What Is “Composability” in DeFi and Why Are Token Standards Essential for It?
Composability, often called "money legos," is the ability of different DeFi protocols and applications to seamlessly interact and build upon each other. This is possible because all components adhere to the same underlying token standards, primarily ERC-20.
For example, a lending protocol can accept any ERC-20 token as collateral, and that collateral can then be used by a derivative platform. Token standards act as the universal interface, ensuring that the inputs and outputs of one protocol are instantly recognizable and usable by another.
Glossar
Token Standards Essential
Interoperability ⎊ Token Standards Essential refers to the critical role of standardized smart contract interfaces, such as ERC-20 for fungible tokens and ERC-721 for non-fungible tokens, in ensuring seamless interoperability across the decentralized finance (DeFi) ecosystem.
Token Standards
Specification ⎊ : These established technical blueprints define the functional behavior of digital assets, dictating how they interact with smart contracts for derivatives.
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.