1932

Abstract

We explain the mechanics of smart contracts. We then highlight the 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: token issuance (e.g., initial coin offerings, nonfungible tokens), decentralized exchanges, and protocols for loanable funds. Our survey covers both institutional details and relevant literature.

Loading

Article metrics loading...

/content/journals/10.1146/annurev-financial-110921-022806
2023-11-01
2024-10-15
Loading full text...

Full text loading...

/deliver/fulltext/financial/15/1/annurev-financial-110921-022806.html?itemId=/content/journals/10.1146/annurev-financial-110921-022806&mimeType=html&fmt=ahah

Literature Cited

  1. Al-Breiki H, Rehman MHU, Salah K, Svetinovic D. 2020. Trustworthy blockchain oracles: review, comparison, and open research challenges. IEEE Access 8:85675–85
    [Google Scholar]
  2. Bakos Y, Halaburda H. 2021. Blockchains, smart contracts and connected sensors: Substitutes or complements? Work. Pap. Stern Sch. Bus. New York Univ.:
    [Google Scholar]
  3. Barbon A, Ranaldo A. 2021. On the quality of cryptocurrency markets: centralized versus decentralized exchanges SSRN Work. Pap. 3984897
    [Google Scholar]
  4. Borri N, Liu Y, Tsyvinski A. 2022. The economics of non-fungible tokens SSRN Work. Pap. 4052045
    [Google Scholar]
  5. Breidenbach L, Cachin C, Chan B, Coventry A, Ellis S et al. 2021. Chainlink 2.0: next steps in the evolution of decentralized oracle networks. Work. Pap. Chainlink Labs San Francisco:
    [Google Scholar]
  6. Capponi A, Jia R. 2021. The adoption of blockchain-based decentralized exchanges. Work. Pap. Columbia Univ. New York, NY:
    [Google Scholar]
  7. Chen D, Duffie D. 2021. Market fragmentation. Am. Econ. Rev. 111:2247–74
    [Google Scholar]
  8. Chen L, Cong LW, Xiao Y. 2020. A brief introduction to blockchain economics. Information for Efficient Decision Making: Big Data, Blockchain, and Relevance1–40. Singapore: World Sci.
    [Google Scholar]
  9. Chipolina S. 2020. Oracle exploit sees $89 million liquidated on compound. Decrypt Nov. 26. https://decrypt.co/49657/oracle-exploit-sees-100-million-liquidated-on-compound
    [Google Scholar]
  10. Chod J, Lyandres E. 2021. A theory of ICOs: diversification, agency, and information asymmetry. Manag. Sci. 67:5969–89
    [Google Scholar]
  11. Chod J, Lyandres E. 2023. Product market competition with crypto tokens and smart contracts. J. Financ. Econ. 149:173–91
    [Google Scholar]
  12. Cong LW, He Z. 2019. Blockchain disruption and smart contracts. Rev. Financ. Stud. 32:1754–97
    [Google Scholar]
  13. Cong LW, He Z, Tang K. 2022. Staking, token pricing, and crypto carry SSRN Work. Pap. 4059460
    [Google Scholar]
  14. Cong LW, Li Y, Wang N. 2021. Tokenomics: dynamic adoption and valuation. Rev. Financ. Stud. 34:1105–55
    [Google Scholar]
  15. Cong LW, Li Y, Wang N. 2022. Token-based platform finance. J. Financ. Econ. 144:3972–91
    [Google Scholar]
  16. Cong LW, Tang K, Wang Y, Zhao X. 2022. Inclusion and democratization through Web3 and DeFi? Initial evidence from the Ethereum ecosystem NBER Work. Pap. 30949
    [Google Scholar]
  17. d'Avernas A, Maurin V, Vandeweyer Q. 2022. Can stablecoins be stable? SSRN Work. Pap. 4226027
    [Google Scholar]
  18. Easley D, O'Hara M, Basu S. 2019. From mining to markets: the evolution of bitcoin transaction fees. J. Financ. Econ. 134:91–109
    [Google Scholar]
  19. Fanti G, Kogan L, Viswanath P. 2021. Economics of proof-of-stake payment systems SSRN Work. Pap. 4320274
    [Google Scholar]
  20. Foucault T. 1999. Order flow composition and trading costs in a dynamic limit order market. J. Financ. Markets 2:99–134
    [Google Scholar]
  21. Gan JR, Tsoukalas G, Netessine S. 2021. Initial coin offerings, speculation, and asset tokenization. Manag. Sci. 67:914–31
    [Google Scholar]
  22. Gans JS. 2019. The fine print in smart contracts. Work. Pap. Univ. Toronto
    [Google Scholar]
  23. Garratt R, Monnet C. 2022. An impossibility theorem on truthful reporting in fully decentralized systems SSRN Work. Pap. 4017963
    [Google Scholar]
  24. Goldstein I, Gupta D, Sverchkov R. 2022. Utility tokens as a commitment to competition SSRN Work. Pap. 3484627
    [Google Scholar]
  25. Gudgeon L, Werner S, Perez D, Knottenbelt WJ. 2020. DeFi protocols for loanable funds: interest rates, liquidity and market efficiency. Proceedings of the 2nd ACM Conference on Advances in Financial Technologies, pp. 92–112. New York, NY: Assoc. Comput. Mach.
    [Google Scholar]
  26. Halaburda H, Haeringer G, Gans J, Gandal N. 2022. The microeconomics of cryptocurrencies. J. Econ. Lit. 60:971–1013
    [Google Scholar]
  27. Hasbrouck J, Rivera T, Saleh F. 2022. The need for fees at a DEX: How increases in fees can increase DEX trading volume. SSRN Work. Pap. 4192925
