The Role Of Blockchain In Financial Contract Management Essay.

Learning objectives and graduate skills tested

In the twentieth century the pillars of financial industry, in which the industry is based on, has been questioned and challenged in many ways. The technology of blockchain is changing the whole system in terms of rules in a disruptive way. The blockchain are among the introducers of the learning modern machines which are changing the way things are done in the financial sector. Technologies based on the blockchain are estimated to save a lot of billions US dollars in the region annually. This is plunged in the financial sector believed to be with annual savings of eleven to twelve billion US dollars. The proposal will be trying to show how the system of management of financial contracts, based on the more general distributed ledger, can replace other machines and human labor in the contract execution. These execution includes the clearing and settling, hence can persuade through changes in the financial industry potentially (Egelund-Müller, 2017). The blockchain, identifying the distributed ledger blockchain1, provides the parties involved the chance to stabilize the projected values distributed on the facts shared in the absence of assumption of mutual trust. The mutual trust will be developed by putting into practice the by putting into a single events involving the non-trusting parties and will now be acting as a single unit of truth. There will be no participants considered privileged to maintain the ledger. (Zyskind, 2015) (Jezic, 2015)

The fixed procedure for adding new events to a group of events can be offered by the distributed ledger when it has not been altered on its basic form. The bitcoin can be transferred from one owner to another. To ensure security of the bitcoin transferred, a protocol has been made which is non-detachable to the bitcoin, this protocol allows only a transfer from approved owner and has a history of transaction that sums to the positive balance. This is when the transferred amount at most is balancing and has not already been spent at time of transfer (Noizat, 2015). Bitcoin is a system of a level-1 distributed ledger because it offers no mechanism for contracts of non-definable. The financial industry in the recent years has developed a financial language for them to move away from the natural language, this has led the financial contractors making financial agreement using the financial language considered to be formal. The languages like the domain-specific languages have clearly defining the procedures and rules specifying the validity of the contract and the way they can be properly executed. (Qiu, 2015) (Swan, 2015) (Watanabe, 2015)

2. Research questions.

Relation to Automated Financial Contracts

There are several questions the research will be trying to answer on the relation to automated financial contract. The questions answered will go in line with the objectives of the research. The following are some of the questions which the research paper will be trying to answer.

1. What is the financial language used in the automated financial contract and how it is different from the current financial industry and the natural language?

To answer the above question the paper try to examine the informal language driven by examples used in the financial contracts, conditions and considerations required in implementation of distributed ledger. The financial industry is composed of different approaches which make it easy for the large varieties of contracts of different kinds using few contractors chosen. The compositional constructors are the most basic ones. The financial language is made up of two constructors, zero and transfer (Papadopoulos, 2015). Zero constructor shows a contract which is empty while transfer shows a transfer from one party to another one single unit of a given currency. The small number of the rules which can be interpreted by the computer gives the precision of mathematics on how the evaluation of contracts. This helps in removing the misunderstandings common in the natural language and reduces any misunderstandings the parties involved in the contract. The financial language in question here is also capable of allowing the parties to check before they commit to any agreement whether there is a well definition of the contract. The system is also able to verify the casualness of the contract, preventing wasting time in absurdities. (Umeh, 2016) (Hurlburt, 2016)

1. What are the contracts manager and their role in the financial contract system?

The reference to the evaluation of the contract, where it can be analyzed, audited and verified is contained by the contract manager. The general functionality related to the language contract and its conditions including the procedure of the language, is provided all by the contract evaluator. The contract evaluator also gives the functions for checking the statics on whether the contract is a well-defined one or casual. Contract manager is employed by the contract manager mainly to handle contract following some particulars confined to contract parties’ subscriptions. This includes the role of bookkeeping, contract storing, handling the cancellation of contract and transferring to another person, contract signing, collected data from the feedback etc. The manager has some other on top of these like encapsulates some contract strategies. The contract managers depend on the input of humans to affect their operations. While some can defer the actions to the participants involved, some can take action automatically necessary for the success of the contract. (Zhang, 2016) (Kraft, 2015)

1. What are the distribution ledgers one can choose from?

Conceptual Framework

The implementation has proved Ethereum to be considered by many people worldwide making it stable and supported by a big community. There are different type of distributed ledgers one can choose from, but Ethereum has seem to be a one stop choice for many people. The reasons making it to be ideal for many is because the computational cost for managing a contract evaluator is very high and the transaction per second is beyond the transaction system of the world. The transactions are also available and accessible to anyone with the ledger copy. These ledgers are efficient in keeping privacy the private transactions, with only the auditors who have been designated to be able to access those kind of transactions. Corda, ledger, is considered to be the best in such private transaction without compromising it consistency.

