One of the unique benefits of Ethereum currently being the most prominent smart contract platform is the interoperability and composability among the many different protocols and applications. That’s not to say that other smart contract platforms can’t achieve this but it takes a long time to build up robust protocols with network effects around liquidity, usage, developers, community, infrastructure, etc. If you are building in an area that involves transfer of high value like decentralized finance (“DeFi”) then it takes time for the protocols and applications to be battle tested to reduce the chances of a bug. However, note that this doesn’t mean that after a certain period of time that something will be completely safe to use. Ethereum smart contracts have and will continue to have bugs so it’s important to proceed with caution when interacting with them.
Interesting possibilities
Within Ethereum, protocols and applications can easily plug into each other and be combined together to create something entirely new from what you started with. This is sometimes referred to within the community as “lego pieces.” It could even be a completely new concept that isn’t possible in the traditional world, not just a decentralized replica of what we already have. Another benefit is that you can help bootstrap projects and communities this way. For example, if you want to create non-fungible tokens (NFTs) such as in-game items then you can instantly have it be tradable through protocols that allow for decentralized exchange of NFTs.
What’s really interesting is you can traverse different industries with this capability. You can combine areas that are considered to be completely separate and end up having a deeper understanding of both through their relations. For example, you could combine DeFi with gaming. Through adding DeFi to gaming we might be able to better understand incentives and marketplaces and through adding gaming to DeFi we might be able to make finance more accessible and interesting to different audiences. Communities that wouldn’t normally interact with each other will start communicating and sharing ideas which could lead to more innovation. For some inspiration, Brian Flynn shares his concept of combining Pac-Man and the stablecoin DAI.
You can also see the amount of creativity from developers at hackathons regarding composability. At the Sep 2019 ETHBoston hackathon, there was a project called SwanDAI that is a synthetic asset created using UMA which is a platform that allows for the creation of synthetics. SwanDAI tracks the deviation of the stablecoin DAI’s price from its dollar peg, enabling people to bet on and hedge against the DAI peg breaking. The Aug 2019 Cheeze Wizards hackathon also had combination of different protocols with gaming. For example, the project Cheeze of Insight combined the game Cheeze Wizards with Augur prediction markets and 0x instant widget to launch daily markets on Augur where users can bet on the outcome of duels in the game.
Screenshot of Cheeze of Insight prediction market combining Cheeze Wizards, Augur, and 0x
There is an incredible amount of possibilities because you could conceptually have almost anything tokenized and plugged into different systems. There are projects like 2100 that bring together finance and social media by allowing participants to lock DAI in order to mint tokens that are linked to Twitter accounts. You can then do interesting things like bet on Twitter accounts becoming more popular and have people monetize a large following on Twitter.
Concept of 2100
There are projects like PoolTogether that combine lotteries with DeFi. People purchase lottery tickets and all funds from ticket purchases earn interest through the DeFi protocol Compound. At the end of the lottery, everyone gets their funds back but one person gets all of the interest earned on the pooled money so it’s essentially a “no-loss” lottery (except smart contract risk still needs to be factored in and there is the missed opportunity cost of earning interest on the capital directly).
Risks
I want to emphasize that by combining different protocols and applications that this compounds smart contract risk. If one protocol has a critical smart contract bug then it can cause the entire system to collapse. That’s why it’s important to be careful with putting too much funds in any of these systems. Eventually when this area becomes large enough, I believe that centralized insurance companies will offer products insuring smart contracts and would employ smart contract auditors to review the code. This would be similar to how some custodians and exchanges having insurance on the crypto that they store.
Conclusion
I’m really excited to see more experimentation with composability since it’s what is uniquely enabled by crypto. Developers will face an easier time bootstrapping what they are working on by plugging into the different protocols and applications since it saves time and you inherit a lot of the community around them. Given Ethereum’s network effects around this, it may lead other platforms to focus on specializing in specific areas especially ones that don’t require transfer of high value. We are already seeing gaming and in-game items be a major focus for upcoming smart contract platforms like NEAR and Flow (disclosure: Scalar is an investor in NEAR). Overall, there’s a lot of interesting work being developed and I’d always love to chat with people who have creative ideas around composability.
Disclaimer: Linda Xie is a Managing Director of Scalar Capital Management, LLC, an investment manager focused on cryptoassets which holds ETH and Ethereum tokens. Linda is also an advisor to 0x.