Table of Contents
What is composability in DeFi?
Composability is combining or linking different decentralized finance – DeFi protocols and applications. This is done in a permissionless and cost-free manner. Anyone, anywhere can build a product by combining different protocols or making use of the existing protocol networks. This phenomenon is also known as Money Legos.
One can also invest in a protocol where the smart contract generates interest and this will automatically reinvest in other protocols - Yearn.
Take out a loan, then use it to provide liquidity on another platform where one will be rewarded by liquidity incentives - Aave.
Because there is a huge range of DeFi possibilities, the power of composability is only limited to the imagination of the developers or users.
What are the risks of composability?
Developers/users should still be wary of the potential risks arising from the composability of DeFi products. The following risks could potentially ruin the yield of the honest yield farmer;
Base layer failure
Several protocols are built on a base layer; wich is Ethereum most of the time. When Ethereum tend to ‘fail’ (slowness, high gasfees), it will have its effect on the protocols as well. Everything that happens to the base layer will affect the applications that are built on it.
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Smart contract failure
Any smart contract can fail or be abused. A protocol can code its smart contracts with all of the best intentions but still end up failing when faced with bugs or unexpected events. It is important to pay attention to whether the protocol has undergone security audits, is open-source and puts time and effort into securing its smart contracts.
Compound security
When two secure protocols work together, the combination can sometimes expose new vulnerabilities. This new platform provides more room for possible attacks and may not be as secure as the platform it was built on.
Complex
Limited knowledge of different possibilities can lead to excessive risk-taking. It is crucial to fully understand each step you take and realize the consequences attached to each action.
Conclusion Composability
Composability in DeFi is a way protocols combine their strength to form entirely new financial systems. For example, one will be able to deploy different tokens on a particular platform and earn rewards on a complete other platform.