Developers
Composability: More Connections = More Possibilities
Author
Bri Wylde
Publishing date
Composability is the ability to combine or integrate different components in various ways to create larger, more complex systems. People often use the idea of LEGO blocks to illustrate this concept, but let’s ditch that tired example and instead imagine ourselves as motorheads building a hot rod. Not sure what a hot rod is? I wasn’t either until I recently watched Fast and the Furious (that Dodge Charger, am I right?). Hot rods are cars that can be modified and customized using parts from multiple car brands. In other words, they are composable.
So, let’s get to it. I have the chassis (a fancy word for the car’s frame), but I need to choose the car’s other components: an engine, transmission, brakes, wheels, and exhaust. The beauty of building the vehicle ourselves lies in the interoperability of these parts—we can mix and match them to optimize for our goals, whether that’s speed, handling, or aesthetics. We can assemble a hot rod that fits our vision thanks to an aftermarket ecosystem. And in addition, the build isn’t fixed. We can swap out parts over time to enhance performance or capabilities as needed. In its final form, our hot rod is a unique composition built for our specific goals.
The same principle of composability can be applied beyond building a sweet hot rod; it’s also at the core of decentralized finance (DeFi) and blockchain development. Blockchains are inherently composable, with most projects and protocols being open-source, modular, interoperable, and permissionless. For builders, this opens up opportunities to extend and integrate components across the ecosystem. But how does composability benefit protocols and users across the network? To answer that, we first need to understand the foundational components that make DeFi work.
DeFi building blocks
The foundational building blocks of DeFi facilitate lending, trading, yield generation, and more. Understanding these is key to grasping how the various protocols can interact.
Here are some fundamental DeFi components and their main functionalities:
Assets / tokens
Tokens on a blockchain serve multiple purposes, many of which directly relate to composability. Governance tokens can be locked, staked, spent, or burned to allow holders to participate in decision-making protocols. Stablecoins fully backed to external assets (like USDC to the US dollar) provide price stability. Security tokens represent ownership of regulated assets, such as tokenized stocks. Real-world assets (RWAs) bring physical assets like real estate onto the network. And liquidity pool shares reward users who provide liquidity to decentralized exchanges. These various tokens can be transferred, traded, or deployed into protocols that enable lending, borrowing, asset exchange, and more.
The list of tokenized assets continues to grow, and with more assets on the network, there are more opportunities for users to interact with and leverage them for various purposes.
Payments
Payment applications are the foundational financial building block in DeFi that enables seamless transfer of assets across the network. Payment applications facilitate trustless, permissionless, and efficient payments, removing intermediaries and reducing costs compared to traditional financial systems. Many payment applications follow widely adopted standards to allow them to integrate with lending platforms, decentralized exchanges, and automated market makers.
Lending and borrowing
With lending and borrowing protocols, users can deposit their assets into a lending pool (similar to a high-yield savings account, mentioned above) and earn interest as others borrow from it. To take out a loan, borrowers must provide collateral, usually exceeding the loan amount (a process called overcollateralization). Interest rates fluctuate based on supply and demand, and the interest borrowers pay goes directly to the lenders. Since everything is run by smart contracts, there are no banks or credit checks involved in the process.
Trading
Decentralized exchanges (DEXs) facilitate trades via peer-to-peer marketplaces that use automated market makers (AMMs) and liquidity pools to enable digital asset trading. Users provide funds into the liquidity pool to facilitate trades and earn a share of transaction fees in return. Prices adjust algorithmically based on supply and demand, with smart contracts handling all transactions.
Savings
By plugging into lending pool protocols, many DeFi applications offer interest-bearing accounts that can earn more passive income than traditional savings accounts.
There are many more use cases for developing financial protocols on blockchain. But it’s important to ask: can users do everything on Stellar that they can do in the traditional financial world or other Web3 ecosystems? If the answer is no, that’s a good start in figuring out what you might want to build!
Composability benefits (just to name a few)
Now that we’ve gone through some of the basic building blocks of DeFi, let’s explore how they come together to create more powerful and efficient systems in a concept called composability.
Composability brings several key advantages to DeFi and blockchain development, including making building more efficient by removing the need for developers to reinvent the wheel. For example, if a borrowing protocol wants to implement a liquidity pool, it doesn’t have to build one from scratch; it can integrate an existing pool from another protocol already on the network, which enables faster, more resource-efficient development and combats liquidity fragmentation.
