Smart Contracts and Decentralized Finance

25 Pages Posted: 28 Sep 2022 Last revised: 18 Oct 2022

See all articles by Kose John

Kose John

New York University (NYU) - Department of Finance

Leonid Kogan

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

Fahad Saleh

Wake Forest University - Schools of Business

Date Written: September 19, 2022

Abstract

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

John, Kose and Kogan, Leonid and Saleh, Fahad, Smart Contracts and Decentralized Finance (September 19, 2022). MIT Sloan Research Paper No. 6800-22, Available at SSRN: https://ssrn.com/abstract=4222528 or http://dx.doi.org/10.2139/ssrn.4222528

Kose John

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0337 (Phone)
212-995-4233 (Fax)

Leonid Kogan

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-636
Cambridge, MA 02142
United States
617-253-2289 (Phone)
617-258-6855 (Fax)

HOME PAGE: http://web.mit.edu/lkogan2/www/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Fahad Saleh (Contact Author)

Wake Forest University - Schools of Business

P.O. Box 7659
Winston-Salem, NC 27109-7285
United States

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