---
title: 2.5 Composability
description: Open source and open protocols are the foundation of Web3. This article explains how composability is the key to unlocking the full potential of Web3
---

# 2.5 Composability and Why It Matters

There is perhaps no other more important thesis in crypto that has developed in the last five years, than the notion of ‘_composability’_. Unlike the siloed and privatized Web 2 internet, crypto has been largely built out in the open - whereby protocols, dApps, and user activity is visible on-chain - or extractable by any person willing to build their own indexer. 

What this fundamental design characteristic does, is inverts the ‘business models’ of internet systems up until this point: In Web 2, behavioral surplus and user data was the commodity used by private tech companies to advertise and manipulate user behavior. This ‘exclusive’ access to information jumpstarted the creation of the wealthiest companies in the last 50 years. In Web3, public open-source systems, undergird the movement of value between systems in such a way where the value can blend into each other based on user interest and product design. This is known as composability - and it is the basis for a thesis that argues that value in the next 50 years is going to emerge within and between different products inside of blockchain ecosystems. 

_Composability: The ability for protocols and dApps inside of crypto-ecosystems to be able to communicate with each other, such that the value from between different systems can integrate and harmonize over time, and automatically._

To break down the definition of composability: We are strictly referring to how the internet of value allows different types of value built or created on top of it, to talk to each other and to streamline into aggregate wholes. 

The precedent for the composability thesis is firmly rooted in economic history and the theory of the firm (Douglass North and Donald Coarse): Maximizing efficiency and minimizing transaction costs, is one of the most - if not the most - fundamental determinant of a successful business. That is to say, making it simple and streamlined for value to be created, shared, and accessed, greatly expands the amount of value created over time. Institutions, culture, and socialization strongly impact these factors (read protocol design, community and active users). 

The composability thesis argues for a world with self-executing code (smart contracts) at the center of new economic systems, such that transaction costs can go down to close to zero, and efficiency can be maximized. 

_The Composability Thesis: That value in Web3 accrues at the intersection of different systems talking to each other, such that new forms of value can be created by the automatic and smart-contract based management of different types of value._

The theory of the composability thesis suggests that the realization of the internet of value is best achieved when the different systems built on top of the internet of value are able to talk to each other. From the perspective of this thesis, one-dimensional products that do not integrate with other dApps are backwards looking. Meanwhile, dApps and protocols that actively connect, facilitate, and utilize other assets, tokens, accounts, or data, are forward looking. While this leads us to a discussion on Money lego’s and new forms of value as short term considerations on how the _composability thesis _will evolve over time, the long-term bet on composability centers on maximizing the network effects of dApps and products within L1 ecosystems. 

## Money Legos

The idea of money lego’s is that certain tokens of value, can be used on different protocols to create or optimize further forms of value. The classic example refers to lending money on a decentralized protocol:

_Example 1:_

[L1] [Infrastructure] Lending → Tokens → stable value

_The logic is that once there are a suite of liquid fungible tokens in an ecosystem - that represent some specific type of value - for example for fees from a DEX, for governance of a protocol, or from the original L1 itself - these tokens can be held in escrow, from which the user can receive a loan in a stable form of value for having locked their fungible asset. This essentially allows users to optimize the type of value they are managing, by locking up certain forms of value, so as to take loans in other forms of value that can then be used to purchase other assets or participate in other facets of an ecosystem._

_Example 2:_

[L1] [Infrastructure] Data Upload → Carbon Credit → Carbon Backed Stable Coin → Purchasing of Art → Loaning of Art for future value. 

_This is a more complex example straight from what is being built on Open Forest Protocol. The idea of composability here is straightforward: Data collected about a forest in the field, can be uploaded on-chain and used as a basis for generating a carbon credit. This carbon credit can then be used to create a stable-coin backed by carbon, such that stable value can be derived from locked carbon assets. This stable value can then be used to purchase other assets, for example, tokenized art from Renaissance DAO. And this tokenized art could then be locked up to or loaned out to a gallery for further value._

Composability across systems is what allows raw data from a forest, to eventually turn into tokenized art loaned out to a gallery! And while normal systems of value operate in this way with cash, the facilitation between assets and cash, is done manually, with high transaction costs and under inefficient mechanisms. With smart contracts, we can facilitate value transfer and composability of value automatically, seamlessly, and solely with communication between user and software (no negotiation needed!). 

What this ultimately means, is that the way _existing value is managed, _can be drastically changed in Web3, with the composability thesis arguing that the ecosystem that can facilitate this transformation of existing value, will benefit the most. 

## Tokenizing New Forms of Value

However, beyond the transformation of existing value, the composability thesis argues that Web3 is optimally positioned to create entirely new forms of value - hitherto unquantifiable, imaginable, or liquid for purchase and resale. 

Some examples of these new forms of value include: 

_(Dynamic) Non-Fungible Value:_ User actions, user participation, user time committed, user personal data, and so forth. Dynamically, this refers to the latter actions, at certain times, in certain locations, or in conjunction with certain events (circumstances / holidays / and so forth). Non-Fungible value would also apply to things like academic research and original content (music, film, etc.). 

_Fungible Value:_ Systems value created from protocols and dApps - this could be sensor data, biological data, tokenized assets, commodities, real-estate, and other value that normally underlies liquid financial markets (bonds, ETF’s, etc.) 

_From Emerging Technologies._ Game items, virtual reality events, AI-generated art, sensor data, live-stream video feed, etc. 

The composability thesis would then argue, that the real value proposition of crypto is for someone to be able to use their genome, to earn money, to invest in tokenized real estate, to loan against stable value, to buy art to license to a gallery - all on-chain and all with interaction facilitated between the self-executing contract, and the user (whereby self-executing contract could also be an organized community such as a Decentralized Autonomous Organization or On-chain Organization). 

So, from a 10,000 foot view, what is the composability thesis ultimately arguing? It is arguing that in the coming decade, the capacity for emerging technologies to quantify and collect information about the world, combined with our ability to digitize and tokenize facets of human experience (non-fungible value), conjoined with the ability for smart contracts to manage the transfer, exchange, collateralization, creation, and velocity of this value, will be the nexus from which the most successful, affluent, and 

## Geopolitics Once Again: Inflows and Outflows of Ecosystem Native Value

When we look at value in a national economy we tend to look at key features like imports or exports to gauge the health of an economy: Strong economies import products they need or could use, to produce other types of products that they export. Some economies export services more than products. And then the importation or exportation of such value, is denominated in some type of currency, usually from which the most powerful or most socially accepted is denominated as the ‘reserve’ of value transfer between states. 

In crypto, we are witnessing the emergence of a similar phenomenon, but slightly different in terms of the nature of the value in question: Productive L1 ecosystems, generate and export _ecosystem native value_ - that is to say, value that originated inside of the ecosystem itself. This could be from types of data, art, bridged assets (USDC backed by treasury bonds), and so forth. Emergent L1 ecosystems, _import value_ in preparation for leveraging that value to eventually export value. Dominant ecosystems, import and export value, with ever increasing users, communities, and organizations settling inside of the ecosystem to offer services and products from such value. 

The composability thesis argues that maximizing outflows of ecosystem native value comes from maximizing composability within the ecosystem. Furthermore, inflows should be used for increasing the types and quantity of value created in an ecosystem, such that more users, organizations, and liquidity can accrue. 
