Crypto composability and cross-blockchain asset composition

Crypto composability and cross-blockchain asset composition

The world of blockchain and cryptocurrencies has rapidly evolved since their inception. What started as a novel idea with bitcoin has blossomed into a complex ecosystem with thousands of digital assets and various blockchain protocols.

April 2024

Patrick Kast
State Street Digital® Product Lead

Adonis Nasr
State Street Digital Product Lead

One of the most exciting developments in this space is the concept of “crypto composability” and the ability to compose assets across different blockchains and protocols.

In this article, we’ll delve into the intricacies of tokenization, bridging and how they enable crypto composability – while also exploring the risks and opportunities associated with this revolutionary trend.

Bridging: Connecting islands of value
While tokenization has revolutionized the representation of assets on a single blockchain, the true power of crypto interoperability comes from bridging different blockchains and protocols. Each blockchain operates as its own “island” with its unique features and capabilities. However, for the full potential of blockchain technology to be realized, these islands must connect to form an archipelago of value.

Bridging is the process of creating connections between different blockchains to enable the transfer of assets and data seamlessly. Various bridging solutions have emerged, with some relying on specialized blockchains, such as Polkadot, to act as intermediaries, while others use bridges that connect specific blockchains directly.

Crypto composability: Building blocks of innovation
Crypto composability is the art of combining various blockchain-based assets and protocols to create new, more complex applications. It’s like building with Lego blocks, where each block represents a different blockchain or asset, and developers can stack them together to construct innovative financial products, services and applications.

For example, through crypto composability, one could use a stablecoin on Ethereum as collateral to mint synthetic assets on another blockchain like Binance Smart Chain, which can then be used as liquidity in decentralized finance (DeFi) protocols.

This composability unleashes a wave of creativity and innovation, providing fertile ground for developers to experiment and create new financial instruments, games and much more.

The risks and opportunities of crypto composability
As with any emerging technology, crypto composability presents both exciting opportunities as well as inherent risks; thus, it is equally crucial to highlight the importance of auditing and security best practices.

Opportunities include:

Financial inclusion: Crypto composability can extend financial services to the unbanked and underbanked populations by enabling access to a wide range of financial tools and assets through simple smartphone applications.

Innovation: Developers can create novel financial products and services that were previously impossible or too costly to build. This innovation can democratize finance and increase competition in the sector.

Global reach: Composability is not constrained by geographical boundaries, allowing users to access and utilize assets and services from anywhere in the world. This global reach can empower individuals and businesses.

As well, cross-chain compatibility not only enhances flexibility, but also reduces reliance on a single blockchain. Instead of being confined to one blockchain’s limitations, users and developers can diversify their assets and applications across multiple blockchains, spreading risk and enhancing resilience.

Composability also plays a role in addressing scalability issues. By distributing workloads and data across multiple blockchains, the burden on any single blockchain is reduced. This can lead to improved scalability and performance, making blockchain technology more efficient for a wide range of applications.

Furthermore, recent Oracle developments (such as ChainLink’s CCIP) have facilitated more seamless data flows between different blockchains. These developments enable the secure and efficient exchange of data, opening up new possibilities for cross-chain applications and data.

Risks include:

Security concerns
Bridging and composability introduce new security risks. Vulnerabilities in one blockchain can affect connected chains, potentially leading to large-scale financial losses.

Regulatory challenges
Regulators are still catching up with the rapid pace of innovation in the crypto space. The lack of clear regulations can create uncertainty and legal risks for users and developers.

Interoperability issues
Not all blockchains and protocols are compatible, and creating bridges can be technically challenging. Incompatibilities can hinder the smooth flow of assets and data.

Conclusion: The future of finance is composable
Crypto composability is reshaping the financial landscape, offering a glimpse into a future where assets can seamlessly move across different blockchains and protocols. This revolution has the potential to democratize finance, foster innovation and provide unprecedented access to financial services.

However, as the ecosystem matures, addressing security concerns and navigating the regulatory landscape will be essential. The road to fully realizing the potential of crypto composability may be bumpy, but the destination promises a more inclusive, efficient and innovative financial world.

In the coming years, we can expect to see an explosion of creativity as developers continue to explore the possibilities of combining assets and protocols. As this unfolds, it is good to look out for the ever-expanding archipelago of value in the blockchain space – where the future of finance is being built, one block at a time.


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