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What is composability in DeFi?

What is composability in DeFi? Composability is the backbone of decentralized finance (DeFi)

Decentralized finance (DeFi) aims to create a financial ecosystem in which anyone can participate without the need for a central custodian. 

What is composability in DeFi ?

Composability is a system design principle that deals with the inter-relationships of components.

Users can select and assemble components in various combinations within a highly composable system to meet specific user requirements.

Since Ethereum launched its programmable smart contracts, the blockchain ecosystem has witnessed the emergence of a new financial capital called decentralized finance (DeFi).

Over the years, the DeFi ecosystem has evolved into an unlicensed and unrestricted marketplace, reinventing the structure of traditional finance (TradFi) by enabling anyone with an internet connection to access a wide range of financial products.

Most discussions don’t often cover the underlying features, although smart contracts receive most of the credit for this burgeoning DeFi ecosystem.

One of the most important features is Composability.

Composability in DeFi refers to the ability of different decentralized finance applications and protocols to interact and seamlessly connect with each other.

Users can combine and integrate the building blocks of these applications, creating a modular and interoperable ecosystem.

Moreover, composability enables developers to leverage existing protocols and smart contracts as building blocks to create new protocols or combine functionalities from different protocols to offer unique financial services.

Within the DeFi ecosystem, developers can utilize a framework where one protocol’s outputs can serve as inputs for another, resulting in a synergistic effect and broadening the range of possibilities.

We can see the maximum potential of composability in decentralized finance due to the open-source nature of most DeFi protocols.

Developers can reuse various applications without reinventing the wheel or fearing patent infringement issues. 

An example of DeFi composability is :

A user can borrow funds from a decentralized lending platform and use them as collateral on a decentralized trading platform to trade assets.

Users can utilize the profits generated from trading activities to repay the loan obtained from the lending platform.

How to Achieve DeFi Composability?

  • Smart contracts, which are self-executing contracts with the terms of the agreement written directly into the code.
  • Using decentralized oracles and smart contracts that can gather and retrieve external data and trigger events on the blockchain .

To summarize, composability is achieved through smart contracts, open protocols and standards, decentralized infrastructure, and decentralized oracles.

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