    [Google Scholar]
  28. Hendershott T, Mendelson H. 2000. Crossing networks and dealer markets: competition and performance. J. Finance 55:2071–115
    [Google Scholar]
  29. Hinzen F, John K, Saleh F. 2022. Bitcoin's limited adoption problem. J. Financ. Econ. 144:347–69
    [Google Scholar]
  30. Howell ST, Niessner M, Yermack D. 2020. Initial coin offerings: financing growth with cryptocurrency token sales. Rev. Financ. Stud. 33:3925–74
    [Google Scholar]
  31. Huberman G, Leshno JD, Moallemi C. 2021. Monopoly without a monopolist: an economic analysis of the bitcoin payment system. Rev. Econ. Stud. 88:3011–40
    [Google Scholar]
  32. Janin S, Qin K, Mamageishvili A, Gervais A. 2020. FileBounty: fair data exchange. 2020 IEEE European Symposium on Security and Privacy Workshops (EuroSPW), pp. 357–66. New York, NY: Inst. Electron. Electron. Eng.
    [Google Scholar]
  33. John K, O'Hara M, Saleh F. 2022. Bitcoin and beyond. Ann. Rev. Financ. Econ. 14:95–115
    [Google Scholar]
  34. John K, Rivera T, Saleh F. 2022a. Economic implications of scaling blockchains: Why the consensus protocol matters. Work. Pap. Stern Sch. Bus. New York Univ.:
    [Google Scholar]
  35. John K, Rivera T, Saleh F. 2022b. Equilibrium staking levels in a proof-of-stake blockchain. Work. Pap. Stern Sch. Bus. New York Univ.:
    [Google Scholar]
  36. Lee J, Li T, Shin D. 2022. The wisdom of crowds in FinTech: evidence from initial coin offerings. Rev. Corp. Finance Stud. 11:1–46
    [Google Scholar]
  37. Lehar A, Parlour C. 2021. Decentralized exchanges SSRN Work. Pap. 3905316
    [Google Scholar]
  38. Li J, Mann W. 2020. Digital tokens and platform building SSRN Work. Pap. 3088726
    [Google Scholar]
  39. Li Y, Mayer S. 2021. Money creation in decentralized finance: a dynamic model of stablecoin and crypto shadow banking SSRN Work. Pap. 3757083
    [Google Scholar]
  40. Mayer S. 2022. Token-based platforms and speculators SSRN Work. Pap. 3471977
    [Google Scholar]
  41. Obermeier D, Henkel J. 2021. Smart contracts on a blockchain: transaction governance with the potential of deductive certainty. Work. Pap. Tech. Univ. Munich:
    [Google Scholar]
  42. Oh S, Rosen S, Zhang AL. 2022. Investor experience matters: evidence from generative art collections on the blockchain SSRN Work. Pap. 4042901
    [Google Scholar]
  43. Park A. 2021. The conceptual flaws of constant product automated market making. Work. Pap. Univ. Toronto
    [Google Scholar]
  44. Qin K, Zhou L, Gamito P, Jovanovic P, Gervais A. 2021. An empirical study of DeFi liquidations: incentives, risks, and instabilities. Proceedings of the 21st ACM Internet Measurement Conference, pp. 336–50. New York, NY: Assoc. Comput. Mach.
    [Google Scholar]
  45. Rimba P, Tran AB, Weber I, Staples M, Ponomarev A, Xu X. 2017. Comparing blockchain and cloud services for business process execution. 2017 IEEE International Conference on Software Architecture (ICSA), pp. 257–60. New York, NY: Inst. Electron. Electron. Eng.
    [Google Scholar]
  46. Sockin M, Xiong W. 2022. Decentralization through tokenization. J. Finance 78:1247–99
    [Google Scholar]
  47. Szabo N. 1997. Formalizing and securing relationships on public networks. First Monday 2:9 https://doi.org/10.5210/fm.v2i9.548
    [Crossref] [Google Scholar]
  48. Tinn K. 2018. Blockchain and the future of optimal financing contracts SSRN Work. Pap. 3061532
    [Google Scholar]
  49. White JT, Wilkoff S, Yildiz S. 2022. The role of the media in speculative markets: evidence from non-fungible tokens (NFTs) SSRN Work. Pap. 4074154
    [Google Scholar]
  50. Yermack D. 2017. Corporate governance and blockchains. Rev. Finance 21:17–31
    [Google Scholar]
  51. Zhang F, Cecchetti E, Croman K, Juels A, Shi E. 2016. Town crier: an authenticated data feed for smart contracts. Proceedings of the 2016 ACM SIGSAC Conference on Computer and Communications Security, pp. 270–82. New York, NY: Assoc. Comput. Mach.
    [Google Scholar]
  52. Zhang F, Maram D, Malvai H, Goldfeder S, Juels A. 2020. DECO: liberating web data using decentralized oracles for TLS. Proceedings of the 2020 ACM SIGSAC Conference on Computer and Communications Security, pp. 1919–38. New York, NY: Assoc. Comput. Mach.
    [Google Scholar]
  53. Zhou Q, Huang H, Zheng Z, Bian J. 2020. Solutions to scalability of blockchain: a survey. IEEE Access 8:16440–55
    [Google Scholar]
  54. Zhu H. 2014. Do dark pools harm price discovery?. Rev. Financ. Stud. 27:747–89
    [Google Scholar]
/content/journals/10.1146/annurev-financial-110921-022806
Loading
  • Article Type: Review Article
This is a required field
Please enter a valid email address
Approval was a Success
Invalid data
An Error Occurred
Approval was partially successful, following selected items could not be processed due to error