Financial contracts are promises specifying who pays whom, how much, and when. These cash flows are central to transaction processing, risk management, accounting, and other systems. Contractual cash flows are determined by a limited set of mathematical algorithms that contain inherent “certainty”. Nevertheless, legal, academic, and financial communities have failed to recognize this “certainty”, leading to unstandardized representations of the same financial contracts across different systems and uses. This creates inefficiencies, vulnerabilities, and reconciliation burdens. We discuss how operationalizing “certainty” with standardized algorithms is essential for modernizing traditional finance and providing the foundation to scale DeFi and integrate it with mainstream finance.
Brammertz et al. (Fri,) studied this question.