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Composable Finance – Taking DeFi Somewhere New?

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Written by   4
6 months ago

Last year, I spent a few of my hard-earned pounds backing projects taking part in the Kusama crowdfunding auctions. However, I was careful to hold back some of my funds in order to buy DOT to support projects looking for a parachain slot on Kusama’s housemate, Polkadot, through their ongoing series of auctions. One of the projects that I’ve backed on Polkadot is Composable Finance and in this post, I’m going to share what it is about the project that so appeals to me.

Composable Finance in Summary

Composable sees its top-level objective as being to take DeFi to a much wider range of people by simplifying and unifying the vast sprawl of DeFi related offerings that are out there. It’s looking to achieve this by providing developers with the tools needed to build and deploy applications that not only operate across more than one blockchain but also across multiple layer 2 solutions.

There are two core elements to this offering. The first is a single developer access point to all these blockchains and layer 2 solutions that the team is building on its Kusama/Polkadot parachain, which it calls the Innovation Availability Layer (IAL). The second, which links to the IAL, is a single developer-friendly interface called the Composable Cross-Chain VM (XCVM). Whilst there is more to Composable than this, these are the two core building blocks.

To encourage the development of offerings on their parachain the project team has built Apollo, an MEV-resistant oracle, Cubic, a vaults pallet, and Angular, a lending protocol built in collaboration with HydraDX, another DOTSuma project. They are also offering grants, building out a knowledge base and running an incubation arm, Composable Labs.

Layer 2, What’s That?

A quick word on layer 2 solutions, in case you’re not familiar with them. If you have even the merest interest in the world of the blockchain then you will no doubt be familiar with the capacity and fee-related issues being experienced on the leading smart contract-based blockchain, Ethereum. Indeed, things have become so bad that those with smaller wallets are effectively being priced out of the market.

In response, enterprising projects have sprung up that adopt a variety of approaches aimed at addressing these issues and these are referred to as layer 2 solutions. Examples include Arbitrum, Loopring and ZKSwap. I’m not going to go into detail here as to how these operate, other than to give a simple example. Some of these solutions carry out a large part of the processing required for a transaction on their own chain then send on the minimum required data to the underlying blockchain. The important thing is, whatever the specifics, these solutions speed up processing, increase capacity and reduce costs.

To use these layer 2 solutions, you transfer your ETH from your wallet to the selected platform, then off you go, free to use whatever dApps are on offer there.

Arbitrum, a Layer 2 Hero with Limitations

I have been using Arbitrum for the past few months and have been very happy with it. Fees are significantly lower than on the native Ethereum blockchain and I have found there is a surprisingly large range of dApps to choose from, a list that seems to be always growing. The extent and nature of the services available are important because no matter how good the transaction handling is, if there is little I can do with my ETH once I’ve transferred it then I might as well not have bothered in the first place.

There are, however, two issues I’ve noticed. The first is that you still have to pay those appallingly expensive Ethereum gas fees when you transfer your ETH in and out of the selected layer 2 platform and that alone is enough to make you cry.

The other issue is that, unless I’ve missed something, there appears to be no way to transfer my assets directly between one layer 2 solution and another. This means if I want to do this I have to transfer my assets back into my wallet and from there out on to the next platform, which means paying at least two lots of those massive gas fees. Not attractive and also inconvenient.

What’s Different about Composable?

And this is where Composable comes in. With its focus on providing not only cross-chain interoperability but also interoperability across layer 2 solutions, it is looking to address these issues of complexity and expense when moving your funds from one platform to another, usually in order to access different services. This is already a significant impediment to the growth of DeFi since it inhibits people’s ability to use the full range of services on offer, and it is only likely to become more so in future. So, definitely, an issue that needs addressing.

What I also like about Composable’s approach is that rather than try to solve everything themselves, they have chosen a route that looks to equip others with the tools they need to develop and deploy their own solutions. With a fair wind, this should result in a flowering of creativity and an array of solutions from which users can select. Indeed, the mind boggles as to the opportunities this could throw up.

A Winner on Our Hands?

There is no doubt in my mind that if Composable is able to successfully deliver interoperability across layer 2 solutions alongside cross-chain interoperability and do so effectively, reliably and at low cost, then it is on to a winner. I know I for one would love to be able to move my funds from one layer 2 solution to another more simply and cheaply than I can do right now. I’m also intrigued to see just how creative project teams can be in putting this new functionality to use and what new services they can come up with since the options appear almost limitless.

What have your own experiences been like using layer 2 solutions such as Arbitrum and Loopring? Would you like to be able to move your funds from one layer 2 to another more simply and cheaply than you can do now?

Until next time…

Renaissance Man


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The Usual Disclaimer

Please don’t take any of the above as financial or investment advice. It is intended to be nothing other than a little entertainment and information sharing. Always, but always, do your own research before committing your money to anything.




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