Blockchain and the future of optimal financing contracts

Abstract

Blockchain technology makes it possible to design Önancing contracts that are based on reliable and up-to-date records of transactions. This paper develops a theoretical model that uses dynamic contract theory to derive optimal Önancing contracts in this new environment. I show that a dynamically adjusting proÖt sharing rule is optimal and I highlight properties that determine the splitting rule. In contrast to the view that blockchain enhances traditional contracts like debt and equity by bringing e¢ ciency gains, I emphasise that blockchain allows borrowers to take e§ort decisions more frequently, which can make debt and equity contracts relatively costlier.