We continue our series of ‘key attributes of DeFi’ with composability.

In our previous post, we started a new series and deep-dived into key characteristics of DeFi. The first attribute we covered was the ‘non-custodial’ nature of DeFİ. In this post we will talk about composability.

What is composability?

Composability “is a system design principle that deals with the inter-relationships of components” says Wikipedia adds: “A highly composable system provides components that can be selected and assembled in various combinations to satisfy specific user requirements”

How is it in traditional finance?

Traditional finance works in silos. What does that supposed to mean? It means, they live in closed environments. You do not see any interaction with the outside world or competitors during the product development stage.

The implication of this close-nature is vertical integration. As there is no interaction with any third party, in order to provide a service to its customer, a financial institution should bring together all the ingredients. Example? All the infrastructure, security, software and hardware required to provide such service should be sourced and deployed by the bank.

This brings a significant amount of investment from a financial institution’s perspective. Investment means cost and institutions have to pass on this cost to customers in order to make profit. This makes their service costly.

Another issue is time. Financial institutions have to bring all these resources and the people to develop software or use such systems together. It takes time to develop such software, so product development phases are quite slow in these institutions.

In the end, after much development the customers were presented a single product. Sure, the institution makes hundreds of tests, customer focus group to understand what the customer wants - but still, the customer gets one type of service.

How about decentralized finance?

Decentralized finance protocols work with a certain set of standards. Why? Couple of reasons.

DeFi protocols work together like a stack. These protocols are specialized in certain type of offerings. For example, Compound focuses on lending, Uniswap focuses on being a decentralized exchange. They operate in crypto land with limited resources and they need to cooperate (or work together) with other services to effectively serve their users.

Image by cocoparisienne from Pixabay

For example, they use their customers’ digital assets which are recorded on blockchains, so they need to comply with these blockchains. Furthermore, these blockchains act as an infrastructure for them, such as iOS for Apple ecosystem and android for Google. Blockchains provide security for users and these protocols and transfer value between parties (which in turn charge them fees).

Another example is oracles. Oracles are service providers that feed external data to DeFi protocols. A DeFi protocol is essentially a smart contract (a software) and these codes do not have ability to go out and fetch information from outside. The DeFİ protocol developers neither have capacity to feed information nor desire to do so. In order to use these oracles, a certain type of standards are needed to be in place.

These standards allow these protocols, ‘not to reinvent the wheel’ and to just focus on what they are good at. Such a standard would also result in building various similar protocols in a short amount of time, which only benefits the users by giving them multiple choices to choose from.

To be continued

We will continue to look at different attributes of DeFi in our next posts. Inclusiveness will be the next one.

This piece is first published in BlockchainIST Center on December 18th, 2021.

None of the views expressed in this article should be considered as investment advice