Introduction
Decentralized finance innovates so quickly that new concepts, practices, and financial primitives are upending traditional finance in real time.
While keeping up with every new DeFi buzzword is nearly impossible, one that’s worth understanding well is composability, sometimes referred to as money legos.
DeFi: The Basics
Technological innovation has a habit of kick-starting disruptive movements across the global economy. And one of the reasons why we believe that decentralized finance, or DeFi, has such vast disruptive potential is that it offers inclusion and innovation.
Participants in economies where the financial system promotes regulated inclusion are fortunate to have relatively easy access to capital markets, savings, borrowing, lending, and other financial functions. However, financial access is a relative luxury and not equal to all, especially in developing economies. Traditional finance, being tied to centralized entities and intermediaries, offer permission entryways to financial inclusion. The merger of finance and technology into fintech has opened doors to new participants by simplifying front-end applications. But fintech’s underlying infrastructure still relies on the existing centralized models and functions.
With the rise of smart contract blockchains that host programmable applications, developers built DeFi decentralized applications (dapps) to provide a permissionless, global financial platform for users, by users. DeFi eliminates the need for intermediaries like financial institutions while transferring power, cost savings, and operational effectiveness to users. It offers financial inclusion in a transparent, secure, and efficient avcılar escort ecosystem.
DeFi composability
DeFi Composability is the interoperability protocol resulting in efficient, creative financial services and products for DeFi end-users. That’s a mouthful, so let’s break it down.
Every day, protocols like Aave, Yearn, Synthetix, Curve, and RenVM (amongst others) mesh together to enable, process, and deliver new financial products only possible in DeFi. To understand this point, remember that DeFi protocols are open-source, permissionless, and can be used by anyone.
The open-ended and permissionless nature of DeFi protocols allows you to stack these protocols together just as you would a lego set. By playing with composable money legos (i.e., DeFi protocols like Yearn), you can unlock incredible yield farming returns, deploy flash loans, or take out loans that repay themselves.
How DeFi money legos work
The basic point to understand about composability is that DeFi protocols, apps, and platforms can work with each other to your benefit. However, the amount of use you actualize by combining their functions is up to your creativity.
So, how do you play with money legos to make their composability feature work for you? Alchemix, a DeFi loan protocol, is a great example to learn from.
Alchemix allows you to take out instant self-repaying loans. No, that isn’t a typo — Alchemix loans automatically repay themselves over time. The way it works is disarmingly simple:
– Deposit DAI in the Alchemix vault.
– Receive up to 50% of your deposit amount back in USD.
– Withdraw USD, spend it, deposit for additional yield, etc.
– Leave your original deposit in the vault while it yields to regenerate the loan amount.
Alchemix loans are free, but a lot of money legos action happens in the background to auto-repay your loan. For beginners, Ethereum is the base layer protocol. Composability favors same-chain protocols because true multi-chain interoperability simply isn’t here yet (but, thanks to Polkadot, it might be soon).
For beginners, Ethereum is the base layer protocol. Composability favors same-chain protocols because true multi-chain interoperability simply isn’t here yet (but, thanks to Polkadot, it might be soon).
Next up on the Alchemix order of operations is Maker DAO. The maker uses Ethereum to mint DAI, an asset-backed stablecoin that always equals one dollar. To use Alchemix, you must deposit DAI, which means you either mint DAI on Maker or convert to DAI from another token.
Once you deposit DAI into your Alchemix Vault, the vault starts farming (loaning) your DAI to other DeFi protocols like Yearn, Curve, and Sushi. By doing this, your vault position starts earning yield, the future earnings of which back your loan today.
The composability of the DeFi protocols in the Alchemix ecosystem turns an otherwise fixed amount of DAI into a powerful financial tool capable of regenerating itself.
The best money legos in DeFi
The best DeFi apps, products, services, and protocols also happen to be the most composable.
What makes a DeFi protocol valuable in a composable environment is the utility created between other DeFi money legos. An easy way to understand this is to look at Curve Finance. ost protocols use Curve for their services and products, making it a DeFi ecosystem essential.
Ethereum is the current home base of DeFi because it contains the vast majority of total value locked into DeFi apps. However, the rise of blockchain ecosystems not called Ethereum proves that the not-too-distant future of composability entails full interoperability across blockchains.
DeFi is true open finance
DeFi’s ability to freely take, integrate, and recycle components from various technologies enables it to find combinations that simply work. Moreover, the interoperability of decentralized finance protocols enables the entire ecosystem to benefit from derivative gains.
Composability is Innovation
While many in the tech and beyond have heard of bitcoin, cryptocurrency, and the concept of a blockchain, less well-known are smart contracts, the major innovation of Ethereum. They’re programs that anyone can write and deploy to a public blockchain, enabling all kinds of innovation. Buzzy acronyms like NFTs, DeFi, and DAOs representing new ways to own anything, better financial systems for all, and new ways for people to coordinate and collaborate, respectively are all powered by smart contracts.
Smart contracts power new kinds of transactions with clear advantages over those enabled by legacy systems. Traditionally it takes weeks and reams of paperwork for a bank to verify an individual’s assets and issue a loan, for example. With a smart contract, a piece of code could automatically issue a loan based on the collateral provided by the individual.
