Linda Xie, co-founder of Scalar Capital, a cryptocurrency investment company, believes that the composability of smart contracts has brought about emergent innovations in the encrypted world. In this article, typical cases such as DeFi, lossless lottery, publishing (combination of Mirror and Zora), flash loans, etc. It demonstrates the implementation approach of smart contract composability and its superiority and innovation. Composability will put cryptocurrencies at the forefront of revolutions in finance and other industries that will fundamentally change industries like the Internet did, and will open up a new world of endless possibilities. The following is the original translation:
While many in the tech world have heard of Bitcoin, cryptocurrencies, and the concept of blockchains, less is known about smart contracts, the major innovation of Ethereum. Anyone can write smart contracts and deploy them on the public chain to realize various innovations. Hot concepts like NFTs, DeFi, and DAOs—representing, respectively, new ways of establishing ownership of something, providing people with a better financial system, and new ways of synergizing and collaborating—are all powered by smart contracts.
Smart contracts enable new types of transactions and have obvious advantages over traditional systems. Traditionally, it took weeks and a lot of paperwork for banks to verify a person's assets and then issue a loan. With smart contracts, using a piece of code, loans can be automatically issued based on the collateral provided by the individual.
Smart contracts do more than just allow instant and verifiable transactions between various applications, though—they can also be programmed to interact with one another. In other words, they make cryptocurrency programs composable, like building blocks. This property of composability, which is much talked about by tech enthusiasts and not well understood by the general public, is one of the most powerful features of cryptocurrencies. Because composability allows leveraging existing programs in this network and adapting or building on top of them, it unlocks entirely new use cases that don't exist in the world yet.
In other words: composability is innovation.
Why composability is possible and what new possibilities it will bring
In a large network of relatively independent distributed actors, anyone has the ability to use the work of others to create new applications, but this does not happen automatically - it requires the cooperation of many people. The developers of Ethereum smart contracts gradually achieved composability by forming a standard protocol for describing how certain types of contracts should work. For example, the ERC-20 token standard, first proposed by developer Fabian Vogelsteller in November 2015 and formalized in September 2017, describes how Ethereum tokens work, including the transfer of tokens, the consumption of tokens Basic functions such as instant authorization allow third-party developers to easily support any token that complies with the ERC-20 standard.
This standardization is as critical to composability as the Internet and email and other standardized protocols were to the evolution of the web. With these token standards, smart contracts can be used as building blocks that can be combined into larger systems. Like a software library, smart contracts of different protocols and applications can be easily combined and plugged in like Lego bricks. In fact, smart contracts in decentralized finance (DeFi) -- one of the earliest and most active examples of composability -- are often referred to as "monetary Lego."
How composability could play a big role in decentralized finance
Financial positions in DeFi protocols -- which enable users to lend, borrow, trade, or otherwise interact without the need for an intermediary centralized financial institution -- can be represented as ERC-20 tokens that can be redeemed for the associated funds. For example, if you deposit USDC (tokenized U.S. dollars) into the lending protocol Compound, you will receive cUSDC, which represents your certificate of earning interest within Compound. Similarly, when you deposit funds into Uniswap, a decentralized exchange protocol, to provide liquidity for a specific market, you will receive ERC-20 tokens that represent your share of funds in the relevant Uniswap market liquidity pool.
Most importantly, these tokens are not "locked" in a protocol - they can now be used in other DeFi protocols as well. For example, you can use your Uniswap Liquidity Provider (LP) tokens as collateral on lending protocol Aave. Smart contracts enable developers to easily interact across multiple applications on top of other protocols; the world of decentralized finance encompasses everything from lending to derivatives.
While certain DeFi transactions are not easy for most people to participate in — either certain applications are too complex, or the technical knowledge required to interact with the protocol is too complex — usability continues to improve dramatically. The chains of transactions involved in making up different DeFi building blocks can be built and visualized using projects like Furucombo and DeFi Saver, which simplify the effort required for developers to combine and interact with different smart contracts. One can easily customize process activities, or directly use other people's composite modules.
Furucombo makes it easy for users to create their own DeFi portfolios
Composability will inevitably bring more choices and better user experience, because people can act on existing thinking without obstacles, and the process is greatly simplified, and it is easier to accept new use cases. As more and more of the underlying technology is simplified, the focus will shift to what people want to do with their money, rather than being limited by the inefficiencies of the traditional financial world.
So what exactly does composability mean for builders and developers?
Most of the possibilities, people can only successfully unlock by trying, but it opens up some new possibilities for builders, including:
Developers can create their own projects and communities with minimal financial resources, without having to reinvent the wheel, because smart contract platforms like Ethereum can build systems like huge, open sandboxes. Allowing small teams to quickly launch their own projects is a big driver of rapid innovation in the crypto world. For example, rather than building a new marketplace from scratch, a new video game developer could easily add the ability for users to trade items in-game by integrating a decentralized exchange protocol.
