! Smart contract platform utility is predicated on a robust open-source development environment and widely available shared infrastructure.Developer tools make it easier to create new applications by borrowing existing infrastructure and design elements, lowering the barriers to development and expanding the number of use cases that can be addressed via non-custodial, blockchain-based applications.Shared token standards drove most of the initial development on smart contract platforms.They made it “easier to create consistent experiences across multiple products and use cases,” and touted the concept of ”token economics” – the concept that exuberance for ICOs could be justified as these new platforms came with attached incentives.
Of course, most applications failed to drive user adoption, some due to a poorly defined or unrealistic product strategy, others hampered by an inadequate surrounding development environment.Recent developments have introduced new standards and complementary protocols that facilitate the creation of non-custodial consumer applications.These primitives provide the necessary infrastructure, such as token liquidity or price stability, to create more intuitive crypto-enabled products.These foundational elements act as building blocks for the next generation of applications and mark a platform’s level of “composability.” Composability increases the rate of software innovation “because developers can use each others’ code like lego blocks” and tap into existing user bases.
The rapid creation of new protocols and applications also has a compounding effect on a network’s utility.With any luck, these experiments will ultimately attract new users, who use new applications and drive a higher total level of volume through underlying services and the network as a whole.### __Breaking down the composability stack__ To help visualize the process, composable tech stacks can be split into four layers, with each layer providing distinct value up or down the stack.! The base represents the blockchain network, such as Ethereum or EOS.
In blockchain ecosystems, this is the security and settlement engine, as well as the shared database that powers the remaining layers further up the stack.Middleware protocols such as MakerDAO and Compound connect the blockchain layer with the consumer applications built above them while providing essential services that facilitate application development .Applications and aggregators both serve as interfaces to the base and middleware layers.The difference we found is that applications select and assemble specific elements of the underlying layers to build new user-facing products.
Examples include PoolTogether, a no-loss lottery that leverages MarkerDAO, Compound, and Aragon.On the other hand, aggregators act as portals to multiple middleware protocols, and in some cases applications, to offer a more friendly user experience when transferring assets between these services.
These aggregators aren’t necessarily locked into developing upon their current tech stacks, but switching costs are still relatively high.Some aggregators may ultimately choose to create their own lower-level infrastructure if necessary , but generally speaking there are significant security benefits to maintaining low-level blockchains with composability, as they present the greatest chance at creating developer lock-in on a given protocol.
The Ethereum ecosystem is the most prominent example of composability in action across live smart contract platforms, especially within the decentralized finance sector.Protocols such as MakerDAO and Compound can serve as consumer applications but are ideally designed to add functionality to applications higher up the stack.Application developers can select certain elements from multiple protocols, like MakerDAO’s price stable DAI or Compound’s lender-borrower matching engine, and assemble them “in various combinations to satisfy specific user requirements.” Aggregators such as InstaDApp enable users to migrate their MakerDAO or Compound deposits between the two lending protocols in a single step, rather than the complex, multi-step process required without the InstaDApp portal.A number of DeFi applications have since integrated the basic utilities provided by MakerDAO and Compound.
Mapping these integrations shows the extent of support smart contract primitives offer various applications and aggregators.
! The Maker and Compound partner maps illustrate how the convenience of composability can turn competitors into partners.Dharma initially launched as a competing lending platform to Compound but later pivoted to building on top of Compound to share Comound’s liquidity pool and offer a more reliable end product.! The DeFi tech stack has the potential to offer a much wider range of highly integrated products and services that focus on the lending, exchange, and management of cryptoassets.
For all of the performance drawbacks to building applications on a decentralized technology stack, enhancements in composability are the differentiator that make smart contract development interesting.! As we zoom out, you can get a more complete picture of the interconnectedness of the DeFi ecosystem by looking at the flows between popular protocols.### __The evolution of composability__ Ethereum’s DeFi ecosystem has been evolving rapidly since the public launch of 0x in Aug.2017, however, the majority of new products and services were released within the last calendar year.
Two-thirds of the projects we evaluated were launched after Q2’18.Even the applications and aggregators with earlier release dates did not integrate middleware services until more recently.! DeFi middleware projects needed time to launch, debug, and incorporate essential features before they could be considered suitable building blocks.This gradual development phase reached a tipping point around the start of 2019 when a flood of new consumer applications and interfaces composed of middleware primitives launched onto the market.
These new applications quickly amassed a critical user base of early adopters, and the total value of ether locked in DeFi applications has nearly doubled year-to-date as a result.A similar , evolution can be seen among Ethereum-based projects in the gaming sector.! The gaming and marketplace sectors are less robust at the middleware layer compared to DeFi, which explains the limited number of live Ethereum-based games that leverage these protocols.However, it may only be a matter of time before the pattern plays out, and gaming middleware projects mature to the point that game developers see advantages to using components of these protocols in their applications.
One notable exception is CryptoKitties, which infamously brought the Ethereum to a near halt shortly after it launched in late 2017.The game was released prior to the existence of reliable gaming middleware.and its smart contracts plug directly into the Ethereum blockchain, while its data and non-fungible tokens have served as the genesis for other games, such as Kotowars.It may be more accurate to characterize CryptoKitties as *extensible* rather than *composable* since third-party developers derive value from the tokens and data versus CryptoKitties smart contacts themselves.In this context, contract extensibility refers to “the quality of being designed to allow the addition of new capabilities or functionality.” ### __Long live the king__ Ethereum features an abundance of developer tooling and composable infrastructure that makes it appealing for developers.But Ethereum’s ongoing transition to Ethereum 2.0 and its proposed sharding solution for scalability has led to questions around whether this new environment can preserve protocol composability.The team at Aragon, a popular DAO governance project, reported the planned Istanbul hard fork was expected to break nearly 680 of its smart contracts, which pushed the project to explore partially migrating from Ethereum to its own chain using the Cosmos SDK.The uncertainty around Ethereum 2.0 creates an opportunity for competing smart contract platforms to steal developer mindshare.
