Leveraged Trading on Blockchain Technology: Literature Review

Table of Links

Abstract and Introduction

1 Literature Review

2 Methodology and Artefact Requirements

3 The Implementation and Integration of the Artefact

4 Artefact Evaluation

5 Discussion

6 Conclusion and Future Work, and References

1 Literature Review

Blockchain technology has been of evident interest to the IS community for several years, yielding multiple novel contributions of a theoretical or design driven nature (Labazova 2019). Within the financial services, scholars have explored the implementation of blockchain technology in KYC data sharing (Moyano and Ross 2017) accounting practices (Dai and Vasarhelyi 2017) post-trade processing (Ross et al. 2019) and the execution of financial contracts (Egelund-Müller et al. 2017). Beyond the purview of the financial services, scholars have pursued innovations in supply chain management (Müller-Bloch et al. 2017) and energy markets (Castellanos et al. 2017), and beyond.

Through the pioneering efforts of early IS scholarship, the community is now in possession of multiple theoretically exhaustive taxonomies delineating the commercial implications of blockchain technologies in variety of settings (Beinke and Nguyen Ngoc 2018; Glaser 2017) juxtaposed by critical examinations of the practical capabilities of the technology (Pedersen et al. 2019). The growing body of theoretical literature in the field has led senior scholars to call for design driven research, exploring the practical implications of blockchain and smart contract technologies, in and outside the financial services and the enterprise setting (Lindman et al. 2017; Rossi et al. 2019).

A permissionless blockchain is a type of distributed database architecture, in which a singleton state machine is maintained amongst a distributed network of nodes. State changes to the shared database require consensus amongst a majority of active nodes and cannot be changed once a transaction is submitted. Because all computations must be replicated amongst a distributed set of nodes, permissionless blockchain technology can be considered deterministic and transparent. Recent iterations of the technology have introduced a virtual machine with a higher-level programming language into the deterministic execution environment. Users can write scripts commonly referred to as “smart contracts“ (Antonopoulos and Wood 2018) facilitating the transparent and deterministic execution of a given business logic. The Dai stablecoin system is amongst the first and most successful smart contract-based applications on the Ethereum blockchain. Since its inception, the project has exhibited tremendous growth holding a $2.39bn valuation of assets locked at the time of writing, with the market capitalization of the associated governance token at a $548m market capitalization, down from an all-time-high surpassing $1bn.

The most recent iteration of the Dai stablecoin system, Multi-Collateral Dai (MCD), is a smart contract system, designed to issue the collateral-backed stablecoin, ‘Dai’. The smart contract system accepts selected tokenized assets (Ross et al. 2019) and subjects the price of Dai to an algorithmic stability mechanism by which the asset exhibits a floating peg to the US dollar.[3] To withdraw Dai, a trader must collateralize a sum of tokenized assets within the smart-contract system. The collateral value guarantees the outstanding Dai, effectively ‘borrowed’ to the trader by the MCD smart contracts. The smart contract type responsible for accepting tokenized assets and issuing Dai is called a ‘vault’. To cover the credit risk exposure accepted by the MCD contracts, a ‘vault’ must always be over-collateralized by a ratio reflecting the perceived risk and volatility of the collateral asset. The MCD contracts utilize a sophisticated set of pricing oracles to continuously monitor the market price of the assets collateralized in vaults. Throughout the lifecycle of a vault, the trader can add or remove collateral assets, ensuring that the value of the collateral assets prevails above the liquidation price, at which the ‘loan’ will be liquidated, and the collateral auctioned away to arbitrageurs for Dai at prices marginally below market value.

[3] We have chosen not to elaborate on the stability mechanism stabilizing the value of Dai in this section, for resources on this topic, we recommend visiting: https://docs.makerdao.com/.