One of the key features of open, permissionless money is that will be more like Lego and less like the wooden blocks.
A core attribute of permissionless blockchains is that they are composable, meaning apps and services can be built on top of them in a modular way, and/or programmatically designed to interact with other blockchain apps and features to create something new.
Composability in blockchain makes it so simple components can be stacked together to become more complicated products. And then they can be re-stacked a different way to create something else.
Overtime, knowing which simple components are the best and knowing how to successfully combine them will enable all kinds of financial services without the need to continually start over at the level of basic network creation.
In a recent post, I teased out different elements that will likely become part of crypto and DeFi’s new narrative during the next hype cycle. The building and scale advantages of composability is definitely one of the elements of blockchain-based systems that will start emerge as a major advantage over traditional financial products and services.
How does blockchain enable composable design in crypto and DeFi
Permissionless, open money, is based on systems that do not require a gatekeeper or a person, government, or corporation allowing or denying access to services.
There are a number of challenges to building and operating within a permissionless environment. After all, gatekeepers do play a role of maintaining a sense of law and order and have controls in place for things like fraud protection.
- Efficient: Fully mature trustless environments will eventually become bureaucracy-killers. By replacing manual processes with code-based and software-based systems that are modular and interoperable, systems that have historically been resistant to change and innovation will become more efficient via composable digital ledgers, or blockchains. Things like the tax code, or DMV registration, or legal contracts, which all feel unnecessarily cumbersome can get a reboot using interopable systems that can be stacked on top of one another to achieve the same objective.
- Accountability: Composable blockchain apps and services are also transparent and accountable. Public interest reporting can be based on on-chain analytics and realtime data instead of info that is buried in reports or that requires a Freedom of Information Act request. On-chain analytics could help fight corruption and mismanagement at all levels.
- Access: Permissionless (and composable) blockchains will lower the bar for innovation. Right now if you want to start a SaaS company or financial app, you would still need to come up with a decent chunk of capital to invest in dev and/or build a network. With composable blockchain tech, innovators can test ideas and iterate at lower costs and leverage existing networks and protocols to build on top of.
- Building codes: One way the blockchain space can enhance ease of use for builders is to settle on standards for smart contract execution. This is already happening within the Ethereum space, (ERC-20 is a popular token standard and ERC-721 is a popular NFT standard), but the possibilities of what can be built using composable frameworks expands as more protocols create standards.
- Global network: Another reason why open money and composable design are a good match is because when paired, they enable a global network that will make it possible to cheaply and efficiently share money and information around the world in a way that is both cheap and fast.
Examples of composability in decentralized systems
While composable design is primed to become a bigger deal in the future as more and more blockchain-based systems grow, composability is already the cornerstone of many DeFi projects. Because of the pace and somewhat automated nature of DeFi, the ability to move across protocols and apps with minimal friction is key.
Here are a few examples:
- Yield farming and liquid staking: With composable design, assets can be locked as collateral in one service and then those contracts can be put to work on another service. Putting assets to work comes with its cost and benefits, but the idea is that money can be more programmable — and the ability to move across chains and services opens up new possibilities.
- Tokenization: Real world assets will be brought on-chain and tokenized and made composable enabling new kinds of markets and economies. Organized and efficient fractionalized buying and selling could open investment and ownership opportunities to more people.
- Swaps: Decentralized exchanges and liquidity pools allow people to exchange or swap one asset for another without having to go through a bank or some kind of centralized platform, all thanks to composability.
- NFTs: While NFTs have gone through a boom/bust recently, for applications like gaming and world-building, the idea that you can take assets created in one game and bring them into another game opens up new possibilities of cross-game interaction and continuation.
- Collaboration: One thing that open money protocols enable is a new kind of organization and coordination, which was not possible before under the constraints of centralized ownership. Decentralized autonomous organizations (DAOs) represent a paradigm shift and will enable new forms of governance and decision-making
Composable architecture by design
Composability isn’t just a blockchain thing. In fact, composable architecture or design is something used in other systems, including open source software.
But the idea of building pieces that are modular and interoperable makes sense within the context of blockchain. Overtime, the mix and match method of programmable building will lead to more innovation and more efficiency.