In fact, the topic caused such concern that it prompted a mid-Devcon research post from Ethereum founder Vitalik Buterin himself.What remains to be seen is whether these alternative networks will offer a comparable development environment to Ethereum in order to successfully acquire new developers.
### __Heir apparent?__ At the moment, EOS has the most advanced composable ecosystem among Ethereum competitors, but our analysis shows its available infrastructure is limited.! The EOS application stack is still in its early stages, hence the lack of more sophisticated consumer products and underlying services.Similar to Ethereum’s gradual development, most efforts have been concentrated in the middleware layer to lay the foundation for future applications as the ecosystem progresses.Among recently launched EOS middleware projects are the Equilibrium Framework and Pizza, which are MakerDAO clones for the EOS network.
Each protocol issues its own dollar-pegged stablecoin in exchange for EOS tokens as collateral.
It makes sense: MakerDAO served as one of the primary catalysts for DeFi application proliferation due to high user demand for a stable, yet decentralized cryptoasset.The hope is that a stable and censor-resistant DAI equivalent could help spark a similar growth trajectory for EOS applications as well.Another compelling project is the lending protocol EOSREX, which allows developers and users to rent the computing resources required to operate on the EOS blockchain.The protocol enables users to commit funds to a lending pool that receives interest from users who borrow network computing resources.As demonstrated by Mohamed Fouda, EOSREX is in high demand among EOS lenders but has yet to achieve meaningful attention from borrowers.
It’s too early to tell whether EOS can match Ethereum’s significant lead in composability.The possibility remains distant due to the immaturity of current EOS developer tools, and the emergence of newer protocols with larger spring-loaded developer communities such as Polkadot.Synthetix founder Kain Warwick stated his project abandoned its EOS related efforts because the available tooling failed to deliver a level of functionality even remotely comparable to Ethereum.Still, EOS’s burgeoning middleware layer indicates ecosystem development is progressing in the right direction.A more sophisticated series of composable applications could be on the horizon should deep-pocketed affiliates such as EOS creator Block.One start to more aggressively fund new infrastructure projects.### __Coming for the throne__ Cosmos takes a different approach by leveraging the infrastructure of multiple networks.
Using the Inter-Blockchain Communication protocol projects can interact with a multitude of networks, creating a hub-and-spoke model that leverages the design elements of other chains.Mohamed Fouda imagines a future where a central hub allows users to leverage Ethereum based MakerDAO to accept Bitcoin collateral for creating DAI stablecoins.
In his piece *Dare To DeFi Ethereum* Fouda shows how Zcash, Bitcoin, Monero, and other cryptocurrencies can be leveraged by MakerDAO’s system.On the flip side, Polkadot is building its own network focused on composability.Using Parit’s Substrate developers can create “parachains” within the network.These chains operate to facilitate collaboration between blockchains on the network.
Unlike Cosmos, Polkadot will initially focus on chains within its own network and does not have a native solution for integrating other blockchains.### __Existing challenges and future opportunities__ Combining different protocols and applications can compound smart contract utility.They also compound associated risk.Composability enables developers to turn ideas into functioning prototypes in a short period of time , but a single critical smart contract bug or point-of-failure lower in the tech stack could cause a system-wide collapse.
The reliance of DeFi protocols on centralized price oracles, for example, has led some to label it a “house of cards,” and there have already been some high-profile examples of catastrophic flaws in oracle services.
In response, some teams have turned to decentralized oracle solutions such as Chainlink or Compound’s Open Oracle System.Protocols have also adopted bug bounty programs that reward developers for discovering and submitting vulnerabilities.MakerDAO was the beneficiary of a recent submission uncovering a bug in its Multi-Collateral DAI contract, which would likely have proven critical upon its launch next month.
Smart contract security presents major challenges, but it need not be an existential issue in practice.Scalar Capital’s Linda Xie believes as the Ethereum ecosystem matures, “centralized insurance companies will offer products to insure smart contracts” and composable systems against potential exploits.Centralized options could even be supplanted by community-owned alternatives like Nexus Mutual, which uses member contributions to offer protection against financial loss caused by smart contract failures.Better standards and security measures will eventually emerge to help preserve efforts in composability as the stakes get progressively higher.
### __Who wins?__ Despite the current risks, composable tech stacks foster innovation and attract developer mindshare.Ethereum’s success in decentralized finance is a direct result of the ability to share design elements and liquidity between layers, enabling developers to experiment with novel applications at a minimum expense.Enhanced composability increases the utility of a crypto network and leads to a value that is greater than the sum of each individual component.Competing smart contract platforms should take note and dedicate a portion of their resources to fund the development of composable middleware infrastructure.A suitable development environment will serve as a gravitational pull on developers and projects should the transition to Ethereum 2.0 pose a serious threat to its composability.This is a companion discussion topic for the original entry at https://messari.io/article/compounding-utility-through-composability.