Non-cryptocurrency enterprises can improve efficiency and expand more functions by introducing an open ecosystem like Ethereum, just like the API economy, which can enable various types of companies, including mother and baby stores and small businesses, to obtain their original Unobtainable data and capabilities. In the field of technology, a typical case is that Reddit has launched an experiment with community points. Tokens are used to reward users for publishing high-quality content, which can be exchanged for unique items in the community. Reddit plans to launch community points as ERC-20 tokens, which will allow them to be used in existing ethereum wallets and applications. This expands more functionality for community points, but Reddit doesn't need to rebuild itself. Even if it’s not a cryptocurrency company, it can reap the benefits of cryptocurrency applications for its users, such as Reddit’s users who can use a decentralized exchange on Ethereum to exchange their points for other tokens. This will make their points liquid from the start. At the same time, once introduced into the Ethereum ecosystem, everyone can incorporate community points into their own projects, thereby creating more use cases on this basis.
Developers can learn and apply various concepts in various industries, including technology, finance, games, and art, so as to generate a deeper understanding of various industries, form new ways of thinking, and provide people with new application scenarios. For example, by adding DeFi components to games, the incentive mechanism and market can be better understood; by adding game components to DeFi, the general public can understand finance more easily and be more interested. Communities that are relatively isolated — because they spend their time on different platforms, or don’t communicate with each other — can also exchange ideas and share ideas in this way, sparking innovation. Even if everyone is a stranger, smart contracts can make information sharing more open, efficient, and communication more credible.
In addition to the DeFi case I just shared, there are currently many interesting use cases for composability in the crypto world; these include:
Earn income with "no loss" lotteries
PoolTogether is a project that utilizes a decentralized finance protocol to create a "no loss" lottery. Users can buy lottery tickets, and all funds collected from lottery sales go into prize pools, earning income from decentralized finance protocols Compound and yEarn Vaults. Everyone gets their own money back, but one person wins all the accumulated interest earned from the pool. No one loses their stake, so it's a "no loss" lottery. Anyone in the world with an Ethereum address can participate in lossless sweepstakes, and anyone can create lossless sweepstakes for any token, making participation in this type of system easier and safer.
NFTs as Collateral
Non-fungible tokens (NFTs) have been getting a lot of attention lately. Unlike the fungible, "fungible" tokens in the ERC-20 token standard, NFTs are unique digital assets whose ownership can be traced on the blockchain. However, even though tokens themselves are not fungible, they still exist in composable ecosystems. This means that when they are issued on a smart contract platform, anyone can own an NFT or exchange it for any other asset that exists on the same platform.
When "combining" (inserting, combining) decentralized financial modules, NFT activities are not limited to transactions, but can include: using NFTs as collateral for loans (such as NFTfi), renting out or earning interest on NFTs (such as RenFT , Charged Particles), etc.
Say you own a piece of valuable real estate in a virtual world like Decentraland or Cryptovoxels, you can actually use that asset to borrow USDC to put down a down payment on a real-life house. Or, say, you have an ideal skin in a video game—you can rent that item out to other players for temporary use, like renting out a room on Airbnb.
NFTFi allows users to lend against NFTs, where NFTs can refer to anything from a wallet name to virtual land
content publishing
Another classic example of combining two applications due to the composability of smart contracts is the collaboration between Mirror (a decentralized publishing platform) and Zora (a protocol for creating and trading NFTs). Combining allows Mirror authors to convert their posts to NFTs, and can embed auction links for NFTs in their posts. This, in turn, allows creators to crowdfund works such as novels and blog posts, or even research papers or other artifacts, where purchasing NFTs will help fund creators.
flash loan
flash loan
Flash loans are one of the most unique functions that cryptocurrencies can enable — and there is nothing yet to come close to flash loans in the traditional financial system. A flash loan allows someone to borrow money and repay the loan in the same transaction; if it is not repaid in the same transaction, the transaction will fail.
This allows loans to be unsecured, meaning that anyone in the world can get these flash loans, no matter how much assets they have. Flash loan is a very in-depth application of cryptocurrency, but in the DeFi field, it often happens that flash loan is used for arbitrage.
As cryptocurrencies mature, we can expect these composable smart contracts to find applications in the wider world beyond the cryptocurrency community. Eventually, developers will be able to add an entire decentralized marketplace to a video game with just one line of code; or have merchants on their e-commerce store earn interest on their balance with another line of code. For institutions, composability puts cryptocurrencies at the forefront of revolutions in finance and other industries -- ones that will fundamentally change industries like the Internet did. And for consumers, it will open up a world of entirely new possibilities.
Here, I'm just scratching the surface of what might happen in the future. In the future, human beings will use their ingenuity to open a new chapter.