Additionally, composability can enhance security. Developers can reuse well-audited and well-tested smart contracts instead of writing new code. Widely used contracts benefit from continuous security reviews by the broader ecosystem, including auditors and white-hat hackers. As a result, new projects leveraging these components can inherit their robust security measures.
Finally, composability improves capital efficiency and supports TVL growth by allowing liquidity and functionalities to be shared across multiple protocols. Instead of remaining idle, assets stay active within the DeFi ecosystem, making them more productive and efficient while also positively contributing to overall TVL.
Let’s focus on that last point: TVL growth.
How composability can boost TVL
TVL, or total value locked, is a metric that measures the total value of assets locked in a DeFi protocol, dapp, or entire blockchain network. Being locked means that assets are deposited into a smart contract and committed to a specific use within a DeFi protocol rather than just sitting in a wallet. These assets can include cryptocurrencies like bitcoin (BTC) and lumens (XLM), stablecoins like USDC, RWAs, and more. Each asset’s amount is usually expressed in US dollars for easy comparison across various platforms and protocols.
A high TVL typically signals strong adoption, ample liquidity, active user engagement, and developer interest. It also indicates deep markets, which can accommodate higher trading volumes with reduced risk of supply exhaustion and lower slippage.
Composability contributes heavily to TVL because it allows protocols to interact with each other, giving users more to do with their assets. The more there is to do, the more opportunities there are for users to earn on their assets, and so the more likely the user is to leverage the various applications on the network, keeping their assets locked.
Here’s a general example of how protocols could work together:
- A user provides liquidity to an AMM liquidity pool (LP) by depositing 100XLM:30USDC;
- In return, they receive LP tokens worth USD 60 that represent their share of the pool;
- Since the AMM protocol is composable with other protocols on the network, the user can then use their LP tokens as collateral in a separate lending protocol to borrow against them.
With composable applications and protocols on a network, assets can be more productive and efficient since users don’t have to withdraw them from the system. Instead of choosing between providing liquidity to an AMM or collateralizing on a loan, users can do both simultaneously. This increases liquidity in the AMM, boosting its TVL, while the lending protocol benefits from a broader range of collateral, allowing users to borrow more and increasing its own TVL. As a result, composability creates a net positive for everyone: users get more out of their assets, and both protocols grow stronger.
We’ve now (hopefully) established that composability is great for many reasons, including increasing overall TVL. But to build a composable project, there are a few practices to consider.
Composability considerations
When building a project, it’s important to design it with composability in mind from the outset. This means ensuring that what you’re building can seamlessly interact and integrate with other protocols, smart contracts, and services within the ecosystem. By prioritizing composability, you enable greater efficiency and functionality across the network.
But how does one build something that’s composable?
Firstly, think about standardizing what you’re doing behind a common interface. For example, for smart contract tokens, use the SEP-0041: Soroban Token Interface standard. Using established standards helps other developers easily integrate with your project without needing to create custom integration logic. Smart contracts launched on Stellar just over a year ago (in February 2024), and there are still many opportunities to break new ground on DeFi use cases. If you’re pioneering a new category, there’s space for you to create your own interface, setting a standard for others to follow.
If there is no existing interface or standard, a great way to understand what is needed for composability in your project is by writing an example integration contract for a specific use case. This will help you identify which data or functions are missing from your contract.
Here are a few other key points to keep in mind for designing composable projects:
- Explore how existing projects are built in the ecosystem to identify how you can plug into them;
- Prioritize modularity to simplify adding support for other projects;
- Publish reusable libraries to share common logic, reducing duplication and fostering interoperability;
- Build efficient contracts. Stellar smart contracts have resource limitations, so design contracts to minimize resource usage, ensuring they remain usable by others without exceeding limits.
Outro and examples
Although smart contracts on Stellar are fairly new, there are several really exciting examples of composability in action. Here are just a few:
- The Meru wallet has integrated a Blend pool for lending and borrowing (check out the case study here);
- Blend fetches its price feed data from Reflector and uses a Comet BLND-USDC AMM token as its backstop;
- FxDAO, a decentralized stablecoin protocol, emits a token called FXG (governance token) that is given out to people who provide liquidity to pools; instead of building their own AMM pools, they deploy and launch an AQUA AMM pool;
- OrbitCDP is building their deposit and vault infrastructure on top of a Blend pool.
A great place to peruse other projects building on Stellar would be through the Stellar Community Fund website. And if you have questions, most founders and developers of these projects can be contacted through the Stellar Developer Discord, so check it out!