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Smart Derivative Contracts in DatalogMTL

Author

Listed:
  • Andrea Colombo

    (Politecnico di Milano)

  • Luigi Bellomarini

    (Bank of Italy)

  • Stefano Ceri

    (Politecnico di Milano)

  • Eleonora Laurenza

    (Bank of Italy, IVASS)

Abstract

The realization of derivative contracts in the crypto world typically occurs through the use of smart contracts. In decentralized finance (DeFi), where intermediation is absent or minimal, these contracts are executed through scripts on blockchain infrastructures. However, these scripts are frequently criticized on account of their complexity, which makes it difficult to understand and communicate their business logic, partly due to the highly procedural and technical nature of the language involved. As a result, derivatives in the DeFi space are often difficult to supervise and are not trusted by non-IT users. This joint work of the researchers of the Bank of Italy and the Polytechnic University of Milan outlines a proposal for making the underlying logic of smart contracts more transparent and understandable through the use of a declarative implementation. In particular, leveraging the extensive experience of database and artificial intelligence communities in knowledge representation and reasoning languages, we propose an encoding of the Ethereum Perpetual Future (ETH-PERP) smart contract using the DatalogMTL language. This work shows that such language allows for simpler, more understandable, and transparent representations of smart contracts for non-technical users. The implementation is validated by executing the ETH-PERP smart contract in Vadalog, a recent reasoner that supports DatalogMTL.

Suggested Citation

  • Andrea Colombo & Luigi Bellomarini & Stefano Ceri & Eleonora Laurenza, 2023. "Smart Derivative Contracts in DatalogMTL," Temi di discussione (Economic working papers) 37, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:wptemi:misp_037_23
    as

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    File URL: https://www.bancaditalia.it/pubblicazioni/mercati-infrastrutture-e-sistemi-di-pagamento/approfondimenti/2023-037/N.37-MISP.pdf
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    References listed on IDEAS

    as
    1. Buenaventura, R. & Ross, V., 2013. "Transparency and financial stability," Financial Stability Review, Banque de France, issue 17, pages 111-119, April.
    2. Kaihua Qin & Liyi Zhou & Yaroslav Afonin & Ludovico Lazzaretti & Arthur Gervais, 2021. "CeFi vs. DeFi -- Comparing Centralized to Decentralized Finance," Papers 2106.08157, arXiv.org, revised Jun 2021.
    3. Randy Priem, 2020. "Distributed ledger technology for securities clearing and settlement: benefits, risks, and regulatory implications," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 6(1), pages 1-25, December.
    4. Sylvie Riederová & Kamila Růžičková, 2011. "Historical development of derivatives' underlying assets," Acta Universitatis Agriculturae et Silviculturae Mendelianae Brunensis, Mendel University Press, vol. 59(7), pages 521-526.
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