Implementing A Letter Of Credit Style Business Process For Small-Scale Contracting Using Smart Contracts

Year 2025, Volume: 2 Issue: 1, 1 - 18, 30.06.2025

Mathew Fukuzawa , Michael Kay , Brandon Mcconnell , Kristin Thoney-barletta Donald Warsing

An Erratum to this article was published on July 22, 2025. https://dergipark.org.tr/en/pub/tcsa/issue/93814/1745926

Abstract

We demonstrate proof-of-concept for negotiating and executing a small-scale contracting job based on letter of credit within a blockchain network using smart contracts. Using Ethereum smart contracts, we model a small-scale general
contracting scenario under perfect conditions. Execution is demonstrated with the Remix Integrated Development Environment (IDE). We show the feasibility of conducting a small-scale contracting job using smart contracts.
The entire process, including job details, payment, and verification, can be conducted digitally. This research continues the efforts of previous research on letters of credit on blockchain but applies it to the general contracting scenario at small scale. Further work is required to investigate variations in the assumptions, such as dishonesty and incompetence. Also, full-scale decentralized application is not explored here. This process expands the scope of current practices and tools, such as Angi, in a decentralized manner with blockchain. Full-scale adoption at the small scale is likely difficult due to disbelief in technology, cost, and resistance to change.

Keywords

blockchain , letter of credit , smart contract

Ethical Statement

The authors declare that they have no known competing financial interests or personal relationships that could have appeared to influence the work reported in this paper.

