Jun 2, 2023 - Economy

How composability makes blockchains work like Lego blocks

Illustration: Natalie Peeples/Axios

One of the ways that blockchain networks promise to work differently than technology as we know it is by offering composability. But what is it?

Why it matters: Composability is one of those things that opens up surprising new applications. What kind of applications? Well it's hard to say because they're... surprising.

How it works: When developers build composable applications, they release a lot control over how their creations can be used.

  • Other creative coders can build on top of their work without asking permission.

Zoom out: Composability is familiar in the real world. Every building is composed of dozens or hundreds of products from different companies (bricks, cement, screws and sheetrock), none of the makers of which have any real visibility into how their output will ultimately be used.

  • Be smart: This is why so many physical products try to create some kind of standardization.
  • If you know, for example, that there's lots of quarter-inch screws out there, you can just make quarter inch holes in your product where it needs them instead of also making custom screws.

Online it's trickier. For example, Twitter has been fighting with its users lately, putting limits on how they can make use of the outputs from their platform.

  • Do you use a fitness tracking app? Good luck exporting the data in that when you want to switch to a competitor.

Composability in crypto is largely enabled by outputs.

  • Imagine, for example, that someone decides to participate as a liquidity provider on a decentralized exchange (such as Uniswap), so they deposit $5,000 in assets.
  • When that happens, they get a token (think of it as a receipt) that represents that deposit. The token does not have their name on it. They could send it to someone else.
  • Later, imagine they needed a little money short term. Another product might let them deposit that token as collateral to take out a loan (the money market C.R.E.A.M. does it, for example).

Functions can be stacked. So, for example, there's lots of places to trade different tokens, and they can have slightly different prices at different times.

  • Products like 1inch, ParaSwap and Matcha allow a user to check a trade on multiple exchanges at one time and then actually execute the trade for them.

Morpho Lending is a peer-to-peer marketplace for lenders and borrowers that grows on top of existing lending platforms, like Compound and Aave.

  • Funds ready to be lent out basically wait in those markets until Morpho finds them a willing borrower.

Functions can be broken out, too. Imagine someone holds a governance token (basically, a vote on how a protocol changes) worth a lot of money. They might want to deposit it with a custodian, but they might also want to vote.

  • Composability enables both — they can custody it someplace secure and designate another wallet or entity to cast votes for those tokens.
  • In fact, this is a whole business. Professional governance firms vote on behalf of large holders who entrust them with such rights.

The other side: Composability isn't all benefit. Mixing and matching can introduce security vulnerabilities, which is true any time complexity is created.

  • It's also true that developers outside the crypto world have been borrowing each other's code for a very long time (Stack Exchange built a business around it). Most web products are mostly an amalgamation of many other projects.
  • Yes, but: That's mostly under the hood. By putting everything out in the open, blockchains open up composability to anyone with a bit of know-how.

The bottom line: The industry is only just beginning to sort out how far it can push composability.

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