What is a Composable Token?
The meaning of composable tokens refers to a new class of cryptocurrencies that allow developers to create highly customizable and interoperable blockchain applications. They are designed to be highly flexible, allowing for the creation of complex smart contracts and decentralized applications (dApps) that can interact with other applications on the blockchain.
Composable tokens are built on top of other blockchain platforms, such as Ethereum, and are typically created using smart contracts. These smart contracts allow developers to specify the rules and functionality of the tokens, including the ability to transfer ownership, the ability to mint or burn tokens, and the ability to interact with other smart contracts on the blockchain.
The key feature of composable tokens is their ability to be easily combined with other tokens and smart contracts, creating new and innovative applications. For example, a developer could create a composable token that represents a share in a particular asset, such as real estate or a company. This token could then be combined with other tokens representing different assets, creating a new investment vehicle with a highly customized risk and reward profile.
Composable tokens also allow for the creation of more sophisticated dApps that can interact with other applications on the blockchain. For example, a composable token could be used to create a decentralized exchange that allows users to trade different tokens without the need for a central authority.
Simplified Example
Composable tokens, or "Decentralized Finance (DeFi) tokens," are like a bundle of rights, similar to stocks, that are backed by a blockchain, similar to a company. The bundle of rights can be freely traded between users, and can represent various assets, such as a company’s shares, bonds, real estate, or even virtual goods. Just like stock, a token holder can be entitled to receive dividends, profits, or even voting rights. An analogy for layman would be like a gift card from the store. It is a bundle of rights, similar to money, but with a limit, like in a gift card, since the user only has the right to purchase items from the store within a certain amount. Similarly, a DeFi token holder has the right to use the token within a certain network, but with the added benefit of being able to transfer it and trade it on the blockchain.
The History of Composable Tokens
In the decentralized finance (DeFi) sphere, the concept of "composable tokens" stands as a pivotal innovation, signifying a transformative approach to token creation and utilization. This term came to prominence in the early 2020s, aligning with the rapid expansion of DeFi and the growing focus on fostering interoperability across blockchain networks.
Examples
Wrapped tokens: These are tokens that represent other tokens, such as wrapping Bitcoin to make it usable on the Ethereum network. They allow different tokens to be used in different protocols and applications, enabling composability.
Tokenized assets: Tokens that represent ownership of real-world assets, such as real estate, artwork, or commodities, can be composed with other tokens to create new financial products and services.
Multi-collateral Dai (DAI): This is a stablecoin that is collateralized with multiple different types of crypto assets, allowing it to be composed with other protocols and applications, such as lending and borrowing platforms, to create new financial products and services.
Yield bearing tokens: Tokens that generate yield, such as yearn.finance's yTokens, can be composed with other protocols and applications to create new financial products and services.
Related terms
Token Burn: Token burn is a process in which a certain number of tokens are permanently removed from circulation in order to decrease the supply, and in turn, increase the value of the remaining tokens.
Governance Tokens: Governance tokens are a type of cryptocurrency that give holders a say in the decision-making process of a decentralized autonomous organization (DAO).