Composability in crypto refers to the ability of different blockchain apps and protocols to work together. It acts like building blocks, often referred to as ‘Money Legos’ in decentralized finance (DeFi). More importantly, these building blocks don’t need permission from anyone else.
Developers and users can combine digital parts to create something more useful. They don’t need special permission to do this. Composability lets smart contracts on a blockchain like Ethereum work together to create public building blocks that anyone can use.
This is possible because most crypto protocols are open-source and standardized. For example, Ethereum’s ERC-20 token standard means any token built to that standard can be used by other apps automatically. Therefore, the output of one app can serve as the input for another, enabling developers to create new financial tools more quickly and affordably.
A suitable example would be when one deposits a stablecoin like USDC into Aave to earn interest and get “aUSDC” tokens in return. Those aUSDC tokens can be added as liquidity on Uniswap, a decentralized exchange, to earn trading fees. These can also be staked in a yield farm on another protocol for extra rewards. And just like that, three different apps can be seen working together automatically in a single transaction.
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But, composability comes with its own set of risks, too. It creates interdependency risks. For instance, the failure or hacking of one protocol can impact others that rely on it. All in all, it makes crypto more flexible than traditional finance.