Explain How a Yield-Bearing Token Is an Example of DeFi Composability.
A yield-bearing token is a token (e.g. cETH or a-USDC) that represents a deposit in a lending protocol and automatically accrues interest. It is an example of composability because this token, while representing a debt position, is also an ERC-20 token that can be used in other DeFi protocols.
For instance, a user can deposit USDC into a lending protocol to get a-USDC, then use that a-USDC as collateral in a derivative platform or deposit it into a yield farming vault, stacking multiple financial operations.
Glossar
Composability
Synergy ⎊ Composability within cryptocurrency, options, and derivatives signifies the ability to combine distinct financial primitives ⎊ such as decentralized exchanges, lending protocols, and options vaults ⎊ to create novel and complex financial instruments.
Yield Farming
Incentive ⎊ Yield farming represents a strategy within decentralized finance (DeFi) where users provide liquidity to various protocols, earning rewards typically in the form of governance tokens or a share of transaction fees.
Lending Protocol
Collateral ⎊ Lending protocols within cryptocurrency represent a paradigm shift in capital allocation, functioning as decentralized marketplaces facilitating loan issuance and acceptance against deposited digital assets as security.