Composability, it’s definition, and importance to the success of both Ethereum and Binance Smart Chain DeFi Ecosystem success.
DeFi Explained, is a series of articles written by Author known as @shortsegments, in which an attempt is made to explain and explore the financial revolution called decentralized finance. Shortsegments has been writing about cryptocurrency and the blockchain for over 3 years.
Composability, it’s definition, and importance to the success of both Ethereum and Binance Smart Chain DeFi Ecosystem success.
Composability is a feature of design wherein the various components of a system can be easily connected to form any number of satisfying results. source
This is a critical component of DeFi.
To understand, we need a mental picture of three software constructs:
The Ethereum Blockchain Network
The interoperability layer
The Protocol Layer.
First, the Ethereum Blockchain Network.
The Ethereum Blockchain Network ...is the base layer for decentralized finance, as we now know it. This Network is like the Operating System that makes it possible for “DaPPs” or Decentralized ApplicationS to function, because it provides all needed support functions...
It consists of:
the Ethereum Virtual Machine the Smart Contract Functionality the Ethereum Blockchain or record of transactions.
Let’s discus them individually, but also how they interact and function.
The Ethereum Virtual Machine or EVM. The Smart Contracts contain the code that make up the logic functions used in DApps. For example: A Smart Contract performs what are called in software coding language Conditional Tasks , the if then statements, if you provide item X, then you get item Y, or similar transaction terms, that are actually executed by the EVM or * *Ethereum Virtual Machine ** across all the nodes in the Ethereum blockchain and distributed network of Nodes, the computers or miners which are an integral part of the consensus mechanism that processes transactions to the Ethereum blockchain. The Ethereum blockchain provides the settlement layer for all transactions. While some protocols take the computation to a separate layer, they will always return the result to the main network that stores the data on the blockchain. It is on the blockchain that transaction data is immutably stored as proof or verification.
As a side note:
The Ethereum blockchain provides accounting features just like Bitcoin, but the addition of the Ethereum Virtual Machine and Smart Contract functionality, is what gives it added or additional functionality, and that additional functionality makes DeFi possible.
Now back to our main topic:
The above construct is referred in spatial reference terms as a base or first layer. This designation has intrinsic meaning as above, but it also serves to help provide a mental image of the way three constructs interact.
Second, the third of Protocol Layer...
I am purposefully skipping the second layer to turn our attention to the third layer:
In DeFi, the protocols function by transferring value, swapping tokens, fetching external feeds, and providing liquidity. These functions or actions are performed by Protocols, which are also referred to as Applications.
These protocols (applications) are the actual components that interoperate as financial instruments for users. Popular examples are the Automated Market Maker Exchange Uniswap, also referred to as AMM Exchange, and other Protocols/Applications like Curve, Yearn, Bancor, and Compound.
The above construct is referred in spatial reference terms as a top or third layer. This designation has intrinsic meaning as above, but again, it also serves to help provide a mental image of the way three constructs interact.
As a side note:
While dApp means decentralized, in actuality these Protocols can be decentralized or centralized, in terms of actual governance or control.
Now back to our main topic:
The Second or The Interoperability Layer.
It is this layer of computer code or software, sometimes called “Middleware” that connects the various protocols and smart contract functionality together. It is also here that the following functions occur.
First, payment for use of the blockchain:
DApps use the Ethereum blockchain Network and as a platform for DApps and they and their users are required to use the Ethereum’s native token Ether (ETH). A smaller denomination of Ether called Gwei (0.000000001 ETH) is used to pay for units of computation on the network called gas. The gas costs are part of the fees paid in order to process transactions that are validated by nodes called miners (or stakers in ETH2).
Additionally, many investors use capitol or assets which are not Ethereum blockchain tokens or Ether. In fact, most DeFi tokens which are used in the Protocols or Applications which run on top of the Ethereum network are not native tokens, but instead, they are value exact representations of those non-native tokens called ERC20 tokens. The standards and functionality that allows this lives here in the interoperability layer.
Putting it all together.
Composability is a feature of design wherein the various components of a system can be easily connected to form any number of satisfying results. source
As you can see from the foregoing discussion, connecting all three layers, and their various functions together, enables the production of various protocols or applications, which are considered satisfying results. Various entrepreneurs and developers can access these somewhat modular components to create functioning applications. Composibility*
The Ethereum Blockchain Network, which encompasses all three layers, has this property or characteristic, which makes the DeFi applications operating on Ethereum possible.
Additionally, it was the replication of the three components of the Ethereum Blockchain Network, and the preservation of Composibility, that makes the DeFi ecosystem on Binance Smart Chain possible, plus its clone like nature of all three components of the Ethereum Blockchain Network made the creation of clones of popular Ethereum Applications possible.
Additionally, economic factors like cheaper transaction fees, and non-economic factors like faster transaction speed and larger transaction volume capacity, have also contributed to the rapid growth and success of the DeFi ecosystem on Binance Smart Chain. Which I think for clarity and completeness, should be referred to as the Binance Smartchain Network, to accurately describe what Binance has built.
Lastly, the close association of Binance Smart Chain, to Binance Exchange, one of the largest cryptocurrency exchanges world wide, with a diversity of coins and wallets makes it easy to transfer assets there, and by using a software construct called the Binance Bridge, you can simultaneously transform tokens to the Binance Smart Chain equivalent of ERC-20 tokens, called BEP-20 tokens, and transfer them to the appropriate wallet on Binance Smart Chain were you can invest in DeFi projects of similar depth of Liquidity and profitability, as popular applications on the Ethereum Blockchain Network.
In fact, Binance Smart Chain is so successful, that it’s first Protocol/Application Pancakeswap has surpassed the most successful AMM Exchange in the world Uniswap, in TVL, Transactional Value Locked. Network. This is a testimonial to the value of Composibility, and the impressive technological nature of the Ethereum Blockchain Network, in terms of creativity and innovation. The reproduction of and modification of this system as the very successful Binance Smart Chain Network is also a testimony to concept of Composability and the usefulness of the modular system developed on the Ethereum Blockchain Network.
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Penned by my hand @shortsegments
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