Finance, as we know it, comprises various entities, some with one specific role while others offer numerous products and services. There are credit creators, market makers, fund custodians, clearing houses, payments processors, brokers and more.
As more of the services they provide make it onto blockchains in the form of Decentralized Finance (DeFi), one of the main goals is to remove any unnecessary intermediaries in any process while making it cheaper. One way to do this is by simplifying the development of comprehensive DeFi apps, which is what composability enables.
On that note, let’s dissect the possible impact of blockchain composability on DeFi projects from the creator and end-user perspective:
Self-orchestration
When you examine the logic behind several financial products, such as savings accounts, fixed deposit accounts, and put and call options, it is not that complicated. Most of these products consist of a few primary instructions, which may involve something slightly elaborate, like simple interest, or something more straightforward, like referring to a price before permitting or declining a trade.
A flowchart for a TradFi product (component) like simple interest or option trading.
Composability can help condense these rules into individual modules like an interest calculator, a forex spread calculator, a currency converter, or any other element that performs a specific task in a financial transaction. These can be offered to any end-user as separate elements or assembled into presets representing traditional finance products.
Consequently, end-users only have to consider the values they want to enter into variable fields to guide the execution of a smart contract. They can enter into multi-party agreements that self-execute thanks to a smart contract composed according to their collective preferences rather than those of a central authority.
Blockchain composability can take this a step further by allowing those who create these products to list them on marketplaces/exchanges and even get them detected by aggregators that search for the best deals. Furthermore, data scientists can analyze these offers and contribute to algorithms that continuously adjust certain parameters in these smart contracts and produce newer, more relevant financial products.
Eventually, the conversation shifts from the cost of developing and maintaining the software that facilitates certain financial services to other issues like regulatory compliance. In fact, the compliance aspect can also be partially addressed by embedding risk management modules into a financial product’s smart contract.
So, for instance, if one party fails to pay out the yield promised, the principle provided is automatically returned to the depositor. Alternatively, you can repurpose an escrow-like module or a collateralization module to store funds and add them to the principle returned as compensation for the opportunity cost foregone by the depositor when they got into a deal that wasn’t fruitful.
Generally, blockchain composability transcends cost reduction in offering DeFi products. It can help democratize the markets and give ordinary people more options for structuring and restructuring deals so that every party is protected and satisfied.
Not forgetting, composability can also enhance governance in the ecosystems where financial service modules exist. Different users can come together and vote on how to modify the modules they use, enrich the relationships and interactions between these elements and profit from them.
Flexibility and Reliability
In TradFi, we’ve seen capabilities like using your bank card to withdraw funds through an ATM machine of another bank. You may do this because you’re closer to that ATM or your bank’s nearest ATM is faulty or out of funds.
However, traditional financial institutions only have contingency plans for some eventualities. For instance, if you have a standing order to transfer money into another account, or some other recurring deduction like one for utility bill payment, the service provider has internal systems they use to initiate these transactions.
If these systems are unavailable for some reason, that provider has no alternatives until they are back up. Luckily, blockchain composability helps address this problem. For example, if one component of a dApp fails, you can provide options for rerouting transactions through an equivalent dApp or dApp component that’s up and running.
This approach also lets you quickly provide additional functionality for certain transactions even though your core dApp lacks these functions. You can temporarily channel transactions through a similar dApp that has a module with those desired functions as you work on infusing a modified version of this component into your dApp.
Moreover, users also benefit since they don’t have to uproot their deposits from one smart contract to another in pursuit of those functions. In a way, the autonomy of disparate dApp components can lead to improved uptime and greater flexibility in financial service execution.
TradFi emulation
While there’s plenty of talk about how blockchain technology can tackle the shortfalls of CeFi, many people still need to understand how challenging it can be to emulate everyday TradFi products on a blockchain.
For instance, ownership through tokenization is typically done using one particular token standard. But what if you want to offer different types of stock (preferred stock and common stock)? What if you want to create tokens with varying qualities like dividends, voting rights or entitlement to proceeds from assets liquidation?
This can also extend to giving some investors priority when distributing profits or paying royalties. Some projects have governance systems to handle these matters, but many have loopholes, such as voting systems based on the number of fungible tokens surrendered to vote. These can encourage collusion between larger asset holders.
