What is Composable DeFi?

Composable DeFi refers to the interoperability between different decentralized finance (DeFi) protocols. Decentralized finance arose with the development of Ethereum-based smart contracts. Since then, DeFi has seen numerous developments and improvements which saw the traditional finance (TradFi) structure revolutionized.

DeFi allows anyone with access to the internet to use a broad range of blockchain-based financial products. It acts as a borderless, decentralized marketplace. Although DeFi has become what it is thanks primarily to the programmable smart contracts, it offers numerous other technical advantages.

Smart contracts are capable of composability – a feature connecting the entire DeFi ecosystem. Decentralized exchange (DEXs) platforms, loan protocols, collateralized loans, futures markets, and other DeFi aspects are all part of composability.

Composability is a technical feature allowing interoperability between different parts of a single system. Thanks to composability, the different DeFi protocols are able to work in conjunction. This creates a parallel digital financial system that can be accessed from anywhere in the world and is not governed by centralized authorities.

Developers can take advantage of composable DeFi to create different combinations of protocols and decentralized apps (dApps).

How Does Composable DeFi Work?

Money legos are programmable DeFi protocols and decentralized apps. Since money legos are open-source, developers can program them for interoperability and synergy, as well as utilize the code to improve their own DeFi protocols and make them better compatible with each other.

On the Ethereum blockchain, where smart contracts originated, developers can find a nearly endless supply of composable DeFi products. Since the blockchain itself is permissionless, meaning that there is no regulatory entity, developers can build their own dApps and integrate aspects of existing protocols on the Ethereum blockchain simply by paying the gas fees.

This model of decentralized development is possible because smart contracts are designed to be composable. This feature allows both developers and users to engage with decentralized financial strategies.

For example, users can take the non-fungible tokens (NFTs) that they own and use them as collateral to receive loan offers. Once they pay back the loan in full, they reclaim their NFTs; however, if they default the loan, the NFT goes to the lender, following the same principle as collateral tokens.

Furthermore, users can rent out their utility NFTs or earn interest on them. This can be useful for those who are interested in the utility of NFTs but do not wish to purchase one. It’s possible that the ability to use NFTs as collateral or a rental object will gain more use in metaverse projects.