Introduction

We often hear proverbs like “Good artists copy, Great artists steal,” and this is especially true in blockchain development. One of the most attractive features of DeFi is its composability, which enables the combination of various financial services and products into a single interface. This allows users to access a broad range of services with just a few clicks, making it more efficient and cost-effective than traditional financial systems. In this article, we will explore how internal competition is virtuous for the ecosystem's growth compared to TradFi and how some projects use composability well, for the benefit of the markets and their users.

What is Composability?

Composability refers to the interoperability between different components within an ecosystem. In blockchain development, the culture of open-source is common. The permissionless nature of smart contracts also allows developers to avoid reinventing the wheel each time they want to innovate. Instead, they can integrate either the full or part of a product into their own, benefiting from the liquidity of the underlying protocol that has already proven to be efficient.

This environment maximizes the possibilities offered by DeFi and widens the range of opportunities for the ecosystem to evolve. Composability has played a key role in the fast growth observed in recent years. Developers can use composability to create new utilities resulting from the combination of different products. They can improve the user experience by creating interfaces that are best suited for a particular use-case. Additionally, they can benefit from identifying and correcting discrepancies that may occur across markets.

Some technical milestones

It is worth noting that on an higher level, the Ethereum community is creating improvement proposals known as EIPs to significantly impact developers in their quest to composability, two impactful proposals:

Tokenized Vaults — ERC-4626

ERC-4626 was developed by Yearn Finance in 2021 and it allows developers to build on top of existing yield products, creating tokenized vaults that pool assets and enable users to farm multiple yield-bearing assets at once. It has been widely adopted by many different protocols since then.

Before the emergence of this standard, developers had to create individual adapters for each app they wanted to integrate. This was necessary because different implementations, such as the aTokens of Aave and yTokens from Yearn, were not computed in the same manner. Integrating them would require several adapters and multiple security checks.

With ERC-4626, this barrier to integration has been significantly reduced. Developers can now use this standard to add all compatible apps without having to check too much for safety. The standard also facilitates fund management for users. They can now invest in multiple vaults that are compatible with each other, making the ecosystem more efficient.

Resource: https://eips.ethereum.org/EIPS/eip-4626

Account Abstraction — ERC-4337

ERC-4337 simplifies Web3 user experience by introducing account abstraction, which allows wallets to be more composable and programmable. This opens up a new design space for developers to create products and services that make Web3 easier to use. Some of its features include wallet recovery, multi-sign transactions, programmable authentication logic, and gasless/sponsored transactions (Gelato) that solve the problem of funding wallets with ETH.

The multi-call ability of the standard improves composability, allowing users to make multiple calls at once and make the most out of the ecosystem and combining different products at once without increasing their costs. Instadapp, with its recently launched Avocado wallet integrate the ERC-4337 and makes it easier to interact with DeFi.

Resource: https://eips.ethereum.org/EIPS/eip-4337

Growing the Blue Ocean

Composability enables compounding at the industry-wide level. In the book “Blue Ocean Strategy,” the authors compare Red Oceans to the competition between companies trying to capture and conquer more of the market share, leading to not sharing the innovations being developed by each other as it is the case in Traditional Finance.

The real competitor of DeFi is traditional finance, and the competition between projects in DeFi is using composability to enlarge the global market size instead of projects only capturing part of it. Projects that understand this point will enhance the composability of DeFi by building on top of previous innovations, improving the ecosystem, and offering better products for end-users.

This internal competition is virtuous, and results in what is called a blue ocean, where companies are not only competing with each other but also widening the size of the market at the same time. This strategy is opposite to a red ocean, where companies are fighting for the same market share, leading to price wars and reduced innovation.

Blue Ocean Strategy: https://www.blueoceanstrategy.com/what-is-blue-ocean-strategy/

Projects enhancing DeFi's composability

Some projects are enhancing the composability of DeFi, which benefits both their users and the ecosystem. Here are three good examples:

Paraswap

It is a prime example of how composability enhances the DeFi user experience. With the growth of the ecosystem on different chains, several decentralized exchanges (DEXes) such as Uniswap, Sushiswap, and many forks have emerged on different chains. While these DEXes can have slightly different features, having too many of them leads to fragmented liquidity and inefficiencies.

Paraswap is a DEXes Aggregator that provides a better interface for users to swap their assets, It also makes it easier to swap large quantities by routing the assets through the best possible DEXs. This saves costs, protects users from slippage, and improves market efficiency by correcting price discrepancies among different markets.

Website: https://www.paraswap.io/

Morpho

Morpho builds on top of lending protocols such as Aave and Compound, with a focus on improving capital efficiency through P2Pool lending. Morpho's matching engine is the secret to better APYs, which ensures that users get the best possible yield from their liquidity. Morpho's matching engine is a unique solution that matches the supply and demand of liquidity in a decentralized and efficient way, resulting in higher returns for users that they would have gotten in the underlying protocols.

Website: https://www.morpho.xyz/

APWine

APWine enhances composability by building on top of yield markets and offering futures on yield-bearing assets. These derivatives are popular in traditional markets and offer certainty in a volatile market. Users can benefit from fixed returns in exchange for their volatile rate, while traders can speculate on the other side, and pay the fixed rate for doing so.

By doing so, APWine is not only competing for the existing market, but also trying to address another demand that can bring more users to DeFi by providing some unique products that are currently only available in traditional finance. APWine's approach to enhancing composability in DeFi is an excellent example of how DeFi projects can benefit from each other's work. This ultimately improves the ecosystem and offers new products for users.

Website: https://www.apwine.fi/

Li.Fi

LiFi is a DeFi project that enhances cross-chain composability by building on top of existing bridges and offering interoperability across different chains. One important problem is that existing solutions are often exploited, leading to many users losing their funds. This creates a centralized point of failure in our ecosystem.

By aggregating different bridging solutions, LiFi and their product Jumper improve the experience of transferring assets from one chain to another. They scout for costs and processing time, and display different solutions for users to choose from. They also provide the ability to swap for another asset during the transfer. This aggregation also limits the risks of getting exploited if using only one bridge. Other projects can integrate LiFi by using their SDK to let their users access this useful tool and open the gate to use innovative protocols based in other chains.

Website: https://li.fi/

Conclusion

Composability is a crucial aspect of DeFi that enables developers to build on each other's work and improve the ecosystem as a whole. It provides users with access to a wide range of services, creating a blue ocean where the market continuously expands. In contrast, traditional finance operates independently, leading inefficiencies, higher fees, and longer wait times.

However, it is important to note that composability also has its limitations. The risk of contract hacking increases with more composability, and users may not understand all the mechanisms happening in the background. It is important for projects to find a balance between innovation, capital efficiency and user safety. Additionally, some projects, like Uniswap V3, keep their innovations secret for a certain period to avoid being forked and maintain their monopoly.

At Murphy Labs, we believe that users with knowledge other than coding, who actively monitor the ecosystem, can play a role in growing the combinations between products, thus helping their peers interact with DeFi in complex ways without having to do it themselves.

Murphy Labs Research — Anything that can happen, will happen.

• Website: https://murphylabs.io/

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