Crypto currencies have gained traction over the past few years. Starting out as a way to transfer digital currency between individuals has morphed into an industry of itself. By utilizing the underlying technology of crypto currencies we can now trustlessly send, receive, create and interact.
The expansion of this technology beyond that of Bitcoins very basic albeit secure programming has led to the development of what is known as smart contracts, most notably utilized on the Ethereum blockchain. A smart contract is a program that automatically executes once the terms of the contract have been met. Using smart contracts reduces the need for intermediaries and trusted third parties which saves users time, energy and money. Think of smart contracts as vending machines. You have certain inputs(money of the proper amount) that are required before the machine executes your desired outcome(getting your snacks)
Based on the public nature of the Ethereum blockchain anyone can verify the smart contracts code and the transactions involved. Add the ability to programmatically interact with other contracts and you have the building blocks of dApps(Decentralized applications).
This is where the word composable comes into play.
Compose: To form by putting parts together, combine, arrange, compound.
What smart contracts allow developers to do is take existing programs and build on top of them. Like bricks of lego these programs can be combined to create new and interesting structures that wouldn’t have existed otherwise.
For this to be possible there needs to be a form of standardization. This came in the form of ERC-20, ERC-1155, ERC-720 etc. These contract standards describe how smart contracts should behave, including functionality, token structure, transfers and limitations. What this means is developers can build upon and support any other smart contract that complies with these standards.
This level of composability offers many benefits to companies and developers. By leveraging this lego approach they can utilize a common standard without having to build their own systems. Instead of building from the ground up developers can piece together smart contracts and build as needed. This can quicken development and provide security in knowing that the software has been proven and tested, something that is of utmost importance when it comes to cryptocurrencies.
Composability opens the doors to a plethora of innovative use cases. By plugging into an open ecosystem like Ethereum, industries that would otherwise never have coexisted can now interact. A few examples of what is being built using the power of composability include:
DeFi
Decentralized finance aims to offer users access to bank-like services without the banks. Services like lending, borrowing and trading without the need for a centralized financial structure. Composability in DeFi stems from the ability to leverage your position in one protocol into another. Without getting too complicated, here is a high level example of what is possible.
- Deposit funds into Protocol A to earn interest
- Protocol A gives you a receipt token “cToken” that represents your position
- cToken is not locked to the protocol and can used elsewhere
- Use cToken as collateral to borrow from Protocol B
Gaming & DeFi
The interaction of these two industries hasn’t been possible until now. Separated by use cases they can now be combined to create monetized gaming. By converting in-game items into digital assets it opens up the world of tokenization to the gaming industry. Tokens that can be leveraged through DeFi protocols, traded on a marketplace or sold for cryptocurrencies.
Content Creators & DeFi
Artists and creators have adopted NFTs(Non fungible Tokens) as a media for their creative outlets in order to leverage the possibilities that composability offers. Creators can now increase their visibility 100x with tokenized content. This can be images, music, videos, writings etc. Tokenized content means creators are only limited by their imagination when it comes to distribution. An interesting concept that has been utilized is using your NFTs as collateral for financial loans. Just like IRL users can benefit from holding onto “Art” and taking cryptocurrencies loans against it.
Community & DeFi
Bringing a community together and incentivizing participation is no easy task. That is where combining community and finance can help bootstrap an organization. Whether for-profit or not the idea behind tokenized participation means individuals can receive tokens in return for their contributions. In some cases these tokens have monetary value but they can also be used in a community credit type system where these tokens offer rewards and perks to holders.
DAOs(Decentralized autonomous organization) are a good example of this. Individuals come together to form an organization where no central authority holds the majority of power. DAOs use tokenization to combine NFTs, tokens and Defi into a structure that can run like a brick and mortar business but with no CEO.
The composable nature of smart contracts has only begun to reveal the potential of what can be done. Expect the technology to continue growing to the point where dApps can seamlessly interact with each other using simple code or even no code options, increasing adoption through usability. The compounding effect of this type of technology means as more projects develop more and more potential is created. Creators, builders and thinkers will continue to push the boundaries of composability and only time will tell what innovations come from this experiment. Will you participate?
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