In the digital age, confidence between individuals finds its manifestation through contractual agreements, as illustrated in Figure 2. Financial transactions, based on the fundamental human need to exchange value. The nature of the assets involved in a financial transaction plays a central role in determining the specific type of agreement in which the parties conclude.
In the digital age, confidence between individuals finds its manifestation through contractual agreements presented in Figure 2. Source: Owner of the author.
The importance of these agreements becomes the most obvious when one of the parties involved in a transaction does not respect the terms stipulated within the framework of the agreement. In such cases, the automatic execution of the contract is not launched, used to protect the rights of the party which conforms faithfully to the agreed conditions. This mechanism guarantees a level of responsibility and confirms the principles of equity in financial transactions, thus promoting the trust among the parties involved.
Consequently, the very act of carrying out financial transactions is intrinsically rooted in the establishment and the functioning of financial confidence mechanisms, which serve as a basis to ensure the integrity of these transactions and the reliability of all the participating parties.
Traditional contracts
Traditional contracts, whether verbally transported or through written documents, generally rely on natural language for their expression. Traditionally, such contracts require the involvement of a third -party trust. This authority and reliable intermediary orchestra and supervises the transaction, serving as a guarantee to ensure the faithful execution of the contract. In particular, in the context of contract performance, the application of traditional contracts is often based on the involvement of state authorities, executed by legal coercion. A notable development in this process is the elimination of the need to physically transfer enforceable legal documents to an agency for execution, thanks to modern technological progress.
From the point of view of the contract economy, taking into account information asymmetry and the incorporation of the main cost theory and the theory of transaction costs provide information on the structure of business capital. Each guarantee can be considered as a rights contract, allowing companies to issue specific forms of securities to resolve internal conflicts resulting from disputes. Thus, the foundations of the theory of financial contracts are based on contractual relations integrated in various titles.
Based on the theory of financial contracts, the classic complete contract model strives to endogenize the form of contracts (Eller, 2020). On the other hand, the theory of incomplete contracts assumes the presence of an incompleteness of contracts to a certain extent. The complete contract model encompasses the main model model and the costly status of state verification, while the dynamic debt model is the category of incomplete contract models.
The complete contract model revolves around the fight against asymmetry of information concerning the advantages of the ex-post project and the associated surveillance costs for service providers (Brunjes, 2022; Gucaylilar-Yenidogan and Erdogan, 2023). The theory of incentive compatible contracts, which is an integral part of the optimization of the allowance of the cash flow flows after the execution, emerges by the application of the methodology of the “cost verification”. For example, Townsend (1979) used OPP analysis in the complete theory of the contract to explore the characteristics and conditions of incentive compatible contracts, concluding that, in the presence of ex-Post surveillance costs, an optimal-compatible contract for capital putting is a debt contract. Subsequently, researchers, including Douglas W. Diamond, plunged into the incentive compatible attributes of responsibility contracts through various perspectives based on the CSV analysis framework, saying that the CSV model is characterized by unique terms, a single risk neur.
The incomplete contract model, on the other hand, finds its foundations within the limits of individual rationality (Gürpinar and Özveren, 2024; LOERTSCHER and Marx, 2022). Complexity in the external environment, information asymmetry and inherent incapacity of contractual parties or contract arbitrators to supervise and verify each aspect culminate in the inherent incompleteness to contracts. The theory of incomplete financial contracts considerably informs research in the field of business financing theory. Taking advantage of the concept of incomplete contracts, the theory of security design, in particular from the point of view of business control, represents the first plan of research on financial theory.
Smart contracts
Intelligent contracts represent a computerized transaction protocol which operates independently, which automatically avoids the need for intermediaries, self-truth and execution of contract conditions (Lohmann, 2020). When rooted in blockchain technology, intelligent contracts acquire distinct characteristics, such as decentralization, minimization of confidence, programmability and immutability. They have remarkable flexibility to be integrated transparently into various data and asset ecosystems, promoting the exchange of secure and efficient information, value transfer and asset management. This technological innovation is ready to inaugurate deep transformations within traditional commercial and financial models, by redefining social production relations. It also serves as a basis for the creation of assets, systems and programmable companies.
Smart Contract Technology is an integral part of blockchain technology, serving as a contract form adapted to the field of transactions on multi -party internet. In essence, it embodies a calculated transaction agreement throughout the execution of the terms of the contract, meaning a transition from traditional transaction systems to a digital paradigm. In particular, Ethereum’s intelligent contracts, based on blockchain technology, have been largely acclaimed. In a narrower sense, they summarize commercial logic and algorithms, allowing the integration of network, human and legal elements. In a broader context, intelligent contracts work as intelligent IT protocols, capable of self-execution and verification. They find applications in various sectors, including the emerging landscape of the Internet of Things and various industries.
Like conventional contracts, intelligent contract technology adheres to a complete principle of the life cycle, encompassing three key phases: the creation, deployment and execution of contracts. During the creation phase, the specifications of the contract and the specific verification criteria are automatically generated by negotiations involving several parties. Once the fundamental contractual standards has been established, the contract code is formulated after a meticulous verification. The validation of the contract obliges people with relevant expertise to carry out initial negotiation checks, or alternately, virtual validation can be carried out via the abstract model of the system. Ensure the alignment of the contractual code and the text of the contract is essential to ensure the security and stability of the execution of the contract. In the deployment phase, similar to the release of specific transactions, the signed contracts are distributed directly on the P2P network. Subsequently, each node receives the contract, stores it in its consensual system, the aggregates recently received from contract systems to calculate the chopping value of the whole and sharing with other nodes of the network. Upon receipt, each node compares the value to its own calculation, forging a consensus which guarantees the reliable execution of the contract.
Blockchain technology, as a catalyst for innovation within financial institutions, can effectively take up many challenges associated with trade and fair securities. Specific platforms, such as Ethereum, have presented pronounced advantages in the field of financial transactions. They deal not only with security and contractual contradictions inherent in public channels, facilitating programmatic management, but they also meet various user requirements, capitalizing on their synergistic capacities. On the other hand, the hyperledger fabric manages the problems linked to transactions within consortium chains. The recent update has seen many financial institutions promoting fabric, national banks also adopting the model to build consortium channels, thus establishing commercial innovation ecosystems based on blockchain. Various platforms offer their unique advantages, mainly focusing on improving confidentiality and security in financial transactions, as well as expansion platforms and models (hypotheses 1.1-2.2).