References

• Abdul-Rahman, H., Kho, M. and Wang, C. (2014), ‘Late Payment and Nonpayment Encountered by Contracting Firms in a Fast-Developing Economy’, Journal of Professional Issues in Engineering Education and Practice 140(2). https://doi.org/10.1061/(ASCE)EI.1943-5541.0000189.
• Ahmadisheykhsarmast, S. and Sonmez, R. (2020), ‘A smart contract system for security of payment of construction contracts’, Automation in Construction 120. https://doi.org/10.1016/j.autcon.2020.103401.
• Alderfer, C. P. (1969), ‘An empirical test of a new theory of human needs’, Organizational Behavior and Human Performance 4(2), 142–175. https://www.sciencedirect.com/science/article/abs/pii/003050736990004X.
• Antia, K. D. and Frazier, G. L. (2001), ‘The Severity of Contract Enforcement in Interfirm Channel Relationships’, Journal of Marketing 65(4), 67–81. https://doi.org/10.1509/jmkg.65.4.67.18385.
• Asgaonkar, A. and Krishnamachari, B. (2019), Solving the Buyer and Seller’s Dilemma: A Dual-Deposit Escrow Smart Contract for Provably Cheat-Proof Delivery and Payment for a Digital Good without a Trusted Mediator, in ‘2019 IEEE International Conference on Blockchain and Cryptocurrency (ICBC)’, IEEE, pp. 262–267. 0.1109/BLOC.2019.8751482.
• Bai, X., Sheng, S. and Li, J. J. (2016), ‘Contract governance and buyer-supplier conflict: The moderating role of institutions’, Journal of Operations Management 41, 12–24. https://doi.org/10.1016/j.jom.2015.10.003.
• Baker, G., Gibbons, R. and Murphy, K. J. (2002), ‘Relational Contracts and the Theory of the Firm’, The Quarterly Journal of Economics 117(1), 39–84. https://doi.org/10.1162/003355302753399445.
• Barnes, L. B. (1981), ‘Managing the Paradox of Organizational Trust’, Harvard Business Review. https://hbr.org/1981/03/managing-the-paradox-of-organizational-trust, Accessed 15 June 2023.
• Belfo, F. (2013), ‘A Framework to Enhance Business and Information Technology Alignment Through Incentive Policy’, International Journal of Information Systems in the Service Sector 5(2), 1–16. https://www.igi-global.com/article/content/78933.
• Biswas, P. K. (2011), ‘Networks of small enterprises, architecture of governance and incentive alignment: Some cases from India’, AI & Society 26, 383–391. https://link.springer.com/article/10.1007/s00146-011-0318-6. Bix, B. (2012), Contract Law: Rules, Theory, and Context, Cambridge University Press, New York.
• Brett, J. M. (2000), ‘Culture and Nnegotiation’, International Journal of Psychology 35(2), 97–104. https:// doi.org/10.1080/002075900399385.
• Brett, J. and Thompson, L. (2016), ‘Negotiation’, Organizational Behavior and Human Decision Processes 136, 68–79. https://doi.org/10.1016/j.obhdp.2016.06.003.
• Butler Jr, J. K. (1999), ‘Trust Expectations, Information Sharing, Climate of Trust, and Negotiation Effectiveness and Efficiency’, Group & Organization Management 24(2), 217–238. https://doi.org/10.1177/1059601199242005.
• Cannon, J. P., Achrol, R. S. and Gundlach, G. T. (2000), ‘Contracts, Norms, and Plural Form Governance’, Journal of the Academy of Marketing Science 28(2), 180–194. https://doi.org/10.1177/0092070300282001.
• Centobelli, P., Cerchione, R., Esposito, E. and Oropallo, E. (2021), ‘Surfing blockchain wave, or drowning? Shaping the future of distributed ledgers and decentralized technologies’, Technological Forecasting and Social Change 165, 120463. https://doi.org/10.1016/j.techfore.2020.120463.
• Chan, H.-L., Choi, T.-M. and De la Torre, D. M. (2023), ‘The “SMARTER” framework and real application cases of blockchain’, Technological Forecasting and Social Change 196, 122798. https://doi.org/10 .1016/j.techfore.2023.122798.
• Chang, S. E., Chen, Y.-C. and Wu, T.-C. (2019), ‘Exploring blockchain technology in international trade: Business process re-engineering for letter of credit’, Industrial Management & Data Systems 119(8), 1712– 1733. https://doi.org/10.1108/IMDS-12-2018-0568. Chang, S. E., Luo, H. L. and Chen, Y. (2019), ‘Blockchain-enabled trade finance innovation: A potential paradigm shift on using letter of credit’, Sustainability 12(1), 188. https://doi.org/10.3390/su12010188.
• City of Cary, NC (2023), ‘Faq’. https://www.carync.gov/services-publications/residential-permits-inspections/home-construction-projects, Accessed 25 May 2023.
