Blockchains are Legos
Comere, take a seat. We're gonna talk about "composability" in blockchain today. And it's gonna be beautiful.
Blockchain technology is changing the way we store and transfer data by providing excellent security and transparency. It has tremendous growth potential and offers new opportunities in various industries. In this article, we will explore how blockchain technology works like building with Legos. Different blocks can be combined to create new and exciting structures.
We will examine the benefits of blockchain composability, and how they are shaping a more interconnected and seamless future, powering new and exciting applications and services.
Composability as a Key Element of Technology
Composability allows different software components or systems to work together smoothly in innovative ways, creating new applications and services that would not be possible with individual components working in isolation. Each component has its specific use case, and developers can easily combine them to add new functionality to new applications without having to build from scratch.
The early days of the internet, such as the World Wide Web, provided a platform for developers to build new and innovative applications by combining existing components. The development of a rich and diverse ecosystem of tools and services that fueled the growth and success of the internet today was made possible through composability. Besides, in the world of open-source software projects, any developers are allowed to use the projects in their products without fear of patent infringement issues.
However, it all changed when the fire nation attacked, or rather, when the big techs of Silicon Valley decided to build “walled gardens” around their software through patent protection and locking users into their platforms by implementing high switching costs, all in the name of securing their profits.
Blockchain Brings Composability Back to the World
Smart contracts are algorithms that govern transactions on public blockchains like Ethereum. They can be viewed as vending machines with their own logic for each action triggered by the user. For example, if you want a cold coke, simply insert enough dollar bills, press the right button, and you'll get your drink.
On public platforms like Ethereum, smart contracts are open-source and available to the public. This means anyone can verify what a smart contract does before proceeding with the transaction. Similarly, developers can freely use and integrate code from other smart contracts into their products or decentralized applications (dApps).
Blockchain Composability in Action
Here are a few examples in crypto that showcase the composability feature of blockchain:
NFTs are unique digital assets that reside on the blockchain. Every time a new NFT is created on Ethereum, it is labeled with a string of numbers (e.g. #12629). Every subsequent NFT created on Ethereum will carry a string of numbers that is +1 from the previous NFT, guaranteeing its uniqueness on Ethereum.
Anyone can trade NFTs on a marketplace as long as they know which number to call from the blockchain. This means the owner of NFT #12629 can put it up for sale at different prices on different marketplaces to find the best offer. Additionally, individual marketplaces can display the ownership history of NFT #12629 by simply calling the right number from the blockchain.
Every NFT marketplace maintains its own set of on-chain order books. To make it convenient for NFT buyers to compare prices across marketplaces, developers built NFT aggregator to aggregate all NFT prices from marketplaces on Ethereum. Now buyers can simply refer to a single NFT aggregator instead of searching through multiple NFT marketplaces to find the best NFT.
2. Decentralized Finance (DeFi)
Flash loans are a unique feature of DeFi in which the loan term is usually limited to a few minutes. Flash loans are unsecured loans that have to be borrowed and repaid within a single transaction. They are commonly used in arbitrage trading.
For example, Alice could initiate a flash loan transaction to arbitrage ETH (Ethereum's native currency) on exchanges like Uniswap and Sushiswap. Alice could use the loaned funds to purchase ETH at a lower price on Uniswap and then sell it at a higher price on Sushiswap, keeping the profit and returning the capital to the lender all within a single transaction.
The standalone components required for this type of transaction already exist and are functional within the DeFi space. As a result, a DeFi developer can simply bundle multiple transactions from different exchanges to make flash loans possible. In traditional banking, such short-term, collateral-free loans are not possible due to the time required for credit checks and the need for collateral to secure the loan.
Several decentralized identity protocols now exist, allowing for the combination of multiple systems and components without the need for complex integration or customization. With these protocols, internet users can authenticate and grant access to various applications and services without the need for each application to have its own separate identity system.
This is a major advancement from Web2, where users had to provide the same information when signing up for different social accounts like Twitter, Instagram, and LinkedIn. With decentralized identity, when a user enters a new crypto platform, they simply have to "Connect Wallet," and the application will scan their decentralized identity profile to verify their legitimacy.
Challenges to Composability in Crypto
1. Security
While building on top of different protocols and smart contracts can lead to significant innovations like flash loans in DeFi, if one of the components that make up the product has security risks or vulnerabilities, it could compromise the entire product.
2. Standardization
To ensure that composability works its magic, there must be a standard everyone follows. Initially, there was only the standard ERC721 for developers looking to create an NFT. Later, the community open-sourced its own version of the modified ERC721 (ERC-721A and ERC-721:Shadow) to fit their specific community needs. As the Ethereum ecosystem grows, newer NFT standards like ERC-1155, ERC-4400, ERC-4906, ERC-4907 have emerged.
As more developers work in crypto, it is likely that new and better standards will be created. It may be challenging to ensure that everyone follows the same standards.
3. Walled gardens
In the open-source world, it is common for other developers to copy successful innovations and add new features to create a better product than the original. In the classic case of Sushiswap’s vampire attack, Sushiswap copied Uniswap’s open-source code then added better incentives for liquidity providers to suck out liquidity from Uniswap into Sushiswap.
The result? Uniswap introduced a new license for the commercial use of its V3 code to prevent copycats.
Conclusion
Composability is a critical feature of blockchain technology that is driving innovation in crypto. It remains to be seen how we will overcome the challenges that arise and continue to enjoy the benefits of blockchain composability.
*Disclaimer: Non of the things I have mentioned here can be taken as financial advice, I am just sharing my knowledge and perspectives on the crypto industry.
*Good-to-know: I hired ChatGPT as my editor where I provided my original thoughts and have it polish sentences and paragraphs. Proofread by yours truly.