These transactions are expected largely to increase as the world is digitalized. The only benefit the current ledger system has is that it can allow for corrections and an override which is manual. (Kishigami, 2015) (Fujimura, 2015)

3. Conceptual framework

There are several approaches that can be used to demonstrate the conceptual frame work of this particular research. We are explaining here, the importance of the details identified for the success of the project. Their relationships in every detail demonstrated using shapes and figures. The concepts  demonstrated here; financial system, contract evaluator, contract manager and the hierarchy of the implementation of distributed ledger.

1. The financial system.

The above figure shows the financial system of today. It is made up of big institutions, gather in small groups, where they can communicate to each other. The regulatory authorities are there to make sure there is consistency in their operations by auditing these big institutions. For the individual companies to get into the financial system they have to collude with these big institutions for this to happen. This also goes to the small companies that can offer the financial service to only access the finance industry by partnering with the big established institutions. (Eldred, 2016) (Clack CD, et al., 2010)

When the distributed ledger is used in the financial system, the parties involved in the system enjoy the direct entry in the financial system as there will be elimination of the other bilateral communication between the large institutions or with anyone. The distributed ledger will handle all the contracts and settle them automatically in line with the party’s strategy for doing such. The leger maintains its consistency since the access to the scales of arbitrary number of the parties involve as consensus protocol. (Frankau S, et al., 2009) (Henglein F, et al., 2009)

Conclusion

Contract evaluator

The contract evaluator demonstration shows how the contract evaluator can reduce the contract to zero. The time taken t_o is the time evaluator needs to bring that effect. The ninety days are for the evaluation after application and the reduction take place after time is applied and a caller notifying the contract evaluator when there is a successful transfer.

1. Contract managers

Ledgers

From the above figure it can be seen that the contract manager resides in the ledger and acts as connectors that inhabits the contracts and compute them using the contract evaluator. They also bring together the data that is vital for the completion of the computation from the suitable feeds and carry out the transfers by involving with the tokens. The main interaction of users, small financial companies and the individual companies, is to evaluate, create, sign and execution of the contracts. To get the full picture of the whole system the regulatory authorities will interact with the ledgers. (L & H, 2016)

1. Hierarchy of the implementation

The above figure shows the hierarchy of implementation. On the above tops are the contracts drafted by either the small financial businesses or individual companies, then given to the contract managers. Providers or the open-source community in the financial service, for example, can create the contract managers. The work of these contract managers is to store, calculate and do the execution of the contracts. They do all these using the contract evaluator or the contract machine. For proper evaluation of contract following the legal-binding semantics, regulators will create the contract evaluator by themselves. Single distributed ledger is under which the contract managers, the contract evaluators and contracts operate.

4. Literature review

The distributed ledger, which sometimes called the shared ledger or sometimes known as the Distributed Ledger Technology, is an item agreed upon in the institutions or countries and spread in many sites through replication, sharing and synchronization. It has no center or mother center or a central administrator. The distributed ledger requires a connected network between peers and a common algorithm to ensure that across the nodes, replication takes place.

During early times, the ledgers were used in the economic transactions. They were used to record contracts, payments, moving assets or properties or buy and sell deals. Over the past few years the computers stepped in to help the process of keeping the record and maintaining the ledger. This came with a lot of speed and convenience. This technology in computer has moved to higher level and forms, cryptographically secured, decentralized and fast. (Omohundro, 2014) (Barkatullah, 2015)

The potential to bring revolution in the way government, the institutions or the corporate work is lying in the distributed ledger technology. Collecting of tax, passport issuance, registering land records, the social security benefits outlay, license and even in the voting procedures can be made ease with distributed ledger. The industries such the finance, music and entertainment, diamond and precious assets, artwork, chains of supplying some commodities had been made easy by the distributed ledger. Many places though have not adopt the distributed ledger despite the benefits.

In the twenty first century, a century defined with the internet and now the layer network of distributed blockchains, the data transactions in the network business has gone beyond the boarder. The business network beneficiary take part in the market place model to do business and possess some certain value asset becoming part of the database. Such assets can either be tangible or non-tangible. The transaction between these assets ownership creates the business value network and all of them get recorded in the business ledger. Basically, businesses have used the multiple legers to track record of asset ownership and asset transfers between the participants in various business lines (Ong, 2015) (Vasek, 2015).

The database of the distributed ledger is scattered across many devices on the peer-to-peer network. These devices or the nodes do the replication and saving of the same copy which is identical to the ledger and independently updates itself. Lack of the central authority or the administrator become the main advantages of the distributed ledger. The new transactions is constructed by the individual nodes any moment the update happens. A consensus algorithm which has the correct copy is then voted by the nodes. The determination of the consensus is important since it will help other nodes or the devices to update with new and correct copy of ledger. (Shehhi & Zeyar, 2014) (Birch, 2015)

Though the distributed ledgers doesn’t have employ necessary chain of blocks to enable them provide valid and secure achievement successfully of consensus distributed; the only data type organized thought to be a distributed ledger is the blockchain.

The distributed ledgers is popular to many because of their use in the cryptocurrencies, it may sometimes make no sense since the underlying ledger and cryptocurrency are two things apart. In practice cryptocurrency can be used to provide the incentives keeping the devices working. Apart from the cryptocurrency, smart contracts and file storage are in play.