• Clohessy, T. and Acton, T. (2019), ‘Investigating the influence of organizational factors on blockchain adoption: An innovation theory perspective’, Industrial Management & Data Systems 119(7), 1457–1491. https://doi.org/10.1108/IMDS-08-2018-0365.
• De Dreu, C. K. (1995), ‘Coercive Power and Concession Making in Bilateral Negotiation’, Journal of Conflict Resolution 39(4), 646–670. https://doi.org/10.1177/0022002795039004003.
• Eisenhardt, K. M. (1989), ‘Agency Theory: An Assessment and Review’, Academy of Management Review 14(1), 57–74. https://journals.aom.org/doi/abs/10.5465/amr.1989.4279003.
• Ethereum (2023a), ‘Nodes and Clients’. https://ethereum.org/en/developers/docs/nodes-and -clients/#execution-clients, Accessed 5 June 2023.
• Ethereum (2023b), ‘Proof-of-Stake (POS)’. https://ethereum.org/en/developers/docs/consensus -mechanisms/pos/, Accessed 6 January 2023.
• Fisher, R., Ury, W. and Patton, B. (2011), Getting to Yyes: Negotiating Agreement Without Giving In, Penguin, New York.
• Friedman, R., Anderson, C., Brett, J., Olekalns, M., Goates, N. and Lisco, C. C. (2004), ‘The Positive and Negative Effects of Anger on Dispute Resolution: Evidence From Electronically Mediated Disputes’, Journal of Applied Psychology 89(2), 369. https://psycnet.apa.org/record/2004-12430-014.
• Goharshady, A. K. (2021), Irrationality, Extortion, or Trusted Third-Parties: Why it is Impossible to Buy and Sell Physical Goods Securely on the Blockchain, in ‘2021 IEEE International Conference on Blockchain (Blockchain)’, IEEE, pp. 73–81. 10.1109/Blockchain53845.2021.00021.
• Google (2023), ‘Google Finance’. https://www.google.com/finance, Accessed 31 May 2023. Haagensen, F. and Debois, S. (2022), Incentive Alignment Through Secure Computations, in ‘International Conference on Business Process Management’, Springer, pp. 343–360. https://link.springer.com/chapter/10.1007/978-3-031-16103-2 23.
• Heindel, T. and Weber, I. (2020), Incentive Alignment of Business Processes, in ‘Business Process Management: 18th International Conference, BPM 2020, Seville, Spain, September 13–18, 2020, Proceedings 18’, Springer, pp. 93–110. https://link.springer.com/chapter/10.1007/978-3-030-58666-9 6.
• Ho, S.-c. (2001), ‘Executive insights: Growing consumer power in china: Some lessons for managers’, Journal of International Marketing 9(1), 64–83. https://doi.org/10.1509/jimk.9.1.64.19828.
• IPFS (2023a), ‘Content Identifiers (CIDs)’. https://docs.ipfs.tech/concepts/content-addressing/#cid-versions, Accessed 10 May 2023.
• IPFS (2023b), ‘IPFS and the problems it solves’. https://docs.ipfs.tech/concepts/ipfs-solves/#data -sovereignty, Accessed 10 May 2023.
• IPFS (2023c), ‘What is IPFS’. https://docs.ipfs.tech/concepts/what-is-ipfs/#defining-ipfs, Accessed 10 May 2023. Isaac, R. G., Zerbe, W. J. and Pitt, D. C. (2001), ‘Leadership and Motivation: The Effective Application of Expectancy Theory’, Journal of Managerial Issues pp. 212–226. https://www.jstor.org/stable/40604345.
• Johnson, S., McMillan, J. and Woodruff, C. (2002), ‘Courts and Relational Contracts’, Journal of Law, Economics, and Organization 18(1), 221–277. https://doi.org/10.1093/jleo/18.1.221.
• Kaplan, R. S. and Norton, D. P. (1996), ‘Using the Balanced Scorecard as a Strategic Management System’, Harvard Business Review . https://hbr.org/2007/07/using-the-balanced-scorecard-as-a-strategic-management-system.
• Kashyap, V. and Murtha, B. R. (2017), ‘The joint effects of ex ante contractual completeness and ex post governance on compliance in franchised marketing channels’, Journal of Marketing 81(3), 130–153. https://doi.org/10.1509/jm.14.0089.
• Kimani, D., Adams, K., Attah-Boakye, R., Ullah, S., Frecknall-Hughes, J. and Kim, J. (2020), ‘Blockchain, business and the fourth industrial revolution: Whence, whither, wherefore and how?’, Technological Forecasting and Social Change 161, 120254. https://doi.org/10.1016/j.techfore.2020.120254.
• Kong, D. T., Dirks, K. T. and Ferrin, D. L. (2014), ‘Interpersonal Trust within Negotiations: Meta-analytic Evidence, Critical Contingencies, and Directions for Future Research’, Academy of Management Journal 57(5), 1235–1255. https://journals.aom.org/doi/abs/10.5465/amj.2012.0461.
• Kowalski, M., Lee, Z. W. and Chan, T. K. (2021), ‘Blockchain technology and trust relationships in trade finance’, Technological Forecasting and Social Change 166. https://doi.org/10.1016/j.techfore.2021.120641.
