Glossary · C
Composability
The ability of DeFi protocols to interoperate — to use each other's tokens, liquidity, and mechanisms as building blocks without permission. Because DeFi protocols share a common on-chain state, LP tokens from Uniswap can be used as collateral in Aave, which can be used to borrow tokens for Curve, and so on. Composability is sometimes called 'money Legos' — the distinguishing feature that makes DeFi more than the sum of its parts.
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How Composability works in practice
Composability is the ability of protocols to build on each other without permission — the property that lets a token from one protocol be collateral in a second and be wrapped by a third. It is DeFi's biggest structural advantage and its biggest systemic risk.
Worked example
You stake ETH for a liquid staking token, supply that as collateral to borrow a stablecoin, and deposit the stablecoin in a yield vault. One deposit, four protocols, each depending on the ones beneath it.
Figures are illustrative and chosen to be checkable, not live market data.
The mistake that costs people money
Stacked positions inherit every underlying risk. A failure at the bottom of the stack — a depeg, an oracle error, a contract bug — propagates upward, and the top layer usually has no way to react in time.
Composability: common questions
- What is Composability?
- The ability of DeFi protocols to interoperate — to use each other's tokens, liquidity, and mechanisms as building blocks without permission. Because DeFi protocols share a common on-chain state, LP tokens from Uniswap can be used as collateral in Aave, which can be used to borrow tokens for Curve, and so on. Composability is sometimes called 'money Legos' — the distinguishing feature that makes DeFi more than the sum of its parts.
- How does Composability work in practice?
- Composability is the ability of protocols to build on each other without permission — the property that lets a token from one protocol be collateral in a second and be wrapped by a third. It is DeFi's biggest structural advantage and its biggest systemic risk.
- Can you give an example of Composability?
- You stake ETH for a liquid staking token, supply that as collateral to borrow a stablecoin, and deposit the stablecoin in a yield vault. One deposit, four protocols, each depending on the ones beneath it.
- What do people get wrong about Composability?
- Stacked positions inherit every underlying risk. A failure at the bottom of the stack — a depeg, an oracle error, a contract bug — propagates upward, and the top layer usually has no way to react in time.