Blockchain Composability: The Building Blocks of DeFi and Web3

If you like working with computers, you’ve probably encountered the term "composability" before. This concept is traditionally used to describe a certain type of software development. However, composability has gradually become a hot topic in the cryptocurrency world, too. More and more decentralized finance (DeFi) organizations are becoming interested in composability. What is composability, and why does it matter? Keep reading to learn all about this intriguing blockchain feature.

Key Takeaways:

• Composability refers to the ability to combine existing blockchain components in multiple ways and create something new.

• If a blockchain is composable, developers who work with it can easily design things like decentralized applications and cross-chain protocols.

What Is Composability in Crypto?

Composability refers to the ability to combine existing blockchain components in multiple ways and create something new. If a blockchain is composable, developers who work with it can easily design things like decentralized applications (DApps) and cross-chain protocols.

Types of Composability

Composability is a fairly broad topic, since there are many different ways to combine different components. To better understand how it works, it's helpful to take a close look at the main types of composability.

Morphological Composability

Morphological composability is one of the most common types. If a system is morphologically composable, then components such as tokens follow the same standard, and are compatible with each other. All of the existing smart contracts essentially speak the same language, so that disparate but composable elements can be used across different DeFi platforms.

When it comes to blockchain composability, ERC-20 is a great example of morphological composability. This token standard is the basis for a variety of DApps, decentralized autonomous organizations (DAOs), web3 games and custom cryptos. The same base cryptocurrency seamlessly works in all sorts of ecosystems and programs, and allows these systems to work together if applicable.

Syntactic Composability

Syntactic composability means that developers can combine existing components of a system to create brand-new systems. If a system has syntactic composability, its protocols are designed to work together. For example, consider the smart contract system on Ethereum: the contracts are all publicly available, and any one contract can call any other. Developers can use this ability to build new systems with several different reusable software components working together in a complex and interoperable system.

Syntactic composability works best when a system is also morphologically composable. The main difference between syntactic composability and morphological composability is a matter of scale: while morphological composability focuses on being able to reuse the same component on different systems, syntactic composability is about being able to combine the building blocks of the blockchain to make brand-new systems.

Atomic Composability

Atomic composability is a little different from the other types. Instead of trying to combine existing components to make new systems and features, atomic composability mainly focuses on contract execution. An atomically composable system is one in which multiple types of transactions are processed as one. A user or developer can choose to join transactions into a single bundle that will only be finalized if each individual transaction is finalized.

A common example of atomic composability is a flash loan, in which the transaction combines a contract to give a borrower assets, invest the assets and repay the loan. Everything is executed at once, and the flash loan only succeeds if every aspect of the loan is confirmed.

How Does Composability Work in Cryptocurrency?

Since it's mostly a software term, composability traditionally involves a lot of careful coding. However, adding composability to crypto is a little more complex. Instead of simply making sure you're writing your programming language correctly, you have to consider all of the different elements that make up a DeFi ecosystem. Everything from tokens to smart contracts needs to be carefully designed.

There are three different principles a cryptocurrency requires in order to be fully composable.

Modularity

To make crypto more interoperable, it's important to avoid making systems too interconnected. Each component needs to have a single defined task. This allows future developers to combine smart contracts and other components without having unintended consequences. Since each item has its own unique use case, a developer can easily combine composable elements in order to create the precise system that they need.

Autonomy

Another key characteristic of composability is that each part of a blockchain is autonomous: it can work independently without having to get help from other parts of the system. For example, if you run a single smart contract with no other components, the contract should still be able to execute itself. By avoiding referential components, people can more easily mix and match existing building blocks.

Discoverability

The final mechanism in a composable system is discoverability, or the ability to view and see aspects of the system. A blockchain can't be composable if it relies on proprietary systems that no one else can access. Composable cryptos tend to be open source, so any user can deploy a contract, fork a codebase or perform other actions. Everything from external contracts to software libraries needs to be fully accessible.

Why Is Blockchain Composability Important?

Industry experts believe that composability is the future of the industry because it leads to more interoperability. Composable DeFi protocols can easily communicate and work with each other to enhance connectivity. People can perform cross-chain functions and use the same infrastructure for multiple applications. For example, composability ensures that NFTs minted in a play-to-earn game can easily be listed on another site's DeFi marketplace. The ability to create multi-chain ecosystems also provides users with better security and less centralization.