• Li, J., Greenwood, D. and Kassem, M. (2019), ‘Blockchain in the built environment and construction industry: A systematic review, conceptual models and practical use cases’, Automation in Construction 102, 288–307. https://doi.org/10.1016/j.autcon.2019.02.005. Li, Q., Ma, M., Shi, T. and Zhu, C. (2022), ‘Green investment in a sustainable supply chain: The role of blockchain and fairness’, Transportation Research Part E: Logistics and Transportation Review 167, 102908. https://doi.org/10.1016/j.tre.2022.102908. Liu, J., Li, H., Skitmore, M. and Zhang, Y. (2019), ‘Experience mining based on case-based reasoning for dispute settlement of international construction projects’, Automation in Construction 97, 181–191. https://doi.org/10.1016/j.autcon.2018.11.006.
• Lv, Y., Ma, G., Lv, L., Ding, J. et al. (2022), ‘The Design of Incentive Mechanism for Policy-Oriented Guarantee Institutions’ Digital Transformation in China’, Discrete Dynamics in Nature and Society 2022. https://doi.org/10.1155/2022/6334476.
• Malhotra, D. and Lumineau, F. (2011), ‘Trust and Collaboration in the Aftermath of Conflict: The Effects of Contract Structure’, Academy of Management Journal 54(5), 981–998. https://doi.org/10.5465/amj.2009.0683.
• Mayer, R. C., Davis, J. H. and Schoorman, F. D. (1995), ‘An Integrative Model of Organizational Trust’, Academy of Management Review 20(3), 709–734. https://doi.org/10.5465/amr.1995.9508080335.
• Meng, H., Bian, E. and Tang, C. (2019), Themis: Towards Decentralized Escrow of Cryptocurrencies without Trusted Third Parties, in ‘2019 Sixth International Conference on Software Defined Systems (SDS)’, IEEE, pp. 266–271. 10.1109/SDS.2019.8768704.
• Messick, D. M. and McClintock, C. G. (1968), ‘Motivational bases of choice in experimental games’, Journal of Experimental Social Psychology 4(1), 1–25. https://doi.org/10.1016/0022-1031(68)90046-2.
• Mills, E. S. (1994), ‘The functioning and regulation of escrow accounts’, Housing Policy Debate 5(2), 203–218. https://doi.org/10.1080/10511482.1994.9521160.
• Nash, J. (1951), ‘Non-cooperative games’, Annals of Mathematics pp. 286–295. https://doi.org/10.2307/ 1969529.
• National Library of Medicine (2023), ‘Data Provenance’. https://www.nnlm.gov/guides/data-glossary/data-provenance, Accessed 23 May 2023.
• NCLBGC (2023a), ‘FAQ for Consumers’, North Carolina Licensing Board for General Contractors. https://nclbgc.org/faq-consumers/, Accessed 28 February 2023.
• NCLBGC (2023b), ‘FAQ for contractors’, North Carolina Licensing Board for General Contractors. https://nclbgc.org/faq-contractors/, Accessed 28 February 2023.
• Niu, B., Dong, J. and Liu, Y. (2021), ‘Incentive alignment for blockchain adoption in medicine supply chains’, Transportation Research Part E: Logistics and Transportation Review 152, 102276. https://doi.org/10.1016/j.tre.2021.102276.
• Niu, B., Shen, Z. and Xie, F. (2021), ‘The value of blockchain and agricultural supply chain parties’ participation confronting random bacteria pollution’, Journal of Cleaner Production 319, 128579. https://doi.org/10.1016/j.jclepro.2021.128579.
• Niu, B., Xu, H. and Dai, Z. (2022), ‘Check Only Once? Health Information Exchange Between Competing Private Hospitals’, Omega 107, 102556. https://doi.org/10.1016/j.omega.2021.102556.
• Noorian, Z., Zhang, J., Liu, Y., Marsh, S. and Fleming, M. (2014), ‘Trust-oriented buyer strategies for seller reporting and selection in competitive electronic marketplaces’, Autonomous Agents and Multi-Agent Systems 28, 896–933. https://link.springer.com/article/10.1007/s10458-013-9243-z.
• Norrman, A. and Naslund, D. (2019), ‘Supply Chain Incentive Alignment: The Gap Between Perceived Importance and Actual Practice’, Operations and Supply Chain Management 12(3), 129–142. http://doi.org/10.31387/oscm0380237.
• North, D. (1990), Institutions, Institutional Change, and Economic Performance, Norton. Pereira, J., Tavalaei, M. M. and Ozalp, H. (2019), ‘Blockchain-based platforms: Decentralized infrastructures and its boundary conditions’, Technological Forecasting and Social Change 146, 94–102. https://doi.org/10.1016/j.techfore.2019.04.030.
• Poppo, L. and Zenger, T. (2002), ‘Do formal contracts and relational governance function as substitutes or complements?’, Strategic Management Journal 23(8), 707–725. https://doi.org/10.1002/smj.249.
