Web3 Disputes Require More Than Just Code

Contract law and codes were never meant to address the amorphous, dynamic world of Web3 and crypto. They were designed for tangible transactions and for real-world assets to facilitate trade and commerce. But the modern world has introduced new avenues and challenges. The Web3 world, blockchain, and crypto are the three biggest disrupters that have forced the once dismissive legal minds to tweak the law to adapt to the changes of the 21st century.

As someone trained in traditional law, I was taught to think in binaries. Terms such as offer and acceptance, asset and consideration, jurisdiction, and forum were all that you needed to execute an agreement. Web3 refuses to sit inside those boxes. In Web3, tokens move without intermediaries, DAOs operate without a boardroom, and smart contracts execute without courts. 

However, that does not make the law obsolete to Web3; rather, it makes it more relevant. While code can automate performance, it cannot allocate risks when things go awry. Neither can it interpret intent, fill performance gaps, or deal with situations that the developer(s) never anticipated. More so, it certainly cannot resolve disputes when billions of dollars are at stake.

When I first ventured into this sector, most founders were completely oblivious to its contracts and their role. The prevailing belief was the largely misinterpreted term “code is law.” For them, the discussion ended as soon as the smart contract executed. Legal discussions were largely limited and almost cosmetic, and questions were mostly limited to jurisdictions for incorporation and methods to save tax. 

That mindset has not shifted. It is noteworthy to state that this change did not happen overnight. It happened because reality intervened. Protocols forked, DAOs crashed, founders split, and money was lost. Then, when the regulators showed up to protect the investors, code stopped being the end of the conversation, and contracts became the starting point.

Founders today are far more conscious of the fact that decentralization does not mean the absence of reality. Instead of avoiding legal frameworks, founders now want to know how to design them without breaking the ethos of Web3. Founders are more conscious of whether a particular off-chain contract mirrors the on-chain logic, who owns the code once multiple contributors get involved, or what happens when a core developer leaves or turns hostile. 

In practice, this has translated into growing reliance on well-drafted and purpose-built agreements. Founder and contributor agreements have become essential to define IP rights, ownership, vesting, confidentiality, and exit consequences. Smart contract developer agreements now play a critical role in aligning legal intent with execution. It clarifies what the code is meant to do, how errors are treated, and who bears the risk in case of exploits. 

Token-related agreements, whether they are for issuance, allocation, or transfer restrictions, have become central to managing internal alignment and regulatory exposure. Service provider, validator, infrastructure, and IP agreements are also gaining momentum in situations where oracles and custodians introduce points of failure that can only be contractually managed.

Enforcement, too, has become a part of the conversation. Founders want to know as to against whom rights can be asserted and whether they can be held liable for negligence in situations over which they did not have control. 

However, Web3 agreements cannot be drafted like standard, single-jurisdiction contracts. A clause that may look neat and perfect on paper may not stand judicial scrutiny in many jurisdictions. Where founders sit in different jurisdictions, developers in some other, and token holders could be present in dozens of jurisdictions, identifying the proper forum, determining the governing law, and enforcing the outcome becomes far more complex than in traditional commercial relationships. In such a setting, the neat assumptions of traditional contract law begin to fray.

For instance, arbitration, which has long been seen as the default solution for international disputes, is not often the silver bullet for the resolution of disputes in Web3. Not only is it expensive, but it is often ill-suited for disputes that require urgent relief or technical understanding of the subject. At times, an arbitral award against a decentralized entity may exist only on paper as a moral victory if there is nothing to enforce against.

This has made us rethink. Web3 contracts must rely on a multi-layered approach to resolving disputes. It must have an on-chain mechanism, such as governance votes or protocol-level remedies, as the first approach. This is quick and aligned with the protocol architecture of Web3. 

Off-chain resolutions come next. Negotiations followed by structured mediation allow disputes to be resolved without escalating into adversarial proceedings that can irreversibly damage protocols. 

In Web3, disputes are not purely bilateral, but they affect token holders, contributors, and users who have no seat or say at the negotiating table. Resolving issues through negotiation or mediation often preserves trust, avoids public signalling of failure, and prevents panic-driven exits that can be far more damaging than the underlying dispute itself.

This format of dispute resolution mechanism, when embedded into a traditional legal contract, allows for outcomes that are quick, efficient, and preserve the commercial relationship in a longer run. 

In a space where relationships, reputation, and continuity matter as much as enforceability, this format of off-chain resolution provides flexibility without surrendering legal rights. Not only does it keep the protocol intact, but it also allows the breathing space for the parties to recalibrate their incentives.

This layered approach to resolution of disputes combines technical controls, economic incentives, and legal remedies rather than relying on any single tool. Lawyers who understand this system are no longer just drafting agreements but are designing systems of accountability that actually work in a decentralized and cross-border world.

While arbitration and litigation still have a role, they are to be used as a last resort rather than the default response. They should ideally serve as the backstop and not the front line. Carefully drafted escalation clauses that move from informal resolution to mediation and only then to arbitration or courts should become the norm and not the exception. 

What we are seeing now is not a retreat from decentralization but an integration of law into it. Legal contracts continue to evolve into a tool that connects permissionless technology with real-world accountability, enforceability, and sustainable governance. 

It is safe to say that the Web3 ecosystem has outgrown the belief that code alone can govern systems built by humans and driven by incentives, and projects that understand this are the ones that are actually building something that will leave an impact.

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Author: Chandan Goswami, Advocate, Partner, AT & Partners