Smart Contracts and Decentralized Finance
25 Pages Posted: 28 Sep 2022 Last revised: 18 Oct 2022
Date Written: September 19, 2022
We explain the mechanics of smart contracts. We then highlight benefits of smart contracts such as overcoming commitment problems. We also discuss limitations such as the difficulty for smart contracts to access information external to the blockchain and the difficulty of integrating smart contract code with traditional legal enforcement. We further highlight how the absence of a trusted intermediary inflates implementation costs for blockchain applications. We conclude with a discussion of the most prominent smart contract applications in Decentralized Finance (DeFi): token issuance (e.g., ICOs, NFTs), decentralized exchanges (DEXs) and protocols for loanable funds (PLFs). Our survey covers both institutional details and relevant literature.
Keywords: Smart Contracts, Decentralized Finance, DeFi, Decentralized Exchanges, DEX, Protocols for Loanable Funds, PLF, Tokens, Stablecoins, Oracle Problem, ICOs, NFTs, Ethereum
JEL Classification: A20, A30, B26, G00
Suggested Citation: Suggested Citation