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Automated Execution of Financial Contracts on Blockchains

Author

Listed:
  • Benjamin Egelund-Müller

    (University of Copenhagen)

  • Martin Elsman

    (University of Copenhagen)

  • Fritz Henglein

    (University of Copenhagen)

  • Omri Ross

    (University of Copenhagen)

Abstract

The paper investigates financial contract management on distributed ledgers and provides a working solution implemented on the Ethereum blockchain. The system is based on a domain-specific language for financial contracts that is capable of expressing complex multi-party derivatives and is conducive to automated execution. The authors propose an architecture for separating contractual terms from contract execution: a contract evaluator encapsulates the syntax and semantics of financial contracts without actively performing contractual actions; such actions are handled by user-definable contract managers that administer strategies for the execution of contracts. Hosting contracts and contract managers on a distributed ledger, side-by-side with digital assets, facilitates automated settlement of commitments without the need for an intermediary. The paper discusses how the proposed technology may change the way financial institutions, regulators, and individuals interact in a financial system based on distributed ledgers.

Suggested Citation

  • Benjamin Egelund-Müller & Martin Elsman & Fritz Henglein & Omri Ross, 2017. "Automated Execution of Financial Contracts on Blockchains," Business & Information Systems Engineering: The International Journal of WIRTSCHAFTSINFORMATIK, Springer;Gesellschaft für Informatik e.V. (GI), vol. 59(6), pages 457-467, December.
    • Handle: RePEc:spr:binfse:v:59:y:2017:i:6:d:10.1007_s12599-017-0507-z
    DOI: 10.1007/s12599-017-0507-z
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    References listed on IDEAS

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    1. Jensen, Mads Vestergaard & Pedersen, Lasse Heje, 2016. "Early option exercise: Never say never," Journal of Financial Economics, Elsevier, vol. 121(2), pages 278-299.
    2. Robert C. Merton, 2005. "Theory of rational option pricing," World Scientific Book Chapters, in: Sudipto Bhattacharya & George M Constantinides (ed.), Theory Of Valuation, chapter 8, pages 229-288, World Scientific Publishing Co. Pte. Ltd..
    3. José Parra Moyano & Omri Ross, 2017. "KYC Optimization Using Distributed Ledger Technology," Business & Information Systems Engineering: The International Journal of WIRTSCHAFTSINFORMATIK, Springer;Gesellschaft für Informatik e.V. (GI), vol. 59(6), pages 411-423, December.
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    Citations

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    Cited by:

    1. Wallbach, Sören, 2020. "Assimilation and Diffusion of Multi-Sided Platforms in Dynamic B2B Networks: Inhibiting Factors and Their Consequences," Publications of Darmstadt Technical University, Institute for Business Studies (BWL) 123277, Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute for Business Studies (BWL).
    2. Saeidinezhad, Elham & Hovhannisyan, Tatev, 2019. "Can the Hybridity of Law and Finance Save Central Banking in a Zero-Lower Bound Recession? A Money and Legal View," MPRA Paper 97719, University Library of Munich, Germany.
    3. Massimo Bartoletti & James Hsin-yu Chiang & Alberto Lluch-Lafuente, 2020. "SoK: Lending Pools in Decentralized Finance," Papers 2012.13230, arXiv.org.
    4. José Parra Moyano & Omri Ross, 2017. "KYC Optimization Using Distributed Ledger Technology," Business & Information Systems Engineering: The International Journal of WIRTSCHAFTSINFORMATIK, Springer;Gesellschaft für Informatik e.V. (GI), vol. 59(6), pages 411-423, December.
    5. Teck Ming Tan & Jari Salo, 2023. "Ethical Marketing in the Blockchain-Based Sharing Economy: Theoretical Integration and Guiding Insights," Journal of Business Ethics, Springer, vol. 183(4), pages 1113-1140, April.
    6. Moritz T. Bruckner & Dennis M. Steininger & Jason Bennett Thatcher & Daniel J. Veit, 2023. "The effect of lockup and persuasion on online investment decisions: An experimental study in ICOs," Electronic Markets, Springer;IIM University of St. Gallen, vol. 33(1), pages 1-25, December.
    7. Christian Sillaber & Bernhard Waltl & Horst Treiblmaier & Ulrich Gallersdörfer & Michael Felderer, 2021. "Laying the foundation for smart contract development: an integrated engineering process model," Information Systems and e-Business Management, Springer, vol. 19(3), pages 863-882, September.
    8. Kowalski, Michał & Lee, Zach W.Y. & Chan, Tommy K.H., 2021. "Blockchain technology and trust relationships in trade finance," Technological Forecasting and Social Change, Elsevier, vol. 166(C).
    9. Wallbach, Sören & Lehner, Roland & Röthke, Konstantin & Elbert, Ralf & Benlian, Alexander, 2020. "Trust-Building Effects of Blockchain Features – An Empirical Analysis of Immutability, Traceability and Anonymity," Publications of Darmstadt Technical University, Institute for Business Studies (BWL) 120705, Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute for Business Studies (BWL).
    10. Mohsen Pourpouneh & Kurt Nielsen & Omri Ross, 2020. "Automated Market Makers," IFRO Working Paper 2020/08, University of Copenhagen, Department of Food and Resource Economics.
    11. Nadine Kathrin Ostern & Johannes Riedel, 2021. "Know-Your-Customer (KYC) Requirements for Initial Coin Offerings," Business & Information Systems Engineering: The International Journal of WIRTSCHAFTSINFORMATIK, Springer;Gesellschaft für Informatik e.V. (GI), vol. 63(5), pages 551-567, October.
    12. Nadine Kathrin Ostern, 2020. "Blockchain in the IS research discipline: a discussion of terminology and concepts," Electronic Markets, Springer;IIM University of St. Gallen, vol. 30(2), pages 195-210, June.

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