Smart Contracts and Decentralized Finance

Kose John, Leonid Kogan () and Fahad Saleh
Additional contact information
Kose John: Stern School of Business, New York University, New York, NY, USA
Leonid Kogan: Sloan School of Management, Massachusetts Institute of Technology, Cambridge, Massachusetts, USA
Fahad Saleh: Wake Forest University, Winston-Salem, North Carolina, USA

Annual Review of Financial Economics, 2023, vol. 15, issue 1, 523-542

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.

Keywords: smart contracts; decentralized finance; DeFi; decentralized exchanges; DEXs; protocols for loanable funds; PLFs; tokens; Ethereum (search for similar items in EconPapers)
JEL-codes: G00 O30 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (3)

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DOI: 10.1146/annurev-financial-110921-022806

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