Composability also helps to streamline and democratize development. With composable blockchains, people can easily turn their own blockchain concepts into a reality. Almost anyone can make decentralized exchanges (DEXs), games, lending programs and other systems without needing extensive, in-depth education on building blockchains. Furthermore, people can make systems quickly and conveniently instead of having to waste time building basic tools that already exist in other programs.

Benefits of Blockchain Composability

Blockchain composability is more than just a fun novelty, as it has a lot of important applications that make it an essential part of web3 development. 

Following are some of composability’s main benefits.

Simpler Development

In the modern blockchain community, there are countless people with fantastic ideas who don't quite know how to implement them. Composability makes development a lot easier for anyone who’s technologically-minded, but who might not be an expert on blockchain. Composable systems essentially work like LEGO®: they give you the building blocks that you can then assemble yourself to make anything you like.

Cross-Chain Communication

When a lot of people are building on the same composable blockchain, you end up with many similar cryptocurrencies that can easily send information to other compatible blockchains. The reliance on the ERC-20 standard has demonstrated just how useful it is to have cross-chain communication. Users can send and receive data more easily, and then use the same information to perform tasks on multiple blockchains, DEXs and DApps. 

For example, composability allows a DAO to obtain a loan from a second system and then invest the funds in a third system to earn money and fund the DAO's liquidity pool.

User Convenience

With composability, using DeFi ecosystems becomes a lot easier. Since composable systems operate on the same standards, users don't have to create new accounts and learn new tasks each time they want to work with a new system. You can do things like use the same crypto wallet to load the same web3 identity for multiple DApps and games. Composability can also be used to bundle transactions and existing smart contracts, which simplifies things for users.

Challenges of Blockchain Composability

Like any other feature, composability has both pros and cons. Though it's certainly a useful tool, it's not entirely foolproof. Here are a few challenges to be aware of.

Scalability

Composability works well for designing small-scale DApps and other projects. However, it can lead to some issues when a DeFi ecosystem ends up becoming wildly popular. There are a lot of DeFi protocols that work well for a small number of users, but fail to function well when there are hundreds of thousands. Composability often incentivizes developers to stick to outdated methods only designed for a few users, instead of coming up with new techniques that can better handle large numbers.

Profitability

In theory, composability is a great way for developers to make new blockchain systems. However, it leads to one major problem: Who designs the reusable software components and existing building blocks that all developers work from when making new blockchain technology? 

It can be hard to incentivize composability because the person who creates the underlying structure may not profit from it. Instead, others who use the initial code may end up making all the money. Many organizations prefer to use a proprietary construction method that cannot be shared or copied by others, as this is more likely to guarantee their system is profitable.

Blockchain Composability Examples

How does blockchain composability work in the real world? To answer this question, let’s check out the following exciting examples of crypto and blockchain projects that have used composability to create fantastic products.

MakerDAO

MakerDAO is a financial system that has created the Dai (DAI) crypto stablecoin. It runs on Ethereum and mints a stable, decentralized currency with a 1:1 value to the U.S. dollar. Thanks to composability, MakerDAO allows for very convenient access to Dai. Instead of requiring people to purchase coins directly with funds from a bank account, they can instantly acquire Dai in exchange for crypto collateral. Dai can also be used with over 400 different DeFi platforms.

Curve

Composable automated market makers (AMMs) are one of the most intriguing applications of Curve’s blockchain technology. It’s a decentralized exchange whose users can trade with algorithmic mechanisms, instead of having to trade with each other. Not only does Curve use composable technology to integrate with other protocols, but it also uses it to simplify transactions. Unlike other AMMs, Curve bundles similar assets, such as stablecoins, into liquidity pools. This allows for a faster, more straightforward trade.

Yearn Finance

Yearn Finance is a financial system that uses composability to help maximize investments for its users. Once you sign up for Yearn, the composable elements combine to distribute your tokens to several other DeFi applications. By working with multiple platforms, users can make the most of lending, trading and liquidity incentives across several different DeFi ecosystem types.

The Bottom Line

Composable blockchains are one of the most promising types of blockchain technology. Systems with disparate but composable elements make it easy for developers to design their own projects, or to create different DeFi platforms that work together. Most commonly found in the ERC-20 system, composability is an increasingly popular feature. Expect to see more DeFi applications, gaming DApps and other composable blockchain ecosystems in the future.

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