Fortunately, blockchain composability can support more nuanced programming of tokens to create different fungible and non-fungible standards that represent other value streams and capabilities. Subsequently, you can have contracts dedicated to tokens with associated dividends or royalties, thereby creating new approaches to collateralization.
Additionally, composability enables innovators to combine functionality in new ways that further simplify business transactions. Recently, we’ve seen NFTs crossing over into DeFi as assets you can lock up in liquidity pools and earn a yield. However, NFT technology can do more than that in DeFi.
Think about tokenizing real-world assets like plots of land or condominium apartments in the same block. Some plots may be more valuable than others because they are nearer to a major access road or another vital facility, even though all plots are the same size. And the same goes for apartments in the same building. Some may have more bedrooms, while others have better views.
To emulate these attributes, you can utilize blockchain composability to create non-fungible tokens representing each real-world asset’s uniqueness. So when someone is investing, they can easily see that they are buying the apartment with an ocean view, but in the corner or on the top floor with quick rooftop access.
You can even take it further by creating fungible tokens of differing standards representing fractional ownership in a particular real-world asset, with additional attributes like caveats. This could enable purchasing assets in installments, prohibiting premature liquidation and unwanted speculation.
How SparqNet’s composability benefits DeFi projects
SparqNet allows developers to create and utilize assets across any EVM protocol, thus enabling easier multi-chain delivery of DeFi services. In practice, different activities can take place on separate base layers while using the same component for a specific task in their processes.
For example, one platform could be hosting an auction of a non-fungible asset used as collateral, while another is hosting an equivalent of an Initial Public Offering (IPO) or a seed funding round for a new project. In both cases, the administrators may want to allow people holding value in an assortment of tokens to participate.
Accordingly, they can utilize the same token converter to accept different cryptocurrencies when taking bids or receiving investments. In such cases, a dApp component that supports the broadest set of tokens and communications from smart contracts on various chains will eventually handle more transactions.
This is part of what SparqNet enables participants to achieve. Ultimately, composability sets them on a path to serving more users whose requests span numerous chains. Consequently, they can earn more rewards for validating portions of transactions or entire transactions that utilize SparqNet infrastructure.
So for example, whenever tokens from one EVM chain are sent to SparqNet’s network to be exchanged for native tokens, validators earn from the reception and swapping. And when native tokens are sent from SparqNet to another EVM-compatible chain, our validators earn from the sending action.
In addition, our validators require a token lockup of only 200,000 $SPARQ tokens to run a validator for gateway network, and 1,000 $SPARQ to mint an NFT that holds the binary for the app-chain with $100 fee for hard forks, making validator node operation more accessible for many people. Subnet creators can also stick to validating their own subnets rather than the entire collection, which gives them more flexibility over the strategies they use when investing resources in pursuit of validator rewards.
SparqNet’s composability is also particularly relevant to DeFi since it can increase the fluidity of value in several ecosystems.
Take the example of staking and liquidity pool mechanisms. Some of these may only allow you to unlock your tokens or withdraw your yield after a specific time. But what if there’s another time-sensitive opportunity like providing liquidity for a highly-demanded trading pair, a chance to get in on the ground when a new STO or IGO goes live, or profit from surging crypto prices?
Composability makes applying ad-hoc rules like temporarily transferring ownership or rights/claims to valuables easier without losing eligibility to gains from any earlier/ongoing contracts associated with those valuables. What does this look like? A person soon to extract a payout from a liquidity pool can borrow against the expected income or use it to purchase assets the same way they would with a credit card.
So once the value used is available to be moved around, any party paid using that expected value receives their share. Alternatively, the owner of those valuables can manually pay the party they had temporarily given ownership to regain it. In a setting with no composability, participants couldn’t combine different software pieces to execute such agreements.
They’d have to find a way to contact anonymous users and set up these agreements without robust protections in case one party reneges. And remember, the execution would probably require one party to let another access and control a wallet interacting with a dApp, which isn’t ideal.
Wrapping Up
DeFi definitely has the potential to revolutionize the way parties enter into financial agreements and update them over time. But to do that in a multi-blockchain setting where speed, security, trust and several other factors influence the potential value of any deal, you need composability to quickly expand and deliver app functionality that enables different types of transactions.
SparqNet neatly packages all these qualities in an environment with a transaction speed of 400,000 TPS, so come build the future, come build on SparqNet!
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