5. Methods

The main focus in the methods to make the whole process of data collection possible, we will cover; study designs, study area, study population, sample size determination, sampling method, data collection methods, analysis of the data and the study variables.

1. Study design

The data to be collected are both the quantitative and the qualitative data. The quantitative data will be focusing on the numeric aspects of data while the qualitative data focuses on the view points of the population observed of interviewed.

1. Study area.

On the area of study, the main focus will be on the places where the distributed leger has been used and has become popular. The main areas where the distributed ledgers are used;

Fundraising. The people who want to invest in their ideas, services or the products are using the cryptocurrency to collect their fund.

Charities. Many people are nowadays using the crptocurrency to give fund to the charities to mainly avert the fraud where many people receiving the charity funds trying to take them to the personal account.

Travel. There are some travelling agencies using the cryptocurrencies in booking for their customers a flight or a drive.

Education.  In the form of payment, many schools are nowadays accepting cryptocurrency for school fees.

Battling the electoral fraud. This can happen when voting is combined with blockchain technologies.

Other area which will be visited are the businesses and people managing their wealth through using the blockchain technology.

1. Study population

This will involve the people who at one point in their lives have interacted in one way or the other with the cryptocurrency. With the study questions in place we will be able to get the right respondents to get the desired results. The respondents will be the people who support the charities, people involve in the transport sector, education and use the cryptocurrency to do all that.

1. Sample size determination

Sample size calculation has been done using the upper limits to minimize sampling errors. Thus, sample size will be determined as follows;

n =  Z²pq

Z = the standard normal deviate at the required confidence level set at 1.96 which corresponds to 95% confidence interval.

P = the proportion in the target study population estimated to have the characteristics being measured (performing task shifting).

q = the proportion in the target population estimated not to have the characteristics being measured. In this research this will be the number of participants in the financial (q = 1-p).

d = is the marginal error 0.05

Since there is no estimate available of the proportion of in the world of financial contract, 50% will be used as p as recommended by Fisher et al formula .Thus, calculation for sample size will be done as follows:                  

we will then adjust the sample size using the formula

Where:  nf  =  the desired sample size population

n = the desired sample size

N= the estimate of the population size.

6. Significance of the study

The significance of the study will focus on what the study will contributes to the general public. The study of the automated financial contracts will be able shade more light on the distribution ledger, the participants in the field of financial contracts. The parties such as the contract managers, contracts, legal regulatory authorities and the ledgers. It will help people to understand these terms better and their roles. The proposal will see people get to know the overall importance of taking the digital distributed ledger, as it eliminates the intermediaries between the participants and the ledger itself. The paper will help the government to understand the better ways to collect and manage the taxes. Shading all these light can help many invest in the automated financial contracts after the information reach them creating ways of creating wealth.

The paper will be to identify how people perceive the automated financial contracts and other people involved in the distributed ledger apart from the blockchain. How the distributed ledger works will also be addressed into much details.

The study will also inform on the clear and reconcile transactions in nearly real time. The speed at which the transactions is carried out compared with the traditional mechanism. Its provision of the records which cannot be changed hence the trust from the people. The nature by which it is distributed eliminating a single point failure. These will be highlighted by the paper.

7. Limitations and Delimitations

The following are the limitations and delimitations expected to be encountered during the process.  

1. In cases where the researchers will be writing observation from the field, some information will be captured since the non-verbal communication in that case will not be captured at all. This may also be caused by the fact that while writing, what is not seen and unheard cannot be recorded.
2. Incomplete records contributed with lack of signatures. This will cause addition of work to the researcher since they will have to verify the every detail from the questionnaire in case they are used in the research. Focus group discussions and in-depth interviews will also be verified.
3. The respondents may give question on their view about the whole thing but not in according to the questions provided in the questionnaire or the question asked during the interview. This problem majorly occurred at the demographic profiles, but controlling will be done during analysis.
4. Some respondents may fear the victimization since some information might be sensitive to some of them.
5. Ethical issues

For the whole process – data collection, data entry and analysis –to successful, some ethical factors will be considered. The data will be taken from different environments. This means that, the research assistants will have to be authorized to collect the data by the local authority. Therefore, we have to address some issues concerning the privacy of the information, how the results are going to be used, and intervention on the results, conclusions of the project and what shall be advocated to be done in case there are some. (McGee, 2007)

The consent of the respondents must be addressed, where the respondent will be given opportunity to choose on whether to answer to the questions presented to them or not to answer them, tell respondents the reason why those questions are necessary for the data and the information being sought from the data. The research assistants will be introducing themselves before presenting the questions to the respondents. The privacy of the information from the respondent will be kept, the respondents will be assured that the information got from them will not be used in any way apart from what it is intended to. When they brought something of concern, they will also be assured that the intervention will be made so that a lasting solution may be achieved. (Paolettti, 2014)

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