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Article
Publication date: 29 May 2019

Alpen Sheth and Hemang Subramanian

The purpose of this paper is to model blockchain-based smart contracts specifically for the insurance industry. The authors introduce the concept of smart contracts and further…

1862

Abstract

Purpose

The purpose of this paper is to model blockchain-based smart contracts specifically for the insurance industry. The authors introduce the concept of smart contracts and further discuss the implementation of a decentralized insurance marketplace, namely Etherisc, using smart contracts on the Ethereum blockchain platform.

Design/methodology/approach

The authors employ three methods in this paper. The first one is a design illustration of a live application, namely, Etherisc. The second one is an economic model using demand–supply and equilibrium economics. The third one is an illustration using principal–agent modeling using constrained optimization.

Findings

The findings illustrate the following: in the design discussion, the authors demonstrate the architecture of a live Ethereum-based smart contract system. In the economic model, the authors illustrate how decentralized smart contract systems can increase social welfare by shifting demand and supply by reducing transactional costs. In the principal–agent model, the authors show how both the principal and agent are positively benefited by various mechanisms.

Originality/value

The paper is an original contribution and can be used as a reference model to study insurance or other similar marketplaces and the underlying economic transformations happening therein.

Details

Managerial Finance, vol. 46 no. 6
Type: Research Article
ISSN: 0307-4358

Keywords

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Article
Publication date: 13 August 2019

Hemang Subramanian

Blockchain technologies have pervaded modern crowdfunding and capital sourcing through a variety of financial instruments implemented as smart contracts. Smart contracts provide a…

1076

Abstract

Purpose

Blockchain technologies have pervaded modern crowdfunding and capital sourcing through a variety of financial instruments implemented as smart contracts. Smart contracts provide a unique mechanism not only to create a unique one-of-a-type financial instrument, but also to enable unique innovations atop existing financial instruments due to underlying efficiencies. The smartness comes from the flexibility that programs provide which can create extremely unique financial instruments that are often complex to implement, yet easy to create, maintain through versioning, trade and destroy. The purpose of this paper is to describe the security token architecture as an application of smart contracts. Further, the author illustrates the implementation and design of a commonly used financial instrument known as Simple Agreement for Future Equity (SAFE) using the security token architecture proposed and smart contract functionality. The author then models the transaction using relational algebra, and, models the utility maximization. The author shows how on account of reduced information asymmetry between the investors and SAFE users (i.e. startups) utility is positive when smart contract-based security tokens are deployed for each state in the SAFE contract.

Design/methodology/approach

Using an existing well-adopted instrument called a SAFE contract, the author illustrates the architecture of a smart contract-based security token system. The author illustrates how different components of a SAFE contract can be implemented as a smart contract and discusses the advantages and disadvantages of applying blockchain-based smart contracts to design SAFE instruments. The author deploys two methods: a state space diagram to explain state transitions and a utility model to explain the utilities.

Findings

The key findings of this research study are the design of a security token architecture, which can be used to convert any the physical or contract-based financial instrument to a smart contract that runs on the blockchain. However, there are limitations to the implementation of the same which can be overcome. The model illustrates the positive utilities derived for all economic actors, i.e. the contractors, the utility providers, etc., in the market.

Originality/value

This paper is an original paper. For the very first time, the author explored the architecture of a security token system. Using a well-known financial instrument, namely the SAFE, the author describes various components, e.g. the four contracts that form SAFE and then model the utilities for the system.

Details

Managerial Finance, vol. 46 no. 6
Type: Research Article
ISSN: 0307-4358

Keywords

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Article
Publication date: 29 August 2020

Krishnan Dandapani and Manuchehr Shahrokhi

84

Abstract

Details

Managerial Finance, vol. 46 no. 6
Type: Research Article
ISSN: 0307-4358

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