree on the same resolution.
  • 5 out of 7: Seven arbiters are chosen, and a majority decision is achieved when at least five of them concur on the resolution.
  • 7 out of 11: In this setup, eleven arbiters participate, and a majority decision is formed when at least seven of them agree.
  • 9 out of 15: Fifteen arbiters are involved, and the majority decision is reached when at least nine of them concur on the outcome.

These different systems provide flexibility in the arbitration process, enabling the involved parties to choose the level of consensus required based on the complexity or significance of the dispute.

Finality of Transaction: Arbitration and appeal should be subject to a time constraint following the closure of a deal. If no arbitration trigger or appeal is initiated within a predetermined period, such as [n] amount of time, the option to arbitrate or appeal should no longer be available. This time limit ensures that disputes are addressed promptly and prevents parties from raising concerns long after the deal has been completed.

Incentivisation

Rewarding Arbiters: Arbiters obtain a percentage share of the arbitration deposit as compensation for their contributions. Additionally, they participate in community rewards incentive programs, which are funded using native tokens.

The percentage share from the arbitration deposit is disbursed solely to arbiters whose votes align with the final majority decision at the last instance of the arbitration process.

Native-token incentives are distributed to arbiters based on the number of cases they have resolved successfully, where a successful resolution is defined as a case in which the arbiter’s vote is in accordance with the final majority.

Penalising Arbiters: Arbiters who neglect their responsibility by failing to cast their vote within the designated time frame not only lose reliability points, but additionally face additional consequences. The following implementation roadmap relating to penalisation measures in conjunction with score reduction is recommended:

  • Temporary removal from the active arbiters list.
  • Raising the entry-level requirements for maintaining a position on the arbiters list.
  • Extending the unstake cooldown period (such as adding seven days for each consecutive skipped duty).

These measures can be correlated with the number of times [n] an arbiter has skipped their duty, ensuring a fair yet strict system that upholds the integrity of the arbitration process.

Content Reporting

Content reporting can be managed using social arbitrage mechanics similar to those described earlier. However, there are some key differences in this context. In content reporting, arbiters vote on whether uploaded content should be removed or not, and the conflicting parties are the uploaders and the reporters.

For each uploaded content, a minimum initial deposit of [n] native tokens is required. The cost of arbitrage is determined using a poker-based betting approach. When reporting content, the reporting party can either call the initial deposit by matching the same amount of tokens or raise the stake. The uploading party then has the option to pass, raise, or call.

The betting process concludes when one party either calls or passes. If a call is made, arbitrage is triggered. If a pass occurs, the party that passes forfeits their deposits already placed on the table. Depending on which party passes, the content either remains uploaded or is automatically removed.

In the event of an appeal, the poker-based betting process is initiated once again, increasing the overall pool. This approach ensures a fair and engaging mechanism for handling content reporting and arbitration.

Poker-based betting in social arbitrage

Anti-Exploitation Measures

To mitigate the risk of fake-volume attacks, such as triggering false arbitrations, an arbitrage cost is implemented. This measure makes carrying out such attacks economically unfeasible. Furthermore, in the context of content reporting, potential exploits could involve uploading inappropriate content from one account and reporting it from another. However, by distributing a portion of the betting pool among randomly selected arbiters, the economic profitability of this exploit is significantly reduced.

From a broader perspective, fake volume arbitrage calls can be used to increase the number of cases resolved by whale-level arbiters, ultimately enhancing their share of arbiter rewards funded by the treasury. To address this concern, it is crucial to limit the influence of staking or staking score on arbiter positioning and scoring. For example, the highest staking level could contribute a maximum of +20 base points to an arbiter’s score. This approach allows low-level stakers to quickly attain a similar position simply by actively participating as arbiters, thus promoting fairness and preventing exploitation in the ecosystem.

Conclusion

Ultimately, the social arbitrage framework serves as a well-orchestrated symphony, harmonising the diverse elements of the DeFi ecosystem. Just as skilled musicians carefully tune their instruments, this framework outlines the processes, rules, and incentives that help maintain equilibrium within the community. By addressing non-binary conflicts, arbitrage mechanisms, and anti-exploitation measures, the framework strikes a delicate balance, fostering a collaborative and trustworthy environment where all participants can thrive.

Contact Us

In case you’re interested in purchasing one of our due diligence and consulting packages or would like to get more details on the above, feel free to reach us via [email protected] or [email protected]. You can also contact us directly through one of the following telegram IDs:

  • @d_dum – QuantBlock’s CEO
  • @nathanZC – Zerocap’s Innovation Lead

About Zerocap

Zerocap provides digital asset investment and digital asset custodial services to forward-thinking investors and institutions globally. For frictionless access to digital assets with industry-leading security, contact our team at [email protected] or visit our website www.zerocap.com

DISCLAIMER

This article, authored by QuantBlock, is published on Zerocap’s website for informational purposes only. The content, views, and opinions expressed in this article are solely those of QuantBlock and do not represent or reflect the views, opinions, or positions of Zerocap. The information provided should not be considered financial advice, and Zerocap bears no responsibility for any actions taken based on the article’s content.

Zerocap does not guarantee the accuracy, completeness, or timeliness of the information provided in the article. The industry sector discussed is subject to rapid changes, and the content should not be regarded as universally applicable or definitive.

For any concerns about the article’s authenticity, please contact QuantBlock directly at [email protected].

FAQs

What is Social Arbitrage in the context of Decentralised Finance (DeFi)?

Social Arbitrage in DeFi refers to the process of resolving subjective, non-binary user conflicts that require human-based assessment within a digital ecosystem. It involves engaging ecosystem participants and providing incentives for undertaking such activities. Social Arbitrage is often associated with social platforms or similar products where users upload audio-visual content, necessitating content reporting and removal features.

What are the two methodologies for resolving subjective conflicts in DeFi?

The two methodologies for resolving subjective conflicts in DeFi are through Decentralised Autonomous Organizations (DAOs), or closed arbitration, and open arbitration. DAOs should be considered a measure of last resort, isolated from any form of spamming or burden associated with user-base expansion. Open arbitration, on the other hand, enables any community member to participate in resolving users’ conflicts.

What is the role of Arbiters in Social Arbitrage?

Arbiters play a crucial role in Social Arbitrage. They are selected from the community and tasked with casting their vote for one of the two binary solutions in a conflict. Arbiters accumulate reliability points, which enhance their overall score and standing in the arbiters ranking. The reliability score is augmented by the quantity of staked tokens and the number of cases resolved.

How does the Social Arbitrage process handle content reporting?

Content reporting in Social Arbitrage is managed using similar mechanics to those described for conflict resolution. However, in content reporting, arbiters vote on whether uploaded content should be removed or not, and the conflicting parties are the uploaders and the reporters. A poker-based betting approach is used to determine the cost of arbitration.

What measures are taken to prevent exploitation in Social Arbitrage?

To mitigate the risk of fake-volume attacks, such as triggering false arbitrations, an arbitrage cost is implemented. This measure makes carrying out such attacks economically unfeasible. Furthermore, by distributing a portion of the betting pool among randomly selected arbiters, the economic profitability of potential exploits is significantly reduced. Limiting the influence of staking or staking score on arbiter positioning and scoring also helps prevent exploitation in the ecosystem.

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