Researchers at North Carolina State University have introduced a digital tool designed to bring a greater level of security and trust to small-scale business transactions. At its core, this tool seeks to solve a widespread problem: how to ensure that service providers are paid fairly and that customers receive the services or goods they were promised. Unlike traditional approaches that rely heavily on legal action after the fact, this system takes a proactive stance, offering both parties a contract enforcement mechanism before money or services change hands. The tool draws its power from blockchain technology, using smart contracts to formalise agreements in a tamper-proof, automated way.

The inspiration for this development comes from the concept of letters of credit, a financial instrument typically used in international business deals between large companies. A letter of credit is a formal promise from a bank guaranteeing that the buyer will pay a seller, provided the terms of a contract are fulfilled. This system gives both parties confidence in the transaction, but it is expensive and not readily available to small businesses or individuals. As a result, smaller players often enter into contracts with a degree of uncertainty and vulnerability. The research team set out to create a more accessible version of this concept, one that could work on a smaller scale but provide similar assurances.

Brandon McConnell, associate research professor in NC State’s Edward P. Fitts Department of Industrial and Systems Engineering, explained that the tool is meant to empower ordinary people and small business owners alike. “Letters of credit provide a level of safety that would be immensely valuable in everyday transactions,” he said. “Think of a homeowner hiring a contractor. Right now, there’s no simple, accessible way to guarantee that the contractor will be paid if they do the job right, or that the homeowner will get what they paid for without resorting to court proceedings. Our goal was to offer a blockchain-based solution to that problem.” This proof of concept focuses on small transactions, specifically those that typically lack formal protections.

The system relies on smart contracts—digital protocols that execute automatically when predefined conditions are met. Each transaction is broken into components, with separate smart contracts governing the scope of work, milestones, proof of credentials, and payments. These elements are recorded on the blockchain, meaning that neither party can change the terms unilaterally. For example, a client would need to demonstrate that funds are available, and contractors might be required to prove licensure or insurance. Once the work is completed to the agreed standards, the smart contracts verify the fulfilment of conditions and automatically release payment. This offers a streamlined, enforceable way to ensure mutual accountability.

The researchers tested the tool in a variety of scenarios to confirm its reliability and adaptability. They also considered more complex cases where disputes might arise, such as when one party fails to meet expectations. In such cases, additional mechanisms—like arbitration clauses embedded within the smart contracts—can be used to resolve disagreements without turning to traditional litigation. Lieutenant Colonel Mat Fukuzawa, lead author on the studies and now a faculty member at the U.S. Military Academy at West Point, pointed out that current platforms like Angi and Frontdoor may connect clients with service providers, but they fail to enforce agreements. By contrast, the blockchain-based tool is designed with enforceability in mind.

Ultimately, the goal is to create a robust, low-cost alternative to court-based dispute resolution, making professional-grade contract security accessible to those who have historically lacked it. “Civil litigation and arbitration are often too expensive or cumbersome for small jobs,” Fukuzawa noted. “We believe our tool offers a practical and affordable way to protect both parties in a transaction, reducing the likelihood of conflict while ensuring fair outcomes.” The team is now seeking collaborators interested in further developing the technology for commercial use, with hopes that it can be integrated into platforms serving small businesses, freelancers, and consumers in need of secure but straightforward agreements.

More information: Mathew Fukuzawa et al, Implementing A Letter Of Credit Style Business Process For Small-Scale Contracting Using Smart Contracts, Transactions on Computer Science and Applications. DOI: 10.2139/ssrn.4776795

Journal information: Transactions on Computer Science and Applications Provided by North Carolina State University