• Qian, L., Wang, Y. and Yang, P. (2020), ‘Do control mechanisms always promote collaborative performance: the role of formal institutions and business ties’, Journal of Business & Industrial Marketing 35(11), 1871–1886. https://doi.org/10.1108/JBIM-07-2019-0342.
• Rejeb, A., Keogh, J. G., Simske, S. J., Stafford, T. and Treiblmaier, H. (2021), ‘Potentials of blockchain technologies for supply chain collaboration: a conceptual framework’, The International Journal of Logistics Management 32(3), 973–994. https://doi.org/10.1108/IJLM-02-2020-0098.
• Schwartzbach, N. I. (2021), An Incentive-Compatible Smart Contract for Decentralized Commerce, in ‘2021 IEEE International Conference on Blockchain and Cryptocurrency (ICBC)’, IEEE, pp. 1–3. 10.1109/ICBC51069.2021.9461077.
• Sen, S. (2023), ‘How to integrate IPFS with Ethereum’, QuickNode. https://www.quicknode.com/guides/ethereum-development/dapps/how-to-integrate-ipfs-with-ethereum/, Accessed 10 May 2023.
• Shou, Z., Zheng, X. V. and Zhu, W. (2016), ‘Contract ineffectiveness in emerging markets: An institutional theory perspective’, Journal of Operations Management 46, 38–54. https://doi.org/10.1016/j.jom.2016.07.004.
• Simatupang, T. M. and Sridharan, R. (2005), ‘An integrative framework for supply chain collaboration’, The International Journal of Logistics Management 16(2), 257–274. https://www.emerald.com/insight/content/doi/10.1108/09574090510634548/full/html.
• Tedder, M. K. (2017), ‘Black Metal Fence’. Used in reliance on fair use; use of this image complies with Pexels license rules, available at https://www.pexels.com/license/. https://www.pexels.com/photo/black-metal-fence-635405/.
• Toorajipour, R., Oghazi, P., Sohrabpour, V., Patel, P. C. and Mostaghel, R. (2022), ‘Block by block: A blockchain-based peer-to-peer business transaction for international trade’, Technological Forecasting and Social Change 180. https://doi.org/10.1016/j.techfore.2022.121714.
• U.S. Customs and Border Protection (2023), ‘Bill of Lading document’. https://help.cbp.gov/s/article/Article-758?language=en US, Accessed 26 September 2023.
• US Department of Commerce (2023), ‘Letter of Credit’. https://www.trade.gov/letter-credit, Accessed 26 March 2023.
• Van Kleef, G. A., De Dreu, C. K., Pietroni, D. and Manstead, A. S. (2006), ‘Power and emotion in negotiation: power moderates the interpersonal effects of anger and happiness on concession making’, European Journal of Social Psychology 36(4), 557–581. https://doi.org/10.1002/ejsp.320.
• Von Neumann, J. and Morgenstern, O. (1947), Theory of games and economic behavior, 2nd rev., Princeton University Press.
• Walton, R. and McKersie, R. (1965), A Behavioral Theory of Labor Relations, McGraw-Hill, New York.
• Wang, L., Northcraft, G. B. and Van Kleef, G. A. (2012), ‘Beyond negotiated outcomes: The hidden costs of anger expression in dyadic negotiation’, Organizational Behavior and Human Decision Processes 119(1), 54–63. https://doi.org/10.1016/j.obhdp.2012.05.002.
• Williamson, O. E. (1996), The Mechanisms of Governance, Oxford University press.
• Wong, R. S. (2014), ‘Same Power But Different Goals: How Does Knowledge of Opponents’ Power Affect Negotiators’ Aspiration in Power-Asymmetric Negotiations?’, Global Journal of Business Research 8(3), 77–89. https://papers.ssrn.com/sol3/papers.cfm?abstract id=2451204.
• Wu, J. and Wang, X. (2023), ‘Platform-leading blockchain adoption for traceability under upstream competition’, Annals of Operations Research pp. 1–37. https://link.springer.com/article/10.1007/s10479-022-05147-8.
• Xie, E., Yang, Z. and Reddy, K. (2019), ‘Institutional environment and inter-firm collaborative relationships: an introductory perspective and ideas for future research’, Journal of Business & Industrial Marketing 34(6), 1264–1269. https://doi-org.prox.lib.ncsu.edu/10.1108/JBIM-07-2019-405.
• Zhou, K. Z. and Poppo, L. (2010), ‘Exchange hazards, relational reliability, and contracts in china: The contingent role of legal enforceability’, Journal of International Business Studies 41, 861–881. https://link.springer.com/article/10.1057/jibs.2010.7.
• Zimbeck, D. (2014), ‘Two Party double deposit trustless escrow in cryptographic networks and bitcoin’, BitHalo. https://cryptochainuni.com/wp-content/uploads/BitHalo-whitepaper-two-party-double-deposit-trustless-escrow-in-cryptographic-networks-bitcoin.pdf, Accessed 21 July 2023.