Understanding Composable DeFi
With the advent of programmable smart contracts on the Ethereum blockchain, decentralized finance (DeFi) emerged as a new vertical within the blockchain ecosystem.
DeFi has revolutionized traditional finance (TradFi) by creating a permissionless and borderless marketplace, granting global access to a wide array of financial products for anyone with an internet connection.
The Glue Binding the DeFi Ecosystem
While smart contracts receive much of the credit for the growth of the DeFi ecosystem, it is important to delve into the underlying features.
Composability is a key feature of smart contracts that binds the entire DeFi ecosystem together.
It enables seamless interaction of decentralized exchanges (DEXs), lending and borrowing protocols, collateralized loans, synthetic assets, leveraged trading, futures markets, payment networks, and more.
The Foundation of DeFi’s Interconnected Ecosystem
Composability facilitates the interoperability of these products, creating a parallel financial system that operates globally without relying on centralized authorities.
Technically, composability is a technical feature that allows different components within a system to combine and support new use cases.
Through composable DeFi, developers can leverage various combinations of existing protocols and decentralized applications (dApps) without requiring special permissions.
How Composability Works in DeFi
DeFi dApps and protocols, often called “Money Legos,” are open-source, allowing them to communicate and interact with each other.
This open-source nature enables dApps and protocols to leverage each other’s code and utility, fostering a synergistic effect.